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Canada Housing Market - Chill in the air: Surging Interest Rates and the Ho...

Canada Housing Market - Chill in the air: Surging Interest Rates and the Housing Market's Coming Lull

by Laura Forester | October 25, 2022

According to the Moody’s Analytics and RPS Real Property Solutions housing outlook report released today, the Canadian housing market is poised for a rougher landing in the next few years, though it will begin to recover in late 2024.

With the rapid increase in mortgage interest rates since the start of 2022 and more to come in the near term, the underlying dynamics of the housing market are changing, putting homeownership outside the reach of millions of would-be first-time homebuyers.

The combination of increased borrowing costs, elevated inflation, and a softening labour market spells the end for the housing boom. We project house prices will suffer a peak-to-trough decline over 10% by early 2024.


 Key highlights include:

  • The ra­tio of average homeownership costs to average household disposable income, as measured by the Bank of Canada’s affordability ratio, has recently risen to its highest level since the late 1990s.
  • The RPS Metropolitan Composite Index—a weighted average of 13 major metropolitan areas—fell for the second consecutive month in August, causing the year-over-year appreciation in house prices to decelerate to 13.8%, its slowest pace in a year and a half.


 Baseline Forecasts Highlights:

  • On average, the Canada metro areas will experience significantly slower house price growth over the next five years, though not evenly.
  • The Toronto and Vancouver areas are overvalued and will continue to experience downward house price pressure due to reduced affordability, however, house prices in Toronto have shown less sensitivity historically and will likely experience less downward pressure.
  • Alberta and Saskatchewan will do better despite weaker economic fundamentals because they have retained better afford­ability, while Montreal will see downward pressure on house prices for at least the next year.


 Housing Market Risks:

  • Declining affordability caused by rising interest rates remains the most important risk to housing demand as current home valuations are fragile.
  • If energy and agricultural prices flare back up, then the clock resets on infla­tion’s pivot, interest rates will go even higher, and the prospect of recession becomes more likely.
  • Overall, the risks are equally balanced, with demographics providing structural strength while higher interest rates and supply-chain bottlenecks present cyclical challenges.


Read the full report