Amid elevated interest rates, here's what to expect from Canada's housing market in 2023

Homeowner says his mortgage payments are spiking New homeowner Youseff Shehata says he's had to cut down on his expenses after his interest rate payments spiked.

After a series of interest rate hikes throughout 2022, the average price of a home in Canada has dropped by more than $180,000 since hitting its peak in February.

This “softening” of the market represents a shift to more accurate home valuation, said Moshe Lander, an economics professor at Concordia University in Montreal. This landscape of lower home prices is likely to continue into 2023, he said.

“Housing prices have been disconnected from reality for some time now,” Lander told CTVNews.ca in a telephone interview. “The rapid increase in interest rates is probably going to generate a rather quick fall in housing prices [and] a sudden correction.”

The Bank of Canada has implemented seven interest rate hikes in 2022 alone, taking its key interest rate from 0.25 per cent in February to 4.25 per cent in December. By increasing interest rates, the Bank of Canada’s goal is to reduce inflation, Lander said. While Canada’s annual inflation rate dropped slightly to 6.8 per cent in November, the central bank’s goal is to bring that number down to its target of about two per cent.

Higher interest rates aim to reduce demand, discouraging Canadians from opting for larger loans such as mortgages, Lander said. This is already being reflected in some of the latest data from the Canadian Real Estate Association (CREA), said Doug Porter, chief economist at the Bank of Montreal (BMO).

According to the CREA, actual monthly sales activity in November 2022 was nearly 39 per cent below that of November 2021. There were 49,357 residential sales reported over the MLS systems of major Canadian cities in November 2021. Exactly one year later, there were 30,135 sales. Both figures are not seasonally adjusted.

“There was no significant change in the overall trend [since October],” Porter told CTVNews.ca in a telephone interview. “Sales are clearly below the 10-year average.”

A continuation of this slowdown in sales activity is something Porter said he expects to see in 2023. Elevated interest rates will also continue to put downward pressure on prices next year, he said.

Average home prices for residential properties in Canada have already fallen 12 per cent from November 2021 to November 2022, according to non-seasonally-adjusted data from the CREA. Based on BMO’s forecast, average home prices are expected to drop another 10 per cent within the next six to 12 months, Porter said.

“That would really just compensate for the backup in interest rates,” he said. “The market just got overcooked late last year into early this year, and it was due for at least a minor correction.”

As interest rates rise, economists from the Royal Bank of Canada (RBC) are predicting the country will enter a recession in the first quarter of 2023. This slowdown in economic activity will likely also put downward pressure on housing prices, said Porter.

Despite a projected drop in costs, this may not necessarily translate into greater housing affordability, Porter said, as homeowners will likely continue spending money, just on higher interest rates instead of home prices.

WILL INTEREST RATES KEEP RISING?

The Bank of Canada has another announcement scheduled for Jan. 25. While the central bank suggested it may be ready to press pause on interest rate hikes, further increases have not been ruled out entirely.

According to Bank of Canada deputy governor Sharon Kozicki, the central bank’s decision on whether to continue raising its key interest rate will rest on the latest economic data.

“We are moving from how much to raise interest rates to whether to raise interest rates," Kozicki said during a speech in Montreal on Dec. 8.

However, the bank also remains ready to “act forcefully” with rates if necessary, she said.

BMO is forecasting an increase of 25 basis points in January before the central bank holds its rate steady until 2024.

It’s unlikely the Bank of Canada will reduce its key interest rate any time soon, Porter said. As a result, Canadians can probably say goodbye to the low interest rate environment witnessed throughout 2021.

“It’s highly unlikely we’re going back to that,” he said. “Those days are probably behind us. The kind of interest rates that we have now are closer to what we're probably going to deal with in the years ahead.”

BUYERS AND SELLERS TO TAKE A ‘WAIT AND SEE’ APPROACH: EXPERTS

While average home prices may have dropped across Canada since February, not all cities have been impacted by rising interest rates in the same way, Porter said.

Sales in the Greater Toronto Area have slowed down significantly in recent months, said Nero Naveendran, a real estate agent based in Toronto. Residential sales activity over MLS systems dropped 49.6 per cent between November 2021 and November 2022 in Greater Toronto, according to data from the CREA that is not seasonally adjusted.

The reason behind this drop likely stems from a sense of uncertainty residents are feeling about future interest rate hikes, including whether they will take place and if so, by how much, Naveendran said.

“Nobody wants to get into a market where they expect [prices] to continue to go down,” he told CTVNews.ca in a telephone interview. “They are waiting on the sidelines until they know for sure that interest rates won’t go up anymore.

“If we know that the interest rates are going to stay the same, then I think sales will pick up.”

Sheila O’Brien, a real estate agent based in the Greater Vancouver Area, said she is also seeing clients take a “wait and see” approach as well, particularly those looking to sell their homes, as they assess the ongoing impact of rising interest rates on prices.

The city of Montreal has also seen fewer sales within its residential market since July, said real estate agent Jaclyn Rabin. Rising interest rates are having a significant impact on reducing buyer demand, she said, with those looking to purchase a home now being more cautious with their spending.

