Is Canada’s real estate market heading towards a crash?

There’s a question bothering many mortgage and housing specialists across Canada, as interest rates go up and sales activity decreases: how cool will Canada’s real estate market get?

We’ve faced strong concerns recently about a market that’s been showing insane activity during the previous two years as Canadians benefitted from extremely low interest rates to buy their own property.

A combination of sharp home prices growth and stagnant labour incomes made Canada Mortgage and Housing Corporation (CMHC) announce last year that the real estate market had been exposed to “high vulnerability” and was overheated.

Oxford Economics has expressed worries about a potentially rapid downward trajectory of the market, predicting national home prices decline by 24% by the middle of 2024.

As housing prices are expected to keep rising even amid today’s rate hike conditions, Oxford’s director of Canada Economics Tony Stillo says the housing market will “reach a breaking point and crash under the weight of its own success before the end of 2022.”

Meanwhile, others are more optimistic about the real estate market’s prospects. For instance, Justin Havre, real estate advisor at RE/MAX, says the latest slowdown is a positive sign for the market.

“The Canadian housing market has been boiling and needed some calmness,” – he noted.

“With all the stimulus that governments have injected into the economy over the previous two years during the pandemic, it’s supposed to have an influence on the economy and inflation. So, there’s no surprise that interest rates are rising.”

According to Havre, inflation has been the “elephant in the room” for more than a year already, with the central bank following the course on keeping its key lending rate low as the country was coping with the COVID-19 pandemic.

Nevertheless, while rates will probably go up significantly in 2022, he says forecasts of a 1980s-style inflation hike to the high teens are unlikely, and higher rates may help the market in the long run.

“In my opinion, we can’t really expect anything like that, but we should be ready for higher interest rates, which will cool down the housing market slightly. It’s actually not a bad thing, as buyers are sometimes forced to make their most important decision or their largest purchase in a few minutes while they are inside a home,” – he added.

Havre believes a more balanced market could provide buyers with better selection and more time to make a home buying decision.

When it comes to the home price issue, a new report by RBC Economics shows there’s a “shift” at the market with price growth starting to moderate. However, RBC doesn’t make such crash forecasts as Oxford.

“With the central bank continuing to raise rates quickly and rapidly, we may have already reached peak prices in Toronto (and other markets will soon also show signs of prices declines),” – the report’s author Carrie Freestone says.

A prices decline in Toronto during the period from March to April was the first one in more than 13 years, RBC pointed. In addition to it, Vancouver reported a 1% increase in composite benchmark prices, which is half the average pace of the previous six months.

While Canada recovers from the pandemic and rates keep going up, Havre expects a stable home price environment, although with modest growth.

“I expect the housing market to stabilize with activity and prices probably fluctuating slightly from month to month, but on a year-over-year basis we’ll continue to see price increases,” – he said. “Maybe not by 40% plus, but I really believe there will be modest price gains.”