It may be several years yet before home prices fall back into an affordable range for the average Canadian, according to a new report from Oxford Economics.

Tony Stillo, director of economics for Canada for the research firm, told BNN Bloomberg this week that home prices may get “a little worse” before starting to come down later in 2023.

After that, homes probably won’t hit a reasonably affordable level until around 2027, he said, once interest rates and prices have time to come down and incomes have risen.

“It’s going to take a while. We don't think housing will become within the reach of the Canada-wide average household until 2027,” he said. “It’ll be some time, unfortunately.”

Home prices vary across Canadian cities and regions. Houses in the Vancouver and Toronto areas are particularly expensive, where average homes priced at around $1 million are far outside the budget of a median-earning household.

While prices were already high in major cities before the pandemic, the Bank of Canada’s interest rate hikes of the past year have driven up mortgage rate interest costs, further impacting affordability.

But the price picture could shift over the next year thanks to several factors, Stillo said.

With the Bank of Canada notching another rate increase last month, Stillo said he expects prices to rise further, putting a squeeze on homebuyers feeling pinched by higher interest rates and high home prices. Tighter credit conditions may also play a role amid heightened unaffordability across the country, he added.

Stillo predicts a moderate recession will set in over the next few months, causing people to pull back on their spending as interest rates catch up to them. He thinks that phenomenon will ultimately lead to a decline in home prices.

“That's going to be the key trigger that you'll see soon,” he said.

“Only in the basically the latter part of this year, over the next couple of years will we start to see an improvement in affordability.”

Stillo anticipated by halfway though 2024, home prices will have fallen about a quarter from their peak in February 2022, before becoming “somewhat” more affordable in 2027 as conditions such as high interest rates and prices even out.

He expects home affordability will improve over the next decade into the mid-2030s.

Those projections are heavily dependent on more housing supply becoming available to keep prices in check, he noted, pointing to pledges from governments to fill the gap.

“We're looking for supply of housing to outpace demand,” he said. “Governments have made a lot of concerted efforts to streamline the development process, get more housing built, and that is what we're hoping for.”