Economists expect Canadian home prices to fall by as much as 20 percent this year as higher interest rates begin to hit the country’s booming real estate market.
Mortgage rates are expected to rise again as the Bank of Canada aggressively raised interest rates to deal with hyperinflation. Economists expect higher borrowing costs to drive prices lower in some of the hottest markets.
Toronto Dominion Bank economist Rishi Sundi forecasts a twofold decrease in the national average home price during the March-December period of this year. Robert Cavic, chief economist at Bank of Montreal, expects a 10 to 20 percent drop in the home price index in certain areas.
“When we talk about housing correction, it is not about whether, but where, how much, and for how long,” Mr. Kavcic said in a research note. “The suburban markets in Ontario are looking a bit more shaky,” he said.
The national home price index, which is adjusted for price fluctuations, fell 0.6 percent to $866,700 from March to April on a seasonally adjusted basis, according to the Canadian Real Estate Association, or CREA. It was the first drop since April 2020, when homeowners struggled to sell their properties amid the pandemic economic shutdown.
The current decline in home prices was led by smaller markets in Southern Ontario. The Oakville-Milton house price index fell 5.6 percent from March to April, while the London house price index fell 4 percent and Cambridge fell 3.9 percent, according to CREA.
The slowdown in the housing sector has been due to the rapid increase in borrowing costs over the past few months. The next interest rate announcement from the Bank of Canada is scheduled for June 1. The central bank is widely expected to raise interest rates by another 50 basis points.
Realtors described the sudden change in buyer sentiment. Some homes do not bring in any offers and remain on the market for longer than a month. This is in contrast to the first two years of the pandemic when homes attracted dozens of bidders and sold for hundreds of thousands of dollars above listed price.
“The pandemic housing boom is clearly waning. Bid wars are waning and prices are starting to stabilize,” said Phil Soper, chief executive officer of Royal LePage.
“When markets over the past couple of years are correcting,” he said, adding that it’s too early to say the pendulum has fully swung in the buyer’s market and that it’s watching cases for both multiple offers and homes not selling.
Overall, CREA said the number of resales fell 12.6 percent from March to April on a seasonally adjusted basis, a sharper drop than the previous month, with volumes lower in most areas across the country.
Kylie Hibbs, a realtor who has been selling homes in Toronto for more than two decades, said she still sees multiple offers above the listed price but also said, “We’re not seeing the same frenzy that was there in the early months of a year.”
CREA said just over half of the country was in a balanced market for the first time since June 2020, when the economy began to open up. Although the number of new listings decreased from March to April, buyer demand has also waned.
Even if home prices fall 20 percent during the latter half of this year, values will still be higher than they were before the start of the pandemic. Since January 2020, the national home price index has risen by 52.2 percent.
Compared to April of last year, the house price index increased by 23.8 percent.
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