The Canadian spring housing market, according to CMHC

The Canada Mortgage and Housing Corporation (CMHC) just released their latest housing market predictions, and guess what? They think home prices will hit rock bottom this year–but, it’s important to note, they don’t think they're not gonna dip below the prices we saw before the pandemic.

Highlights from the report

In their spring Housing Market Outlook, CMHC mentioned that things like slower growth and rising mortgage rates are going to keep putting the brakes on the housing market and the economy for a while.

According to the report, CHMC expects "a price decline between 2022 and 2023, but the average price will not revert to pre-pandemic levels," and that the decline should stop sometime in 2023. 

• Their latest predictions say the average MLS home price will drop to about $643,325 in 2023, which is almost a 9% decrease from the average price of $703,875 in 2022. But even then, prices will still be nearly 14% higher than they were in 2020.
• With the economy and immigration picking up steam, CMHC also thinks home prices will start climbing again in 2024, hitting an average of $694,196 in 2024 and $746,410 in 2025.
• They've also got this alternative scenario where high inflation and interest rates stick around for longer. If that happens, their average price forecasts are about 5% lower. 

Regional predictions for the housing market

First up, the Prairie provinces are gearing up for some good news! CMHC expects these areas to have a better go of it in the housing market than other regions. Even with a bit of a dip in housing starts (new residential construction projects) expected in 2023, the drop won't be as steep as in other places. A few reasons behind this:

1. A boost from people moving in from other regions during the forecast period.
2. Housing affordability is doing pretty good thanks to the lower home prices.
3. A more robust economic outlook in general.

Now, on the flip side, Ontario, British Columbia, and Québec might have a tougher time. They're expecting bigger decreases in housing starts in 2023 compared to other regions. This isn't great news, especially since these provinces are where you'll find the three biggest housing markets– Toronto, Vancouver, and Montréal–which are already squeezed for supply.

As for the Atlantic region, it's kind of in the middle of the pack. CMHC's forecasting that in 2023, growth in the economy and housing will be somewhere between what's expected for the Prairies and what's predicted for Ontario, British Columbia, and Québec. 

City predictions for the housing market

Toronto

In 2023, the CMHC is expecting the total number of housing starts to take a bit of a tumble. But don't worry, things should pick up again in 2024 and 2025. The catch here is that higher costs for things like construction financing, labour, and materials might put a damper on construction activity.

The average price for homes on the MLS® in the Greater Toronto Area (GTA) is predicted to drop a bit in 2023, to be similar to home prices in 2021. But just like with housing starts, prices should start going up again in the following couple of years. That said, the high price levels in the GTA will make it tricky for people to buy their first home. The average household required 22% more disposable income than was being earned to qualify for a mortgage on the average priced GTA home in the fourth quarter of 2022. This number is expected to rise as mortgage interest rates rise and the amount people can qualify for in mortgage value decreases. High mortgage rates are expected to lead to a decline in home prices in 2023 and shift in sales toward lower-priced homes.

As for the rental market, it's going to stay pretty tight, which means rent prices are likely to keep climbing. 

Calgary

First up, the rental market. It's gonna get a bit tougher for renters as affordability goes down. This is because vacancies are expected to keep decreasing while rents keep going up. Not the best news for renters, unfortunately. Even as rental units grow in volume, the rental market is expected to tighten in 2023 asa interprovincial and international migrants enter the Calgary market. This segment usually take rental units upon moving to the area rather than buying a home straight away. Higher mortgage rates will also cause some potential homebuyers to remain renters for the time being.

When it comes to buying a home, we're expecting the average price to stay pretty much the same, and sales activity to dip a bit. So, things might be a bit slower on the home-buying front. Home prices grew by 6% in 2022 from a hot spring market. The demand for single-detached homes has slowed down significantly in 2023. Home sales have now shifted to condominiums and townhomes. The average price of a home in Calgary is expected to remain between $504,500 and $541,600 in 2023.

And what about new home construction? Well, it's expected to cool off a bit. Expensive financing is making it harder to get new projects off the ground, and demand for single-family homes is slowing down. So we might see a slight slowdown in the construction of new homes.

Regina

In 2023, the CMHC is anticipating a bit of a cool down in housing activity. Construction starts and sales will likely be on the lower side for the first half of the year, mainly due to the country’s high interest rates.

But it's not all slow and steady. Average house prices are expected to see a modest uptick in 2023, and should climb even higher in 2024 and 2025 as people start showing more interest in single-detached homes again. Regina experienced a 2% decline in average home prices in 2022 and a 6% decline in sales compared to 2021. The amount of homes on the market has stayed well below the 10-year average, making housing availability a concern in Regina. This is due to two main factors. First, construction costs are rising which has led to a decline in the total starts of new homes in the region. Second, there has been a elevated level of migration to Regina from Alberta.

But things are looking up for Regina's housing market in 2023 thanks to some strong economic fundamentals like rising employment, high prices for key commodities, major projects, and record international migration. With all of these factors in play, expect more investment, higher commodity prices, and rising wages. This should lead to higher demand for housing.

If these positive market conditions stick around into 2025, there may even be an influx of people moving from Alberta into Saskatchewan, which would boost housing demand even further.

Halifax

In Halifax, the number of homes up for sale is still pretty low, which means prices will likely keep climbing for a while.

As for new home construction, or housing starts, expect a bit of a drop in 2023. This is mainly because home sales are expected to be weaker, and there are some other economic challenges in the mix too. But don't fret, things should pick up again in 2024 and 2025.

