Canada’s Housing Market Is Starting to Stabilize, Say Economists

The spring buying and selling season is up and running, but new listings are low in many cities

An aerial view of a residential neighbourhood in Vancouver on April 4, 2023. (Darryl Dyck/The Canadian Press)

After the great ups and downs in Canada’s housing market these past couple of years, the ramp-up of the 2023 buying and selling season promises greater stability, say economists.

Home prices have stopped falling in a lot of the major markets, BMO senior economist Robert Kavcic told The Epoch Times. Mortgage rates have stabilized and are likely to go down in the near future, he said, and compared to last year, we’re “back into a more balanced position” regarding supply and demand.

Many potential sellers, however, seem to still be waiting to see if conditions improve before listing, Kavcic said, noting that “new listings are down to probably 10- or 20-year lows in a lot of cities.”

With relatively high mortgage interest rates, buyers are also still hesitant, he said. But fixed interest rates have come down and variable interest rates are likely to be stable for the rest of this year, Kavcic said, adding that he expects them to drop next year.

Sellers

“I’m going to be the bull in the housing market and say that I think things are pretty good for sellers,” Moshe Lander, an economist at Concordia University, told The Epoch Times.

“Whatever we’ve seen in terms of fall [in home prices], this is probably the worst of it,” he said. Prices may continue to drop through the first part of this season, but should stabilize toward the end.

That should be the case, he said, “in the absence of any bad news for the economy that hasn’t been anticipated.”

Lander said the rise in rent prices is an indicator that home prices don’t have much further to drop. Rent prices and home prices often settle into a certain ratio—rent should cost annually about 5 percent of the home’s value, he said. So a $500,000 house should cost about $25,000 per year to rent.

That ratio has been out of whack in recent years, Lander said, with rent costing much lower than 5 percent. However, rent prices have risen rapidly lately, as often happens with inflation, and they’re approaching the 5 percent equilibrium. “So it kind of reinforces my belief that I don’t think that there’s much further for housing [prices] to fall,” he said.

Earlier this year, RBC reported home prices had slumped some 15–20 percent, depending on the region, from what they were at the same time last year. But early 2022 is an unusual point of comparison, since prices peaked amid the pandemic-related housing rush. This year, prices have returned closer to pre-pandemic levels, according to RBC figures.

The volume of home sales has also returned close to pre-pandemic levels, according to a March report by the Canadian Real Estate Association (CREA). While monthly sales activity for February this year was 40 percent lower than February 2022, this year’s sales were “comparable to what was seen for that month in 2018 and 2019,” CREA said.

Kavcic said the market is not seeing many forced sales—that is, homeowners who need to sell because they can no longer afford their homes.

That’s why there are so few listings, he said. Homeowners who want to sell are able to wait for better conditions. They are still able to afford their homes in an economy that’s strong by some measures if not others, he said.

The labour market is strong, so not that many people are losing their jobs, Kavcic said, and homeowners have also remained resilient amid rising interest rates because Canada has buffers in place to prevent defaults.

Interest Rates

“Most people were stress tested at these higher rates already, so they’ve proven they could handle these rates,” Kavcic said. Federal rules require lenders to ensure borrowers can make payments at the benchmark interest rate of 5.25 percent, or their mortgage rate plus two percent, whichever is higher.

Variable rates are currently around 6.5 percent, and five-year fixed rates are around 5 percent.

Homeowners with variable rates aren’t seeing higher monthly mortgage bills for the most part, Kavcic said. Rather, the banks have extended their amortization period (the length of time it will take them to pay their mortgage loan in full), stretching it out to 30, 40, or even 50 years.

A lot of people are just paying the interest, not making any dent in the principal, Kavcic said. “It’s really just buying households and the market time to adjust to the change.”

He doesn’t expect rates to go back down to 1 or 2 percent, at least not anytime soon, but instead somewhere between that and the current rates.

Fixed rates are coming down more quickly, Kavcic explained, because they are tied to bond yields. Variable rates, however, are tied to the prime rate set by the Bank of Canada. The Bank of Canada has said it will now hold interest rates for some time following repeated hikes over the past year. But it hasn’t guaranteed a hold, saying it will raise them again if needed to cool the economy and bring inflation down.

For buyers, interest rates have been prohibitive, Lander said, but “where interest rates have settled is fine. It’s a 20-year high, but it’s not that high in the grand scheme of things if you have good credit and if you’re taking out a reasonable-sized mortgage.”

Lander and Kavcic said real estate investors—as opposed to those looking to live in the homes they buy—are hanging back right now.

High returns aren’t guaranteed at the moment and other investments are more appealing in comparison, Lander said.

Lander highlighted several longer-term factors increasingly affecting housing supply and demand. Baby Boomers are living longer, he said, “so the supply of used housing is not being released as quickly as you would normally expect.”

And while many supply chain issues for developers have been resolved, builders are facing restrictive zoning laws in some cities, he said.

Increased immigration is fuelling demand, Lander said, as is the aspiration of many Canadians to be homeowners rather than renters.