Despite a strong start to the year, real estate in 2022 was dominated by a lack of affordability, exacerbated by one of the most divisive interest rate hike cycles in Bank of Canada (BoC) history. As a result, even as home prices began to fall, many buyers and sellers found themselves effectively shut out.
However, the new year brings renewed hope and an opportunity for Canadians to re-enter the real estate market… albeit with revised expectations.
So, what is the outlook for real estate in 2023? Experts predict more of the same, but also some respite on the (distant) horizon.
Prices May Finally Bottom Out
Canadian housing markets were in correction mode for the majority of 2022, and while the worst of the downturn appears to be behind us, many major markets are still experiencing downturn conditions. Having said that, prices have yet to fall significantly, falling only 0.98% month over month in November, according to Canadian Real Estate Association data.
This kind of gradual decline is expected to persist into 2023.
In a December affordability report, RBC’s assistant chief economist Robert Hogue predicted that the national benchmark price would fall 14% from its 2022 peak by spring. Hogue added, “it will likely take years to fully reverse the tremendous deterioration that has occurred since 2021.”
Hogue also emphasized that price depreciation will vary by market, stating that the most significant corrections in average home prices will occur in smaller markets, such as markets across the Prairie provinces, while affordability will remain “overstretched” in BC and Ontario.
BoC Will End its Rate Hike Cycle
The Bank of Canada raised interest rates for the seventh time in a row in December, but the hike cycle has done little to reduce inflation. In November, Canada’s inflation rate was unflinching, falling by only 0.1% from the previous month.
With inflation remaining stubborn, many experts believe we haven’t seen the last of interest rate hikes — the next rate decision is scheduled for January 25, and the consensus appears to be a 25 basis point increase — but they also agree an end is in sight.
Moshe Lander, Senior Economics Lecturer at Concordia University, previously told STOREYS that the Bank will have “more of a steady hand” in the coming year.
“At some point, they do need to take a break,” he said. “They should at least sit out one meeting and simply say, ‘we’ll see what happens,’ whether that happens in the first or second meeting of 2023.”
In terms of what this means for prospective buyers, CREA Chair Jill Oudil stated in a recent report that it could actually create favorable conditions.
“… while the interest rate environment for buyers is unlikely to improve in the first half of 2023, it is more likely to remain the same,” she said. “However, it could be the first spring market in a number of years where buyers don’t have to compete for properties that catch their eye.”
Mortgage Carriers Will Feel the Rate Pain
Whatever the Bank of Canada does next, mortgage carriers will be in a bind in 2023.
In a December interview, Ron Butler of Butler Mortgage discussed the impact of additional interest rate hikes on existing mortgage carriers, even if the next increases are relatively modest.
“House inflation is ten times that of mortgage inflation,” he explained. “People who have a primary-based mortgage product or a HELOC will struggle with the continued escalation of their payments.”
Those looking for a mortgage will not fare much better. With runaway inflation and high rates continuing into 2023, both variable and fixed-rate mortgage carriers are expected to remain unattractive for the rest of the year, according to Butler.
Immigration Will Heat Up Housing Demand
According to an announcement made earlier today, Canada will welcome a record-breaking number of new permanent residents in 2022 — 431,645. This number surpassed the previous high of 405,000 new permanent residents in 2021.
Furthermore, the federal government’s most recent immigration targets are the most ambitious in Canadian history. Canada will welcome 465,000 new permanent residents in 2023, 485,000 in 2024, and 500,000 in 2025, for a total of 1.45 million new permanent residents over the next three years, according to the Immigration Levels Plan 2023-2025.
With the government upping the ante on immigration, housing demand is bound to increase, injecting a sense of urgency into the market that was lacking in 2022 due to the high cost of borrowing. And, with new housing supply being offset by high development costs and existing inventory remaining scarce, Canadians, both new and existing, will continue to turn to the rental market, exacerbating the sector’s affordability challenges.
