Home sales have kicked off 2022 below 2021 levels, while price growth has continued to set records. This is consistent with strong demand meeting end-of-month inventory levels that are lower than they have ever been.
Along with the ongoing supply crisis, the other main factor expected to impact housing markets this year and next will be higher interest rates.
While discounted five-year mortgage rates have already begun to rise – a jump last spring followed by a steady upward trend since last October – and are now back above pre-COVID-19 levels, the Bank of Canada has only just announced its first quarter point hike in early March.
Analysts surveyed by Bloomberg Economics see the overnight rate ranging from 1.75% to 2.75% by the end of 2023. That said, given markets are currently pricing in 1.75% by the end of 2022, it is more likely to be the latter. That would make for nine Bank of Canada quarter-point rate hikes by the end of next year.
Having said that, it’s important to note Canadian borrowers must qualify for their mortgage loans at the stress test rate (currently set at 5.25%), which is currently somewhere in the range of 245 basis points above the typical discounted five-year rate.
The original intent of the stress test was a buffer of around 200 basis points, which is likely why the Office of the Superintendent of Financial Institutions (OSFI) chose not to move the stress test rate following their December 2021 re-evaluation.
As such, recent higher market rates have not really made it any more difficult to qualify for a mortgage, and borrowers are still being stress tested at a very robust level.
Another wildcard are the housing policy changes announced in last year’s federal election campaign. Which of these will become policy in 2022 and beyond and how will these affect housing markets across Canada? The answers should become clearer when the Federal Budget is published later this spring.
Finally, to quote the Bank of Canada from their most recent policy announcement: “The unprovoked invasion of Ukraine by Russia is a major new source of uncertainty. Prices for oil and other commodities have risen sharply. This will add to inflation around the world, and negative impacts on confidence and new supply disruptions could weigh on global growth. Financial market volatility has increased. The situation remains fluid and we are following events closely.”
With all of that said, some 612,800 properties are forecast to trade hands via Canadian MLS® Systems in 2022 — a decline of 8.1% from 2021 but still the second-highest annual figure ever by a sizeable margin.
This projection is basically the same as it was in the December 2021 forecast, though under the surface, downward revisions to British Columbia, Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia offset a considerable upward revision to the sales forecast for Alberta, along with smaller upward revisions to Saskatchewan and Newfoundland & Labrador.
The national average home price is now forecast to rise by 14.3% on an annual basis to $786,000 in 2022. Not surprisingly, this is higher than the previous forecast, as prices have continued to set new records, reflecting the unprecedented imbalance of housing supply and demand. The number of months of inventory nationally was a record-low 1.6 in December 2021, and January and February 2022. The long-term average for that measure is a little over five months. It is quite possible the risk to this price forecast is still to the upside.
Home sales are forecast to remain historically strong in 2023 while continuing to move slowly back in the direction of the longer-term trend. Limited supply, higher prices and higher interest rates are expected to further tap the brakes on activity and price growth in 2023 compared to 2022, particularly in Canada’s most expensive markets.
National home sales are forecast to edge back a further 2.7% to 596,150 units in 2023 – still the third-best year on record. This easing trend is expected to play out most notably in British Columbia, Ontario and Quebec. Alberta and Saskatchewan are forecast to buck the trend with moderate sales gains in 2023.
Other provinces are forecast to see fairly little change in sales between 2022 and 2023 as economic growth, population growth, and supportive demographic trends under the surface are counterbalanced by supply and affordability challenges.
The national average home price is forecast to rise by a modest 3.2% on an annual basis to just under $811,000 in 2023. While the $800,000 mark may seem an unlikely milestone to hit given where the market was just a couple of years ago, it should be noted that with the national average price having already surged (though likely only temporarily) to more than $816,000 in February 2022, this is a conservative forecast.