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Will The Housing Market Crash In 2023?

by David Bico on 18 Nov 2022

The prices of housing in Canada are poised to drop quickly in 2023, but not by enough to become more affordable. The Bank of Canada intends to keep hiking interest rates to combat inflated prices, but this won’t do much for affordability.

The BoC has kept interest rates very low throughout the pandemic but began hiking them in April when they pivoted from quantitative easing to quantitative tightening. This response could cause a huge drop in real estate prices.

Keep reading to find details on the possibility of a Canadian housing market crash in 2023, as well as information on why prices may continue falling.

What The Bank of Canada Says

With the current overnight rate sitting at 3.25%, the Bank of Canada says that the Canadian economy is evolving in line with its projected targets. Inflation is still quite high across the world, and most central banks are doing their best to tighten things up.

The annualized Canadian CPI increased by 7.0% as of August 2022, slowing down from the 8.1% peak in June 2022. Surveys of banking officials and economists show that inflation is expected to remain high.

Canada’s central bank is expected to continue hiking rates in an attempt to hit its inflation target of 2%. Current estimates put inflation between 5–5.5%, but the actual numbers could be much higher.

The Housing Market Downturn

Canadian housing markets have been in a steep downturn for the last six months or so, largely in response to the interest rate hikes easing mortgage and housing demand. Reports such as this one from TD Bank indicate that home prices could fall by as much as 20–25%.

While lower home prices may sound like a good thing, it is unlikely that the decrease in home prices will increase affordability, since high mortgage rates make it harder for buyers to qualify for a mortgage.

The greatest decline in price has been seen in Ontario and British Columbia. Alberta has also seen a large decline in home prices, but existing home sales volume remains high, in contrast to what is being seen in Vancouver and Toronto.

John Pasalis, the president of Realosophy Realty, told Reuters that “the national average home price has been disconnected from incomes… for quite some time” and “even if benchmark house prices fall another 30% nationally, this will just put housing prices back to February 2020 levels”

What Banks Have To Say About Home Prices

RBC economist Robert Hogue noted in a recent report that the housing crash has affected Canada’s housing market. In places like Toronto and Vancouver, this drop is steeper than most other declines across the last half century.

As mentioned before, a recent report released by TD Bank indicates that real estate prices could fall 20–25% by the end of 2022, and the downturn will likely continue into 2023. This would make it the steepest decline since data collection started in the 1980s.

TD also projects the volume of home sales to decline by up to 35%, falling just short of similar drops experienced during the recession of 2008. Experts say condo sales will drop even more steeply compared to single detached homes.

Although personal incomes are rising slowly, they were largely outpaced by skyrocketing real estate prices during the pandemic. It is unlikely that a large pullback will make things much more affordable, given how much home price growth is outpacing income growth.

Will Houses Be Affordable?

Housing supply affordability is driven by a large number of factors. With huge immigration numbers fuelling high demand for real estate, it is likely that prices will remain unaffordable for a large number of Canadians.

The Bank of Canada is set to continue sustaining rising interest rates through 2023, which keeps mortgage rates higher even as prices start to come down. This will be exacerbated by increasing immigration targets throughout 2023 and 2024.

Final Thoughts

The Bank of Canada fuelled the pandemic housing boom with sustained low-interest rates throughout 2020, further propping up Canada’s housing market with large purchases of mortgage bonds.

Now that the BoC has pivoted into quantitative tightening, prices have begun to plummet, particularly in large metropolitan areas such as Vancouver and Toronto. Sales volumes have also taken a large tumble across the board.

The downturn is expected to continue as the Bank continues raising its overnight rate in pursuit of its inflation target of 2%. The current inflation rate is estimated between 5–5.5% based on CPI numbers and projections from economists.

Despite the expected drop in average home prices, it is unlikely that homes will return to an affordable level any time soon. Sustained immigration and large amounts of foreign investment are expected to exacerbate the affordability crisis in the near future.



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