Experts: Canadian house prices are expected to fall 17.5% from peak to bottom
According to a poll of market experts, once sizzling Canadian home prices are expected to fall a total of 17.5 percent from their peak, about double the rate seen during the 2008-09 financial crisis, and the slowdown is already well advanced.
A series of rapid rate hikes by the Bank of Canada, taking the federal funds rate from nearly zero to 3.75 percent in just eight months, took some of the steam off the market, with the average five-year mortgage rate doubling to just under 5 percent.
But after a more than 50 percent surge in house prices during the pandemic on top of what is already considered one of the most expensive real estate markets in the world, this expected drop would not be enough to bring prices down to affordable levels.
With a debt-to-net disposable income ratio of 1.85, Canadian households are among the most indebted in the world and are more vulnerable to higher interest rates due to their higher exposure to adjustable rate mortgages.
Correction forecasts from peak to bottom in the November 8-22 survey of 12 real estate analysts ranged from 10 percent – how much the market has already fallen – to 30 percent.
Tony Stillo, director of Canadian economics at Oxford Economics, said higher mortgage rates and panicked price increases during the pandemic have kept average housing costs “35 percent above the borrowing capacity of middle-income households”.
“Our forecast of a 30 percent fall in house prices, combined with steady income growth, stabilizing mortgage rates and stronger housing supply growth…will see house prices return to affordable ranges by the end of 2025,” he said.
According to the middle answer to an additional question, house prices need to fall 25 percent from peak to trough to make them affordable. Responses ranged from 18 percent to 35 percent.
This echoed BoC senior deputy governor Carolyn Rogers, who said house prices would need to fall to restore balance to the housing market. She suggested the bank is quite happy to see those prices fall. Nationally, home prices are down by around 10 per cent from the peak in February.
After rising 11.8 percent this year from 2021, average house prices should fall 10.0 percent next year and rise 1.3 percent in 2024, lagging behind consumer inflation, according to the survey’s median forecast.
“We are in a unique situation where demand has collapsed and buyers cannot qualify or afford spring pricing. Outside of some areas, however, there isn’t a huge range of offerings, and sellers can still say “no thanks,” said Robert Kavcic, senior economist at BMO Capital Markets.
Housing starts fell 11 percent last month as sellers held back on hopes of a spring rally and rising borrowing costs weighed on demand.
The central bank’s overnight interest rate has been priced in by markets to peak between 4.25% and 4.50% next year as consumer inflation is well above triple the BoC’s 2% target.
Home prices in Toronto and Vancouver, the regional epicenters of the biggest price booms in recent years, are forecast to fall 11.0 percent and 9.3 percent in 2023, respectively, after rising as much as 58 percent and 35 percent since the pandemic began.
When asked to rate the average home prices in Canada on a scale of 1 to 10, with 1 being extremely cheap, 5 about the right price, and 10 extremely expensive, the median forecast from 11 contributors gave it an 8. For Toronto and Vancouver, those were Ratings 9.
A majority of property market experts said the risk of a collapse in property prices is low. During the financial crisis, US home prices collapsed by as much as 40 percent, but the Canadian market only fell 9 percent at the time.
“In more ‘normal’ pre-pandemic times, a 30 percent drop in house prices would be considered a crash. However, in the current context, where property prices have risen by 50 percent in just two years during the pandemic, a 30 percent price correction will still leave property values above pre-pandemic levels,” Stillo added.
This article was reported by Reuters.