After the housing market began its descent back down to Earth last year, it looks like 2023 is the year Canadians can expect the market to finally reach its lower limits, according to TD Economics.
Declines in home prices and sales are expected to bottom out in the first few months of 2023, Rish Sondhi, a TD economist, said in a note to clients. The floor will coincide with a pause in Bank of Canada interest rate increases, which TD thinks will happen after one more hike in January.
In all, prices are expected to fall around 20 per cent from their peak before finally stalling in the first few months of the year. To put that into perspective, in November, the price of an average house in Canada was $632,802, the Canadian Real Estate Association reported in December. That represented a decline of 12 per cent from the same month in 2021.
Sales, meanwhile, are also likely to find a floor in the first part of the year. But that doesn’t mean they won’t continue to be weak. High interest rates have pushed the costs of owning a home to new heights, cratering housing affordability, which is plumbing levels not seen since the late 1980s and early 1990s. Indeed, housing affordability has never been worse, according to one measure from the Royal Bank of Canada.
“2023 is likely to mark the weakest sales year since 2001,” Sondhi said in the note.
Similarly, it would be a mistake to expect home prices to rebound this year. Though prices didn’t fall as much as expected in the fourth quarter of 2022, TD economists think they will still face steep declines thanks to higher interest rates, which have gone higher than they thought. The Bank of Canada’s key policy rate rose to 4.25 per cent in December from 0.25 per cent in March of 2022. And there’s still one 25-basis-point hike in store in January, TD said.
Still, when it comes to further price erosion, some markets will be harder hit than others. Ontario, British Columbia and the Atlantic region will experience the sharpest declines, TD said. But even then, things will be more dire in Ontario and B.C., with declines expected to wipe out any gains made in 2022. Meanwhile, home prices in the Prairies and Newfoundland and Labrador are expected to fall less sharply, thanks to better housing affordability in those regions.
It won’t be until 2024 that things truly turn around for the housing market. TD expects both sales and average home prices to post gains next year once the economic picture clears, with prices rising 3.9 per cent and sales growing 18.9 per cent on average nationally.
By then, inflation should have come down, putting interest rate increases off the table. The economy should also be growing again as high immigration levels fuel population growth, juicing demand for homes. That will help sales and lift prices. But affordability challenges will keep the the housing market from getting too hot, TD said. As a result, price gains could be stronger in the Prairies and Newfoundland and Labrador, with overall growth getting weighed down in Ontario, B.C. and Atlantic Canada.
Still, predicting the direction of the housing market is never easy, and TD said there’s one wildcard that could affect its price forecast: supply.
“If higher interest rates and economic weakness result in significant amounts of forced selling on the part of homebuyers, price growth could be weaker than expected,” Sondhi said.