The inflation balloon that sent home prices soaring over the last two years is coming in for a landing, but it’s going to be a slow descent, according to a number of economists and housing market watchers..“We think activity will hit bottom sometime this spring,” says Robert Hogue of RBC Economics..“Prices will level out a few months later, provided the Bank of Canada is done raising interest rates. All told, our forecast calls for a 15% peak-to-trough decline in the national Real Property Solutions (RPS) Home Price Index. Roughly half that is still to come.”.Other price measures, such as the MLS Home Price Index and MLS average sales price already exceeded RBC’s forecast of a 15% drop. .“That’s largely because these measures are more volatile than the RPS HPI,” says Hogue. “They soared higher during the dramatic run-up earlier in the pandemic and responded more quickly to the downturn, as has typically been the case in prior cycles.”.It is important for readers to know the price declines are composite, meaning they include all types of homes under one umbrella, while the rate of price declines by housing type will vary. Some composite declines could be the result of lower priced homes being preferred by buyers, e.g., a condominium versus a single-family home..What’s coming next will disappoint housing bulls, says Hogue..“We see the recovery phase starting slowly later this year as affordability issues and a weaker economy continue to hold back buyers,” he says. “The pace should progressively pick up in 2024 once the economy clears its soft patch, inflation returns to target, and the Bank of Canada reverses part of the massive rate increases it’s imposed since March 2022.”.In a poll of analysts on a Finder.com panel, 88% anticipate property prices will decline further through the course of 2023, with the majority believing prices will drop another 10% by the end of 2023, compared to January 2023 prices..Carl Gomez, chief economist and head of market analytics for CoStar Canada says, "With pent up demand among both buyers and sellers, further adjustments to prices may be required to get the market moving.".Moshe Lander, senior lecturer in economics at Concordia University says, “the supply-side of housing is currently keeping prices higher, despite rapid rate hikes over the last year.”.In a housing market outlook report released March 7, Randall Bartlett, senior director of Canadian Economics, and Marc Desormeaux, principal economist at Desjardins Economic Studies, wrote: “In recent months, the pace of the housing market correction has slowed considerably. Indeed, we expect sales to find a bottom early in the second half of 2023 and home prices to begin rising shortly thereafter.”.Desormeaux says housing prices should fall even more, “but supply remains constrained thanks to overly restrictive zoning laws in many Canadian municipalities. Once people readjust to the higher interest rates, demand will recover and limit the fall in prices.”.Hogue expects the number of new home starts will not increase significantly until next year.“Starts, which have fallen recently from near‑historic highs, should bottom out in the early part of 2024 before gradually climbing higher,” he says. “This change in fortune will likely be the result of interest rate cuts following a prolonged pause by the Bank of Canada.”.“A persistently tight labour market, still elevated household savings and high levels of immigration will also play a role in supporting housing demand in Canada.”.“The booming immigration will fuel demand through the medium term, and possibly beyond, raising the odds of deep supply shortages in the future if homebuilding fails to pick up materially.”.The recent track record for construction has been underwhelming, says Hogue, even though homebuilding has increased over the past three years, more is needed..“Housing completions rose from less than 190,000 units in 2019 to roughly 220,000 units in 2021 and 2022, but nowhere near enough to meet supercharged demand,” he says. “We estimate our housing stock must expand by at least 270,000 units per year by 2025 just to accommodate the growth in households, let alone address the housing affordability crisis in many Canadian cities.”.“Needless to say, homebuilding needs to ramp up considerably from this point on. It’s unclear, though, whether the construction industry has the capacity to do so in the face of significant labour shortages.”.Recent reports from major metropolitan areas, including Calgary, the Greater Vancouver Area and the Greater Toronto Area, say the supply of resale homes on the market is the lowest since the 2008-2009 global financial crisis, excluding the lockdown period in the spring of 2020..“This means the sharp deterioration in housing affordability since 2021 won’t unwind quickly,” says Hogue. “Buyers will continue to face steep challenges, especially in BC, Ontario and other expensive markets where ownership costs have ballooned during the pandemic. Lingering affordability issues will stand in the way of a quick market rebound and a material easing in buyers’ budget constraints.”
