Canada's housing market hit a boiling point last year as homebuyers clambered for real estate in regions with significantly more demand than supply. But now that homeowners and buyers alike are feeling the pinch of rising interest rates and record inflation, the market appears to finally be simmering down.

That, in turn, could create a welcome opening for shoppers to be more selective with their searches. However, buyers hoping for a major downturn in prices may be left disappointed. Although home values in some segments are beginning to sag under the weight of higher borrowing costs, a persistent housing shortage is expected to keep prices high.

Read on for a closer look at some of the top factors impacting Canada's real estate market and how they could affect you.

Over the past couple of years, homebuyers have faced record-high price appreciation and intense competition—in part due to historically low mortgage rates that were a result of the Bank of Canada’s efforts to keep the economy afloat during the COVID-19 pandemic.¹

According to the Canadian Real Estate Association (CREA), in 2021, both the number of sales and average home price hit at an all-time high, with demand for new homes far exceeding supply.² This trend continued through early 2022, despite widespread predictions that the Bank of Canada was gearing up to increase interest rates.³

But now that the central bank has officially begun pushing its key interest rate back up from emergency levels, the housing market is responding, with the pace of home sales cooling in March and April.⁴ The Canada Mortgage and Housing Corporation (CMHC) predicts that the housing market will continue to moderate in the coming year.⁵

The feds plan to keep raising interest rates as necessary to fight inflation, which means target rates could rise by another 1 to 2% or more over the next year.⁶ That, in turn, will cause both fixed and variable mortgage rates to rise.

As Senior Deputy Governor Carolyn Rogers noted in May: “We need higher rates to moderate demand, including demand in the housing market. Housing price growth is unsustainably strong in Canada.”⁷

What does it mean for you?

If you’re shopping for a new home, expect mortgage rates to keep rising into 2024.⁸ So, you’ll need to act fast if you want to get in at a lower rate. However, the cooling effect should make for a less competitive market. We can help you chart the best path.

If you’ve been thinking about selling, higher mortgage rates may shrink your pool of potential buyers, so don’t wait too long to list. And if you are up for a renewal, you should also act quickly or risk paying a higher rate. Contact us to discuss your options.

Nationally, home prices soared a record 26.6% last year, an unsustainable rate of appreciation by any measure.⁹ But now that the Bank of Canada has put rock-bottom rates in the rear view window, sales have begun to slow.

Soon after the Bank of Canada began raising interest rates in early March, the real estate market responded. According to the CREA, in March, home sales fell by 5.4% on a month-over-month basis and the Aggregate Composite MLS® Home Price Index (HPI) ticked up just 1%, “a marked slowdown from the record 3.5% increase in February.”¹⁰ 

By April, home sales dropped by another 12.6% over the previous month as homeowners and buyers continued adjusting to higher rates.^. “Following a record-breaking couple of years, housing markets in many parts of Canada have cooled off pretty sharply over the last two months, in line with a jump in interest rates and buyer fatigue,” said CREA Chair Jill Oudil. Meanwhile, prices are still rising in some markets, but are sagging in others, causing the HPI to dip in April for the first time since 2020.¹¹

As the Bank of Canada continues pushing up rates, more buyers may give up on their homeownership dreams if they feel too squeezed by the combination of high rates and high prices. Still, many experts say a major downturn in prices is unlikely. That's in part due to the fact that there still aren't enough homes available to meet the demands of a growing population, says CREA CEO Michael Bourque. “The supply of new homes is not even close to keeping up with demographic changes and population growth.”¹² As long as housing remains a scarce asset, prices will remain relatively elevated.

What does it mean for you?

If you’ve been waiting to buy a home, now may be the perfect time to jump in the market. There are deals to be found if you know where to look. But don’t wait too long, or higher mortgage rates will erode any cost savings. We can help you find the best opportunities in today’s market.

For homeowners, the outlook is still bright. Governmental interventions are being put in place to stabilize the market–not crash it. And demand for housing and a strong job market should help protect your investment.

According to the CMHC, housing starts trended higher in April after a small downturn in March. Overall, new homes are still being built at a faster clip today than in the past, but at a slower pace than we saw in 2021, noted CMHC Chief Economist Bob Dugan.¹³ Homebuilders are facing a wide range of challenges, including persistent inflation, rising rates, and ongoing labour shortages.

Increased federal investment could help counteract at least some of those challenges. The federal government recently announced plans to help double the pace of housing construction over the next decade by funding significantly more new and affordable housing. It also announced additional relief measures, including a temporary ban on foreign investment, doubling first-time buyers' tax credit, and halting blind bidding wars.¹⁴

In addition to fewer homes being built, new listings are also down, according to the CREA’s sales report. But a decrease in demand is offsetting the impact in some areas. “A little more than half of local markets were balanced markets…a little less than half were in seller's market territory.”¹¹

What does it mean for you?
 

While supply remains at historically low levels, even a modest bump in inventory can help take pressure off of buyers. If you’ve had trouble finding a home in the past, give us a call to discuss what we’re currently seeing in your target neighbourhood and price range.

If you’re a homeowner, it’s still a great time to sell and cash out those big equity gains. Contact us to find out how much your home is worth in today’s market.  

While national real estate trends can provide a “big picture” outlook, real estate is local. And as local market experts, we can guide you through the ins and outs of our market and the local issues that are likely to drive home values in your particular neighbourhood.

If you’re considering buying or selling a home, contact us now to schedule a free consultation. We can help you assess your options and make the most of this unique real estate landscape.

Sources:

1. Bank of Canada -
   https://www.bankofcanada.ca/2020/03/press-release-2020-03-27/
2. Global News -
   https://globalnews.ca/news/8516543/canada-home-sales-record-crea/
3. CBC -
   https://www.cbc.ca/news/business/crea-housing-february-1.6385274
4. Canadian Real Estate Association -
   https://www.crea.ca/housing-market-stats/stats/
5. Canada Mortgage and Housing Corporation - https://www.cmhc-schl.gc.ca/en/media-newsroom/news-releases/2022/housing-markets-moderate-historic-2021-levels
6. Bank of Canada -
   https://www.bankofcanada.ca/press/press-releases/
7. Reuters - https://www.reuters.com/world/americas/bank-canada-says-strong-demand-risks-higher-inflation-2022-05-03/
8. Better Dwelling - https://betterdwelling.com/canadian-mortgage-rates-to-surge-demand-will-be-slowest-in-recent-history-moodys/
9. CBC -
   https://www.cbc.ca/news/business/crea-housing-december-1.6317503#
10. Canadian Real Estate Association - https://www.crea.ca/news/march-home-sales-and-new-listings-ease-back-following-surge-in-february/
11. Canadian Real Estate Association - https://www.crea.ca/news/home-sales-drop-in-april-as-mortgage-rates-shoot-higher/ 
12. Global News -
    https://globalnews.ca/news/8716412/canada-housing-market-cooling-bubble-interest-rate/
13. Canada Mortgage and Housing Corporation - https://www.cmhc-schl.gc.ca/en/media-newsroom/news-releases/2022/canadian-housing-starts-trend-higher-april

14. Office of the Prime Minister of Canada, Justin Trudeau - https://pm.gc.ca/en/news/news-releases/2022/04/13/helping-young-people-get-housing-market