What’s Happening in Canadian Housing Markets as We Head into 2023?

On Thursday, December 15, the Canadian Real Estate Association (CREA) released its national housing statistics for the month of November. Below, CREA’s Senior Economist Shaun Cathcart provides an update on the current state of housing markets in Canada and explains what the data means for REALTORS®:

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. 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.

Sales in November were down 3.3% on a month-over-month basis, rejoining the trend of moderating sales that began back in February.

The Aggregate Composite MLS® Home Price Index (HPI) edged down 1.4% on a month-over-month basis in November, which, as with sales activity, continues the trend that began in the spring. The national MLS® HPI now sits about 11.5% below its peak level but there are considerable regional differences.

While prices are down more in Ontario and parts of British Columbia, they have softened to some degree almost everywhere. Calgary, Regina and Saskatoon stand out as markets where home prices are barely off their peaks.

With the Bank of Canada having hiked rates another 50 basis points in early December, I don’t expect things to turn a corner in any material way in the near future. That said, it’s worth pointing out those rate hikes are likely almost done at this point.

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. 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 doesn’t say what they think the path for interest rates will look like, but they do have a forecast for inflation, and inflation is what guides their interest rate decisions. They currently project 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.

That said, they won’t need to keep their foot fully on the brakes until then. 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.

All of which is to say, we could easily see rate cuts begin in 2023. As I stated above, an eventual rate cut could also be the signal many variable rate borrowers are waiting for to jump back into the market.

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.

Learn more on creastats.ca.