By: Maya Garg

With price correction largely behind us, home prices in Canada are expected to end next year just 1% below 2022-Maya Garg

Tags: Homes in Toronto, Mississauga, Homes in Milton, condos in Oakville, Toronto, Real Estate Prices, Interest hike,


First quarter expected to show double-digit year-over-year declines, with modest quarterly price growth in the second half of next year

TORONTO, December 13, 2022 –Since the Bank of Canada began raising interest rates aggressively in March of this year, home prices in many major markets across Canada have been decreasing. The rate of decline, however, has been modest. According to the Royal LePage Market Survey Forecast, the aggregate[1] price of a home in Canada is set to decrease 1.0 per cent year-over-year to $765,171 in the fourth quarter of 2023, with the median price of a single-family detached property and condominium projected to decrease 2.0 per cent and increase 1.0 per cent to $781,256 and $568,933, respectively.[2]

“After nearly two years of record price appreciation, fueled by a steep climb in household savings, very low borrowing costs and an overwhelming desire for more space during the COVID-19 pandemic, the frenzied housing market overshot and the inevitable downward slide or market correction began, intensified by rapidly rising borrowing rates,” said Phil Soper, president and CEO, Royal LePage. “In an era characterized by the unusual, this correction has not followed historical patterns. While the volume of homes trading hands has dropped steeply, home prices have held on, with relatively modest declines. We see this as a continuing trend.”

Soper continued, “Much focus has been directed at the negative impact of rising rates; there has been far less discussion on factors supporting home prices.”

The higher cost of borrowing erodes affordability, which historically has pushed people out of the market, reducing demand and resulting in falling home prices. Conversely, there are a number of factors supporting home prices in the current environment.

The supply of homes for sale must exceed demand in order for prices to drop materially. Canada is struggling with an acute, long-term housing supply shortage. Organic demand is supported by the current lifecycle of our large millennial demographic and a record number of new immigrants who need to be housed. Smaller household sizes mean more housing units are needed per capita than in the past. Pent-up demand is growing from buyers who have the ability to transact but have chosen not to in these turbulent times.

Low unemployment, and a large buffer of unfilled job vacancies, means that few families are likely to need to sell their homes for financial reasons. Homes are modestly cheaper today than at the height of the pandemic boom, offsetting some of the impact of rising rates, and household savings remain above long-term norms, making it easier to overcome down payment hurdles.

“Traditional wisdom says that a recession triggers widespread job losses and missed mortgage payments. People are forced to sell or the bank forecloses and lists the property, flooding the market with new listings when demand is weak. In this post-pandemic period, people have kept their jobs. In fact, they have seen wages and salaries rise,” said Soper. “We have a tightly managed national mortgage portfolio, with historically low default rates, supported by homeowners who have been required to qualify for a loan under the strict federal stress test for the last five years. And, we can’t forget that Canada has been grappling with an acute shortage of homes overall. We simply don’t see the factors at play that would result in a large drop in home values.”

While home prices nationally are forecast to see modest quarterly gains in the third and fourth quarters of 2023, values are expected to remain lower than the same periods in 2022 throughout the year. The aggregate price of a home in Canada is forecast to be 12.0 per cent lower in Q1 of 2023, compared to the same quarter in 2022, reflecting a 2.4 per cent decline over the fourth quarter of 2022. In the second quarter of next year, the national aggregate price is forecast to be 7.5 per cent lower year-over-year, and remain virtually flat on a quarterly basis. In the third quarter, homes are expected to be 2.0 per cent lower year-over-year, reflecting a 0.7 per cent increase on a quarterly basis. And, in the fourth quarter of 2023, the national aggregate price of a home is expected to end the year 1.0 per cent below the same quarter in 2022, an increase of 0.8 per cent quarter-over-quarter.

“Comparing prices to the previous year, the first quarter of 2023 should show the deepest decline in home values,” said Soper. “At that time, we will be comparing 2022’s final weeks of pandemic housing market excess – when home prices reached historically high levels – to a much quieter market, where values have had a full year to moderate. We expect year-over-year comparisons to show progressively less price decline as the year goes on, with small week-to-week improvements in the third and fourth quarters, allowing Canadian home values to end 2023 essentially flat to where we are today.”

The recovery is not expected to be evenly distributed. Regional markets that saw more moderate price growth during the pandemic real estate boom are expected to experience more modest declines. Due to their relative affordability, cities like Calgary, Edmonton and Halifax are expected to record modest price gains in 2023, as they continue to attract out-of-province buyers, especially first-time homebuyers from southern Ontario and British Columbia looking for more affordable housing.

While home prices have come down from the record highs recorded in the first half of this year, they remain well above pre-pandemic levels. The projected aggregate price of a home in Canada in the fourth quarter of 2023 is expected to sit 15.0 per cent above Q4 of 2020, and 18.4 per cent above Q4 of 2019.

Without a significant increase in housing supply, a return of buyers to the market, some driven by very high rental rates, should start to put upward pressure on prices again. And, in a tight-inventory market, sellers will remain hesitant to list their properties if they are unable to find a move-up home to purchase.

“It’s important to note that many would-be buyers currently sitting on the sidelines have not been forced to exit the market. While some of these families have been priced out for now by rising borrowing rates, we believe some have voluntarily adopted a wait-and-see attitude, not wanting to buy a property today that may be worth less tomorrow. Yet people in their thirties, forties and fifties have known only a Canada where home prices rise faster than incomes. When interest rates appear to have stabilized, these buyers may jump back into the market, anticipating a return to escalating home values,” concluded Soper.