According to a growing number of economic forecasts, Canadian house prices could decline in the near term, with some suggesting declines of as much as 25%.
One such report came from Capital Economics, which described how rising rates pose a major threat to the housing market. However, the housing market won’t return to a pre-pandemic mortgage rate.
In the event that the overnight lending rate, which influences the prime rate and, in turn, variable mortgage rates, reaches 2%, house price increases should slow to “little more than zero” next year, said Capital Economics economist Stephen Brown. A higher policy rate would trigger a decline in house prices.
“We shouldn’t assume that the Bank wants to avoid house price declines at any cost. “House prices are a key driver of shelter inflation, so moderate declines would help to get consumer price inflation under control without seriously jeopardizing the economy.”
Although prices are high compared to traditional valuation metrics, Brown said an initial decline could lead to lower house prices and lower expectations.
On the other hand, Oxford Economics sees home prices falling 24% by mid-2024. According to the report by Tony Spillo, the median home price was 19% above the borrowing capacity of the median-income household by late 2021, and it is expected to reach 38% above that by mid-year.
“We believe this will cause the housing market to reach a breaking point and crash under the weight of its own success before year-end,” – he wrote.
Higher borrowing rates are another factor, with the Bank of Canada’s policy rate expected to reach at least 2% by 2024. Also, by the middle of this year, Oxford expects average 5-year fixed rates to reach 4.25% and by the end of this decade, 5%.
According to Oxford, the third factor that could help bring house prices to the lower side is the introduction of government policies, such as house-flipping tax, tax on non-resident-owned vacant homes, and a temporary ban on foreign ownership.
Still, even though the house prices could decline by 24%, that would still be 15% higher than before the pandemic.
However, not everyone thinks the decline is about to happen. RBC economics said prices are actually likely to grow by 6.2 percent. The Canadian Real Estate Association also released an updated housing market forecast earlier this month. They predict an annual average sale price of $786,000, an increase of nearly $47,000 over its December forecast, which represents an increase of 14.3% over prices in 2021. Prices are expected to grow at an annual rate of 3.2% in 2023, according to the report.
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Kelly Wilson
Kelly Wilson, a top national mortgage producer, has dedicated 19 years to customizing financial solutions for clients across Canada. Her strategic approach has facilitated over $1 billion in mortgage funding. Starting her real estate investment journey at 21, she now holds $11 million in assets. Kelly's mission is empowering clients to achieve financial freedom and sustainable wealth.
