After sizzling Canadian house prices are expected to fall a total of 17.5% from their peak, about double the fall during the 2008-2009 financial crisis, according to a Reuters poll by market experts. , while the slowdown is already in full swing.
A string of rapid interest rate hikes by the Bank of Canada, which took the overnight rate from almost zero to 3.75% in just eight months, knocked some steam out of the market, doubling the average five-year mortgage rate to almost 5%.
But after a more than 50 percent rise in house prices during the pandemic, in addition to what was already considered one of the most expensive real estate markets in the world, this expected fall will not be enough to bring prices to affordable levels.
With a debt to net disposable income ratio of 1.85, Canadian households are among the world’s most heavily indebted and are more vulnerable to higher rates given their higher exposure to floating rate mortgages.
Forecasts for a peak-to-trough correction in a survey of 12 real estate analysts conducted November 8-22 ranged from 10% (approximately how much the market has already fallen) to 30%.
Tony Stillo, Canada’s director of economics at Oxford Economics, said higher mortgage rates and price panics during the pandemic have kept average home values ”35% above the creditworthiness of middle-income households.”
“Our forecast of a 30% decline in home prices, coupled with robust income growth, stabilization in mortgage rates and stronger housing supply growth… will see home prices return to the affordable range by the end of 2025,” he said. .
According to the average answer to the follow-up question, home prices need to fall 25% from peak to trough to make them affordable. Responses ranged from 18% to 35%.
This is in line with Bank of Canada Senior Deputy Governor Caroline Rogers, who said house prices should fall this week to rebalance the housing market.
After rising 11.8% this year compared to 2021, average home prices are expected to fall 10.0% next year and rise 1.3% in 2024, lagging consumer inflation, according to the median forecast survey.
“We are in a unique situation where demand has collapsed and buyers cannot claim or afford early year prices. But outside of some regions, there aren’t many offers to choose from, and sellers can still say “no thanks,” said Robert Kavcic, senior economist at BMO Capital Markets.
New home construction fell 11% last month as sellers delayed listings in hopes of a spring rally and rising borrowing costs dampened demand.
Markets were looking to the central bank’s overnight rate to peak at 4.25-4.50% next year as consumer inflation far exceeds the Bank of Canada’s 2% target.
Home prices in Toronto and Vancouver, the regional epicenters of the biggest price booms in recent years, are projected to fall by 11.0% and 9.3% in 2023, after rising 58% and 35% since the start of the pandemic.
When asked to rate average home prices in Canada on a scale of 1 to 10, where 1 is very cheap, 5 is about right, and 10 is very expensive, the median prediction of 11 participants rated it an 8. Toronto and Vancouver rated it a 9.
Most real estate market experts said that the risk of a collapse in housing prices is low. During the financial crisis, US house prices fell by about 40%, while the Canadian market fell by only 9%.
“In more ‘normal’ pre-pandemic times, a 30% drop in house prices would have been considered a crash. However, in the current environment where home prices have risen by 50% in just two years during the pandemic, a price correction of 30% will still leave home values above pre-pandemic levels,” Stillo added.