"The housing party is over:" Modest correction in Canada underway

May 16 2022, 7:23 pm

All signs point to a “modest correction” of the Canadian housing market due to the ongoing recalibration triggered by higher borrowing costs, according to a new market update by Central 1.

The Bank of Canada increased its policy rate to 1% last month after dropping it earlier in the pandemic to catalyze economic growth. Forthcoming hikes through the coming months could send the rate to 2.5% by early 2023.

Fixed five-year mortgage rates have already risen from 1.7% at the pandemic low to 3.6% this month, and are expected to further increase to about 4.5%.

Historically low rates and the pandemic’s impact on living preferences led to a 50% increase in home values over two years — the strongest two-year gain since the late 1980s.

But now, the combination of higher rates, record-high home prices, inflation impacts on day-to-day living costs, and stagnant wage growth will send the market into a real slowdown and into a correction.

Home sales are forecast to drop 20% in the second quarter and 12% in the third quarter of this year, returning sales volumes to pre-pandemic levels before stabilizing in the fourth quarter. Overall annual home sales are forecast to drop by 19% in 2022 and 10% in 2023.

“The housing party is over. Catalyzed by this rapid change in mortgage market conditions, we anticipate both sales to normalize swiftly and price levels to decline in coming quarters,” reads the update by Central 1 chief economist Bryan Yu.

“There are early signs that recent hikes to fixed-rate mortgage rates have already slowed sales; a trend we expect to accelerate during the remainder of Q2 and through Q3 as rate holds expire and variable rates increase… More broadly, increased mortgage carrying costs will reduce demand as more households are priced out of the market and others shift toward lower-priced homes. Moreover, we think pent-up demand has also been exhausted and buyer sentiment is turning against the housing market and will amplify the slowdown.”

The correction could be similar to the mid-1990s and 2017/2018 when rising rates triggered sales drops over multiple years.

A reduction in home sales is expected to be accompanied by a rebound in supply inventory, trending the housing market towards balanced conditions.

Home values could fall by up to 10% from peak to trough within the current cycle, but prices will still remain well above pre-pandemic levels, with record immigration and other factors sustaining demand. Home prices are expected to remain flat through 2023.

Furthermore, urban centres that shed residents during the pandemic are likely to see a resurgence from increased condominium demand due to affordability impacts and the greater return of employees to offices.

Kenneth ChanKenneth Chan

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