Rising rates will bend, not break, the Canadian housing market: Desjardins report
A new report from Desjardins’ economics team says the Canadian housing market will likely bend, but not break, under the weight of rising interest rates and slowing activity.
In a note to clients on Wednesday, Desjardins Senior Director of Canadian Economics Randall Bartlett and Senior Economist Hélène Bégin said prices could plausibly fall 15 per cent from their February 2022 peak by the end of next year, but would remain above pre-pandemic levels.
“Looking ahead, we believe ever-higher borrowing costs are going to weigh on housing market activity as increasingly interest-sensitive households batten down the hatches for the impending storm. This is expected to lead to sustained weakness in sales activity, thereby keeping persistent downward pressure on prices,” they said.
“While some Canadians may lose their sleeves, we don’t expect Canadian households on the whole to lose their shirts.”
Canadian home prices have fallen sequentially for the last two months, after hitting a non-seasonally adjusted record of $816,720 in February, according to the Canadian Real Estate Association.
The decline came as the Bank of Canada started hiking its benchmark rate aggressively, raising it by a half per cent in each of the last two meetings to combat inflation not seen in three decades. For context, the central bank’s last supersized hike was 22 years ago.
The Desjardins team said they do not expect the declines to be uniform, with greater pain felt in markets where prices soared due to an influx of Canadians able to work remotely during pandemic-era restrictions.
“As we look ahead to how the national housing market correction will play out at the provincial level, in some ways it’s expected to be the inverse of what we saw during the pandemic,” Desjardins said.
“For instance, those provinces that experienced the most dramatic price gains -- notably the Maritime provinces -- should see the largest corrections. In contrast, those provinces that saw home prices increase the least -- the Prairie provinces and Newfoundland and Labrador—should see the least correction coming out of the pandemic.”
And with the gradual return to the office, Desjardins’ team thinks there could be some pain felt in Ontario housing markets that are just a bit too far to commute into the large centres, though that could be cushioned by immigration and hybrid work plans.
“Communities within a few hours’ drive of Toronto are likely to see sales activity and prices cool the fastest as borrowing costs rise and commuting becomes more common,” they said.
“But again, we don’t anticipate average home prices in any of these regions to fall below their pre-COVID starting points due by and large to high levels of international migration and ongoing hybrid work arrangements.”
Overall, Desjardins said the correction should bring the domestic housing market back to more balanced conditions after the recent supercharged run higher.
“It looks as though the Canadian housing market correction we expected has begun, though it’s still concentrated in a small number of markets. But there’s no need to panic,” they said.
“While a correction in the range of 10 per cent to 20 per cent is likely by the end of next year in most provinces, average home prices are expected to remain above the pre-COVID level and trend. As such, the anticipated correction should bring more balance to the Canadian housing market.”