Home prices in Canada could drop 25% by the end of next year, report says

A house for sale in the Annex neighborhood of Toronto on July 18.Fred Lum/The Globe and Mail

Average Canadian home prices could fall as much as 25% from February highs by the end of next year, with the Maritimes and most of Ontario seeing larger declines due to the sharp rise in borrowing costs, according to a new private sector forecast.

Since the Bank of Canada began raising interest rates in March to contain inflation, the domestic housing market has slowed considerably. Sales volumes fell and the average home price fell 18.5% from February to June, according to data from the Canadian Real Estate Association.

Consequently, Desjardins Group said it had to drastically revise its forecasts because the market was correcting faster than it had anticipated. In June, Desjardins economists predicted a 15% drop in the February average price at the end of 2023. Now, Desjardins expects a 20% to 25% drop.

This is the most bearish outlook among private sector economists, who were forecasting declines of 10-20%.

“House prices continue to fall and need to move further before finding a bottom,” Desjardins economists said in a research note.

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Desjardins said the central bank was raising rates more aggressively than expected, which will continue to drive up borrowing costs. The Bank of Canada’s benchmark interest rate is now 2.5%, down from 0.25% earlier this year. With inflation hitting 8.1% in June, the bank is expected to continue raising interest rates.

Desjardins expects bank rates to rise to 3.25% later this year. This will make it more expensive for people with adjustable rate mortgages. Fixed mortgage rates are double what they were a year ago.

Most economists agree that the areas that saw the largest price increases in the first two years of the pandemic are likely to see the largest declines. This has already started to happen in parts of the country, such as parts of Toronto suburbs and small towns in Ontario, where house prices have increased by more than 80% from 2020 to early 2022.

Desjardins said the shift from full-time telecommuting to a gradual return to the office will make life more difficult in relatively affordable parts of the country like the Maritimes. He predicts that the average house price will fall by up to 29% in New Brunswick, 27% in Nova Scotia, 25% in Prince Edward Island and 11% in Newfoundland and Labrador.

In Ontario, he expects an average price drop of 24%, with values ​​down 22% in Toronto and 27% in the rest of the province. It predicts prices will drop 22% in British Columbia, 17% in Quebec and 14% in Manitoba, with Alberta and Saskatchewan seeing single-digit declines.

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