Housing markets across Canada entered 2022 on a hot streak. Sales and prices were rising at unprecedented rates, based primarily on historically low interest rates..Sellers were entertaining multiple offers on their homes, with ‘sold above listing price’ not uncommon news..That activity, coupled with rising inflation in goods and services, forced the Bank of Canada to bring out its fire extinguisher, raising its overnight rate in a series of moves that took it from .25% to 4.25%, effectively dousing the hot streak..What’s ahead for the Canadian housing market in 2023?.Year-end predictions are most often a fool’s game. But I’ve been called worse, so let’s have a look, with the help of some industry veterans..The first thing to understand is a ‘Canadian housing market’ will not exist going forward, just as it didn’t really exist prior to the pandemic..From mid-2020 to the late spring of 2022, all markets were moving in lockstep with rising sales and prices and diminishing supply, so there was what could be considered a national housing market. So, understand year-over-year statistical comparisons of 2022 to 2023 will not look good, but not be as bad as they look..Rising interest rates have put buyers on the sidelines in most, but not all, markets, which will continue into 2023..“While prices are down more in Ontario and parts of British Columbia, they have softened to some degree almost everywhere,” says the Canadian Real Estate Association’s senior economist, Shaun Cathcart. “Calgary, Regina and Saskatoon stand out as markets where home prices are barely off their peaks.”.Sales across the country were showing month-over-month declines since March, with a blip in October, when they rose slightly, says Cathcart..“Just as one car does not make a parade (at least not a very good one), one month of data does not make a trend,” he says. “To wit, it looks like that little sales increase we saw in October was something of a head fake, because activity started trending back down again in November.”.“The aggregate composite MLS home price index edged down 1.4% on a month-over-month basis in November, which, as with sales activity, with the index not sitting at about 11.5% below its peak level.”.The bank raised its rate again in early December and the question on market watchers’ minds is, ‘will it raise the rate again in January?’.Cathcart believes rate hikes are at or nearing an end..“That could pull some variable rate borrowers off the sidelines once it’s clear to all that we’re at a top for interest rates and we’re not going back to the rates of the 1970s and 80s (when they were pushing 22%),” he says. “That collective realization may also dawn just as the market gets a burst of desirable new property listings in the spring.”.“But as far as getting back to normal, the bigger question for housing markets is not so much where the top or terminal rate will be, how long it will stay there, or when will rates start coming back down? It’s when will rates be back at lower levels? Most fundamental factors needed for the market to take off again are still out there.”.The bank’s language at its December hike was less hawkish than at previous announcements, saying it will consider whether another hike will be needed in January..It does have a forecast for inflation, which is what and guides its rate decisions. It is projecting inflation will be back at around 3%, year-over-year, by the end of 2023 and to fully return to the 2% target by the end of 2024..“Once inflation is back at target the Bank will want their benchmark rate to be back in the neutral range of 2% to 3%, or about halfway between the COVID-19 emergency lows and the inflation fighting mode we’re experiencing today,” says Cathcart..Rishi Sondhi, economist with TD Economics, sees continued sales declines in the coming months..“Weaker sales activity should push prices even lower in the near-term. However, our forecast calls for average prices to only partially retrace their pre-pandemic gain when they eventually bottom,” says Sondhi. “An unanticipated surge in resale supply would undermine this view, but so far, the rate at which new listings are hitting the market has been subdued.”.Cathcart wouldn’t be surprised to see intertest rate declines..“We could easily see rate cuts begin in 2023. As I said an eventual rate cut could also be the signal many variable rate borrowers are waiting for to jump back into the market,” he says..“But for many first-time home buyers, passing the stress test may require them to wait, not just until rates have started to decline, but until they have declined quite a bit. That’s more likely to be a 2024 story than a 2023 one.”
