According to the Canada Mortgage and Housing Corporation’s (CMHC) Spring 2023 Housing Market Outlook, the Canadian housing market is expected to experience a decline in prices and housing starts in 2023, but prices will not return to pre-pandemic levels.
The report cites weaker economic growth and higher mortgage rates as the main reasons for the market slowdown.
“While prices have declined, homeownership will be less affordable because of higher mortgage rates and still-elevated price levels,” says CMHC Chief Economist Bob Dugan.
Price decline expected to bottom out in 2023
The report predicts that the decline in housing prices will continue, but the average price will not revert to pre-pandemic levels; CMHC expects this decline to bottom out sometime in 2023. The decline in prices will largely be a result of higher mortgage rates and slower income and employment growth.
Housing starts to decline in 2023
CMHC expects housing starts to decline significantly in 2023 due to constraints in new construction, including labour shortages and elevated costs of materials in the construction sector, combined with higher project financing costs from increased interest rates. This will exacerbate housing shortages in supply-constrained markets, including Vancouver and Toronto.
CMHC expects some recovery in 2024 and 2025; however, levels will be insufficient to meet demand growth and will continue to put affordability pressures on Canadian households.
Rental market conditions to tighten
CMHC economists expect the challenge of affordability in homeownership will drive up demand for rental units—with the added demand from high immigration levels. Greater rental demand in the face of limited supply will lead to tighter conditions in already strained markets and lead to even higher rents.
Risk factors
The report notes that there are significant risks to the baseline scenario. CMHC has developed an alternative scenario that looks at the impact of inflation (and mortgage rates, as a result) remaining higher for longer. In this scenario, the federal housing agency forecasts additional risk of lower housing prices and starts. If this scenario materializes, households will face higher mortgage rates and debt levels.
Housing prices could start rising by 2024
CMHC predicts that housing prices and sales will record year-over-year declines for 2023. However, it expects prices, sales, and housing starts to record growth in the 2023-2024 period onward.
“With inflation coming back to the 2.0 per cent target by the end of the forecast period, mortgage rates will gradually decline, supporting both housing demand and a recovery in the construction of new housing supply,” Dugan explains.
“However, with demand for housing still well outpacing new housing supply, affordability challenges will persist for owners and renters.”
Regional outlook differences
CMHC expects the Prairie provinces to see more positive housing market developments than other regions, including a much smaller housing starts decline in 2023 across scenarios. This is due to:
- the positive impact of high interprovincial migration from other regions over the forecast period
- relatively healthy ownership affordability due to relatively low home prices
- generally stronger economic outlook.
Ontario, British Columbia, and Quebec are expected to see large declines in 2023 housing starts compared to other regions. CMHC calls this “discouraging” because these provinces are home to the three largest housing markets (Toronto, Vancouver, and Montréal), which are already highly supply constrained.
The Atlantic region can be broadly characterized as falling in between the Prairies and Ontario, B.C., and Quebec in 2023, with respect to forecast growth in economic and housing variables.