The Canada Mortgage and Housing Corp. says the average home price will not revert to pre-pandemic levels in 2023 because the recent declines in prices are tapering off in many markets and are expected to bottom out this quarter before starting to rise again.
In its outlook released Thursday, the federal housing agency predicted home prices and sales will see year-over-year declines in 2023 and, by the end of the year, leave the country with an average annual price below the 2022 level.
CMHC chief economist Bob Dugan said average home prices, which have already dropped by about 14% between March 2022 and March this year, are now “levelling off.”
“A low supply of listings means that prices should start to grow as sales pick up,” Dugan told a news conference, noting such activity is already underway in Toronto and Vancouver.
“We expect average prices, in fact, to rise by about 7.9% in Canada in 2024 and by about 7.5% in 2025.”
Should predicted periods of negative economic growth fuelled by higher interest rates and economic uncertainty materialize in 2023, CMHC’s baseline forecast shows the average home price will be $643,325 this year compared with $703,875 in 2022. Under this scenario, CMHC expects the average price will then tick up to $694,196 next year and $746,410 in 2025.
Sales will amount to 423,128 this year, followed by 473,357 next year and 505,215 in 2025. Sales in 2022 totalled 498,269.
However, “vulnerabilities in the economy,” including high levels of household debt, pushed CMHC to also consider an alternative forecast, where Canada faces a longer period of high inflation and interest rates.
In this scenario, the average price for 2023 would be $637,829, followed by $664,600 next year and $708,391 in 2025. Sales would move from 393,005 this year to 397,734 in 2024 and 425,620 in 2025.
However, the declines expected this year won’t blunt much of the market’s heat because CMHC foresees a more significant drop in housing starts — a measure of when construction on homes begins and a key indicator of how Canada is addressing housing supply gaps — in 2023 than was experienced between 2020 and 2022.
CMHC’s baseline forecast accounts for 211,917 housing starts this year, followed by 223,783 in 2024 and 235,347 in 2025.
The alternative scenario will see 176,890 starts this year, 197,551 next year and 230,865 in 2025.
“This is a downward revision from our previous forecast and is alarming given the need for more housing supply in order to improve affordability,” Dugan said.
By comparison, starts totalled 217,880 in 2020, 271,198 in 2021 and 261,849 last year.
CMHC previously estimated about two million new homes would be built between 2023 and 2030 and an additional 3.5 million homes would need to be constructed to restore affordability to housing in Canada.
“In other words, we need a much higher level of starts than is being currently being forecast if we want affordability to improve,” Dugnan said.
He sees some recovery in housing starts in 2024 and 2025, but expects supply gaps in Canada’s most expensive and supply-constrained housing markets, including Vancouver and Toronto, to worsen.
Rental affordability will also be strained as demand outpaces rental supply because interest rate hikes have curbed borrowing power and curbed buying intentions.
“If housing supply doesn’t increase dramatically, affordability could continue to deteriorate in years to come,” Dugan said.