Canadian home prices set to drop 15% from peak, CMHC says

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STOREYS editorial team

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After a meteoric and record-breaking run that began shortly after the onset of the pandemic, the Canadian real estate landscape has seen a dramatic change in events this year when it comes to home prices.

With a fragile economy characterized by skyrocketing inflation and ever-rising interest rates, home prices across the country began to decline in early spring and continue to decline.

READ: National home prices drop nearly 7% in September, down more than $170,000 from peak

The unanimous consensus among economists and real estate professionals is that we can expect lower house prices to persist for some time. More recently, in a report published yesterday afternoon, the Canada Mortgage and Housing Corporation (CMHC) indicates that the national house price is expected to fall nearly 15% by the second quarter of 2023 compared to its all-time high in the first quarter of 2022.

The report recognizes how dramatically Canada’s economic and interest rate landscape has changed since the release of CMHC’s last housing market report in April 2022 and since a July forecast report on the economy. and housing. In the latter, CMHC predicted that prices would drop only 5% by the second quarter of 2023.

“Inflationary pressures have been stronger and more persistent than expected since we released our Housing Market Outlook in April 2022,” CMHC Deputy Chief Economist Patrick Perrier wrote in the report.

Thanks to these pressures – which Perrier attributes to the war in Ukraine and the resurgence of COVID-19 in China – the report’s forecasts are relatively bleak. But, to be honest, we’re getting pretty used to grim reports these days. Case in point: In a report released yesterday, Royal LePage adjusted its national home price forecast downward.

house price
Row of modern townhouses in Vancouver, Canada

According to Perrier, the average price of homes in Canada is expected to fall to $655,190 by the end of the second quarter of 2023, from a high of $770,812 in the first quarter of 2022. Despite the expected decline in prices, property and affordability will not improve. , as falling house prices are offset by rising interest rates. Adding insult to injury for potential first-time home buyers, Perrier says rents will rise with increased demand as fewer renter households can afford homeownership.

In the face of impending interest rate hikes, Perrier says the Canadian economy will enter a modest recession by the end of 2022 and begin to recover in the second half of 2023.

In June, Canada’s annual inflation rate hit a staggering 8.1%, marking a high in nearly four decades. In August, it fell to 7%, which Perrier points out is attributed to lower energy costs during this period. To combat soaring inflation, the Bank of Canada steadily raised interest rates to 3.25% on September 7th. Perrier says he expects that key rate to continue to rise and peak at 4% by the end of this year.

“This increase in policy rates also increases borrowing rates for households and businesses,” writes Perrier. “As inflation returns to its target range by mid-2024, the Bank of Canada’s policy rate will also decline and stabilize at 2.5%, the midpoint of its neutral policy rate estimate. Other interest rates will broadly mimic the policy rate over our forecast horizon to 2024.”

According to Perrier, as other economies also take steps to reduce inflation with higher interest rates, external demand for Canadian goods and services will weaken. This will add downward pressure on the economy.

“We expect the Canadian economy to enter a recession – albeit less deep (or less severe) than previous ones – in the last quarter of this year and begin to recover in the third quarter of 2023,” Perrier writes. “Canada’s real gross domestic product (GDP) is expected to decline 2.1% from its peak in Q2 2022 to Q2 2023. On an average annual basis, GDP growth is expected to slow from 4.5% in 2021 to 2 .8% in 2022. GDP is expected to decline by 1.25% in 2023 and grow by 2.9% in 2024.”

As for house prices, on an annual basis, Perrier predicts that prices will increase by 2.6% in 2022 compared to 21.3% in 2021, then decrease by 6.3% in 2023 and increase again by 2.1% in 2024.

Written by
STOREYS editorial team

Carol N. Valencia