Now, for renters, there's a bit of good news and a bit of bad news. On the bright side, a record number of completed housing units should take some pressure off the rental market. But on the downside, rents are still expected to rise over the next few years.

Vancouver

In Vancouver, home prices peaked in the spring of 2022 and are expected to bottom out in 2023. It is expected that long term growth trends will continue as the correction clears up. The amount of that residents of Vancouver can qualify for in mortgage value has fallen to what they were in 2019 while prices are up by 15%. This is keeping a large portion of millennials out of reach of homeownership. On the supply side, construction costs are up 15% over 2021, meaning less home starts.

On the rental side, units remain in low supply. Young migrants flow into Vancouver while the segment that would typically become first time home buyers continue to delay their purchase decision. This has caused rental units to be in short supply. Net population grew by 80,000 people in 2022 while only 4,000 units of net purpose-built rentals were created.

Although a lot of factors are at play that are causing a correction in the Vancouver housing market, single-detached prices have risen by 50% at their highest point in 2022 and will finish 2023 up 30%. Apartment prices had risen by 27% at their highest point in 2022 and will finish 2023 up 15%.

Montreal

In 2021, housing starts reached a 30-year high, but fell by 25% in 2022 and is expected to continue to decline in 2023. Without the necessary amount of housing starts, it becomes hard to restore affordability to Montreal. Even though the supply of condos for sale is currently very limited, housing starts in the segment are expected to remain low in 2023. Average home prices in 2023 is expected to be between $543,000 and $593,000 which are in line with home prices in 2021.

For renters, a lower vacancy rate and higher rents are expected in 2023. Around 16,000 new rental units are expected to be completed during 2023. However, demand is strong for rental units due to the high level of migration to Montreal. For the segment of population that would normally transition to home ownership, a large portion are still renting, decreasing the amount of units available. The average rent will continue to increase in the coming years due to this lower vancacy rate. Affordability will be a major issue on the rental market in the coming years.

For more information you can read the full report here. 

National Trends and Predictions

Market Cooling: 

The latest data from the Canadian Real Estate Association (CREA) paints a picture of a market that's taking a breath after a heated period. With a 4.1% month-over-month decline in national home sales as of August 2023, the frenzy that defined the market during the pandemic appears to be subsiding. This cooling is a sign that the market is responding to economic pressures and adjusting accordingly.

Year-Over-Year Growth: 

Despite the recent slowdown, when we zoom out to the year-over-year comparison, the market shows a 5.3% increase in actual sales activity compared to August 2022. This resilience suggests that the underlying demand for housing remains strong, buoyed by long-term factors such as population growth and a limited housing supply.

Price Stabilization: 

The MLS® Home Price Index (HPI), which tracks price trends more accurately than average or median price measures, shows a modest month-over-month increase. This indicates that while the market may be cooling, it is not crashing; prices are stabilizing rather than plummeting.

Regional Dynamics

Regional Variations: 

The Canadian housing market is a mosaic of regional markets, each with its own dynamics. For instance, Quebec and the East Coast are experiencing solid price growth, reflecting strong local economies and demand. Conversely, Ontario's market is more varied, with some areas seeing price increases while others are experiencing declines, reflecting a more complex economic landscape.

Inventory Levels: 

A slight uptick in national inventory levels to 3.4 months as of August 2023 suggests that the market is moving towards a more balanced state. However, this level is still below the long-term average, indicating that the market remains tight and competitive.

Long-Term Outlook

Construction and Immigration: 

To keep pace with population growth and high levels of immigration, Canada needs to ramp up its homebuilding efforts. The target is to hit at least 270,000 new housing units per year by 2025, a goal that will require concerted effort from both the public and private sectors to address the current housing shortage. To restore affordability, Canada needs 3.5 million more units on top of what's already being built. There is a 3.5 million housing unit gap currently in Canada. 60% of that housing unit gap is in Ontario and British Columbia. This is a gap that has been building for the past 20 years. Outside of Ontario, BC, Quebec and Alberta, households with an average level of disposable income will find homes to be affordable. Howeer, the CMHC believes that population growth will slow down after 2025 when the current immigration policy ends.

Provincial Predictions: 

The Maritime provinces show remarkable resilience, likely due to their attractive cost of living and quality of life. The Prairie provinces are expected to see growth, driven by strong commodity markets that bolster local economies. These regional forecasts are essential for understanding the patchwork nature of Canada’s housing market.

High Population Growth Scenario: 

This scenario examines the housing supply gap should immigration trends continue to 2030. The housing shortage will increase from 3.5 million to 4 million. As the population increases, the pool of income also increases. This will increase demand for housing. This also leads to higher increase in home prices as compared to the low economic growth scenario. This scenario assumes that the government will continue Canada's traditional approach of welcoming immigrants at a relatively constant proportion of its population. In this scenario, Canada's population is expected to reach over 44 million by 2030. This represents an intake of between 600,000 to 700,000 new immigrants on a yearly basis.

Low Economic Growth Scenario

This scenario examines the housing supply gap should economic growth become weaker than in the baseline scenario and the current immigration policy ends in 2025. The housing supply gap actually is expected to fall to 3.1 million units. In this scenario, we are assuming that productivity growth is lower and inflation remains higher than the Bank of Canada target. In this scenario the mortgage rate is expected to be 5.7%. This directly lowers the demand for housing. This also increases the price of homes.

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