Record Decline in Canadian Home Prices as Interest Rates Deter Buyers

In 2022, Canadian home prices fell by the most on record, as rapidly rising interest rates forced a market adjustment. This adjustment may not be over yet, as interest rates are still relatively high.

The country's benchmark home price fell 1.6% in December to C$730,600, according to the Canadian Real Estate Association. This brings the total decrease since February's peak to 13.2%.

This was the biggest peak-to-trough decline since the group started compiling data in 2005. Last year also saw the biggest price decline for a calendar year since records began, with a 7.5% drop overall.

The economy is at risk of entering a recession, and the Bank of Canada has warned of more interest rate hikes to counter persistent inflation. This could put continued pressure on the housing market in the coming months.

There has been a record number of buyers using floating-rate debt for purchases during Canada's pandemic-era real estate boom. If mortgage costs remain high, these borrowers may come under increasing strain. If there is an economic slowdown and job losses, it will also be harder for people to keep up with loan payments and stay in their homes.

According to a survey of economists by Bloomberg, Canada is expected to enter a recession in the first part of this year.

Looking ahead to the crucial spring selling season, the key question is who will be more active – buyers or sellers? According to Douglas Porter, chief economist at the Bank of Montreal, sellers are likely to have the upper hand as buyers remain reluctant in the face of rising interest rates.

The housing market has slowed down significantly in the past year, largely due to higher interest rates making it more difficult for buyers to afford a home. In December, the number of transactions was down 39% from the previous year, when the market was nearing its peak.

In December, the number of sales rose 1.3% compared to November, while new listings fell 6.4%. This suggests that more prospective sellers are opting to try and wait out the market weakness.

There may be a seasonal component to the slowdown in listings: they tend to drop off during Canada's winter months, then pick up again when the weather warms in the spring, which is traditionally the busiest time to sell.

So far, the decline in prices has not been enough to attract many buyers because it has been outpaced by the rise in borrowing costs. The Bank of Canada has raised its benchmark rate from a record low of 0.25% last March to 4.25% today, meaning prospective buyers looking for a 5-year mortgage now often face rates of about 6.5%.

Despite a decline in prices over the past year, the national benchmark is still 33% higher than it was three years ago. A report last month by Royal Bank of Canada showed that for the typical buyer dependent on a mortgage, housing affordability deteriorated to its worst level ever as mortgage rates rose along with prices.