The Bank of Canada's rate increases will be a major factor in the housing market's growth prospects
Taking all prevailing and expected trends into account, the Canadian housing market is likely to experience a downturn by mid-2023, according to a new analysis by the Canada Mortgage and Housing Corporation.
“Rising rates will cause economic growth to slow. This leads to higher unemployment and less wage growth, which, coupled with higher mortgage rates, will make access to homeownership more challenging,” said Bob Dugan, chief economist at CMHC.
Crucially, the upward trajectory of rates will fuel feverish growth in construction and financing costs. These will come on top of surging material prices and labour shortages, leading to severely constrained housing supply, Dugan warned.
Signs of the major deceleration were already apparent during the pandemic.
“The high rates of house price increases during the last two years have been unsustainable. The cost of housing reached levels that are unaffordable for a large share of new home buyers, translating into a slowdown in 2022,” Dugan said.
Read more: Bank of Canada – could it pause rate hikes as market slows?
CMHC is projecting that in a consistently high-interest rate environment, the national average price will remain elevated but is set to decline by 5% annually in mid-2023. During the same forecast period, the moderate-interest rate scenario will lead to a 3% annual decline in prices.
The year after would likely bring more positive developments, Dugan said.
“Mortgage rates eventually start to stabilize in 2024. Supported by rising household income and higher immigration, house prices are expected to return to positive but moderate growth,” he predicted.
However, Dugan stressed that “elevated price levels [will] persist over the forecast horizon, placing pressure on homeownership affordability. … This would then lead to more pressure on the rental segment. Potential homeowners will stay renting longer and rental vacancy rates will be even lower.”
