Moody’s Analytics and RPS Real Property Solutions released a new report stating that higher interest rates and the significant deterioration in Canadian housing affordability will reduce the number of potential new buyers and moderate housing prices.
Key highlights include:
- Demand for both existing and new homes has outstripped supply by wide margins throughout the country, fueled by migration, low interest rates, and structural shifts in the economy, including the rise of remote work.
- The real estate market is still red-hot. House prices have risen nearly 30% since February 2020, far outpacing growth rates during the housing boom that preceded the Great Recession.
- With the Bank of Canada now raising its target for the overnight rate, the Canada’s housing market has reached a turning point. This policy intervention is neither arbitrary nor intended to put the housing market out of reach of purchasers. The main objective is to prevent further deterioration in affordability.
- As a result, though house price growth remains strong by historical standards, price increases are decelerating in many markets.
- The most important risks to this outlook are due to interest rates. Strong wage growth and higher energy prices because of the Russia-Ukraine military conflict leading to inflation may well prompt further interest rate tightening, which will drag on affordability.
- Prime Minister Justin Trudeau proposed a two-year ban on foreigners buying homes to cool the housing market. However, the impact will be limited as the proposal exempts permanent residents and foreign students and workers, as well as those buying their primary residence.
- Downside risks include supply-side constraints, which will drive up prices in the short term and could cause frustrated buyers to sour on the prospects of homeownership.
Read the Full Report here.