“We're seeing a much less competitive market compared to where we were in 2020 and 2021, when inventory and interest rates were at an all-time low,” she told CTVNews.ca in a telephone interview. “Brace yourself for a more stabilized market.”

During the first couple of years of the COVID-19 pandemic, Montreal and several other real estate markets were characterized by overbidding and home offers with few terms and conditions, which may have led buyers to assume more risk, Rabin said. With interest rates driving down demand, there has been less competition, she said. If interest rates remain elevated, this trend is likely to continue throughout 2023, said Rabin.

“There’s less bidding wars and people are able to go through all their conditions … I think that’s a good thing,” she said. “It’s a rebalancing of the market.”

WILL MAJOR CITIES LIKE TORONTO AND VANCOUVER SEE PRICES DROP?

If the amount of inventory in Montreal increases, particularly among single-family homes, this may place additional downward pressure on home prices in 2023, said Rabin.

“Are we going to see a five to 10 per cent decrease?” she said, referring to single-family homes. “We could … It’s entirely possible.”

So far, sellers appear to be standing firm on their prices, Rabin said. Without an urgency to move, many may be unlikely to bend on asking prices. As a result, some properties may take longer to sell, she said.

Sellers are also being stubborn with their prices in Toronto, Naveendran said. Additionally, homes that are nicely staged and well-marketed not only continue to sell, but are also receiving multiple offers. These are trends Naveendran expects to continue in 2023, he said.

“The homes that are not presented [or] cleaned well are sitting on the market for months, it’s not like last year where everything was selling,” he said. “Now, people are looking for a home to live in, not an investment.”

Although the average price of a home sold in Toronto has dropped between February and July of 2022, prices have remained fairly steady throughout the rest of 2022, Naveendran said. If interest rates continue to rise, it’s likely home prices will continue to plateau or drop slightly in 2023, he said.

Elevated interest rates have also resulted in relatively stable home prices in the city of Vancouver throughout the fall, said O’Brien. The average sale price of a residential property in Greater Vancouver went from $1,232,213 in September 2022 to $1,201,186 in November 2022, according to the CREA. Both numbers are not seasonally adjusted.

Home prices in Vancouver will likely continue to soften throughout the spring and stabilize by the middle of 2023, she said.

“It’s a return to somewhat of a normal market,” O’Brien said. “People will have an opportunity to make logical decisions with timelines that allow for due diligence and probably a bit of negotiation.”

According to a new report from Re/Max Canada, 60 per cent of the country’s housing markets will be considered balanced in 2023.

PRAIRIES TO REMAIN RESILIENT AS ATLANTIC AFFORDABILITY ATTRACTS DEMAND

While larger real estate markets are expected to see prices continue to drop in 2023, the more significant corrections in average home prices will be among properties in smaller markets, said Robert Hogue, assistant chief economist for RBC.

This is particularly the case for markets located just outside of major urban centres, such as London and Kitchener in Ontario, or Fraser Valley in British Columbia. These regions saw some of the largest price increases in Canada during the pandemic, thanks to an influx of new residents moving from nearby hubs, Hogue said.

But with more Canadians physically returning to work, this trend has largely tapered off. As a result, these same markets are likely to see prices decline the most throughout the current correction period, Hogue said.

“Now that the frenzy is over, valuations are coming down to reflect the local realities,” Hogue told CTVNews.ca in a telephone interview.

According to Re/Max, average home prices in Kelowna, B.C., and Nanaimo, B.C., are likely to fall 10 per cent next year. Additionally, average prices in Barrie, Ont., are forecasted to drop 15 per cent.

Meanwhile, markets across the Prairie provinces have largely been resilient throughout the housing market correction so far, Hogue said. Although the region has seen some decline in average home prices and residential sales activity over the last year, these drops have been modest compared to other parts of Canada. This will likely continue to be the case in 2023, Hogue said.

Cities such as Calgary are even reporting an increase in average prices year-over-year. According to the CREA, the average sale price of a residential property in November 2022 was $504,518, not seasonally adjusted. This represents a 1.3 per cent increase compared to one year before.

Additionally, sales activity remains above pre-pandemic levels in Alberta and Saskatchewan, based on data from RBC, reflecting the region’s strong economy.

Housing markets in Atlantic Canada are not immune to the impact of rising interest rates either. However, they continue to be more affordable than those in larger urban areas, Hogue said. Because of this, demand will likely remain strong in the region thanks to interprovincial migration.

“If the correction [in Atlantic Canada] continues in 2023, it will be more limited and end a little bit before other markets in Canada,” he said. “Those types of [migration] flows should provide some support for prices.”

Halifax in particular is beginning to stand out as a city where affordability is stretched, Hogue said. The market has seen tremendous demand throughout the pandemic, which has driven prices up significantly, he said.

According to Re/Max, Halifax will likely see average home prices increase by eight per cent in 2023.

With files from CTV National News' Jordan Gowling and The Canadian Press