What’s affecting Canada’s real estate and housing market?

Is now a good time to buy or sell your home?

The answer depends on a lot of factors. Before we get into market conditions, though, let’s all agree March is a bad time to predict what will happen in Canadian real estate.

March 2020: COVID-19 lockdowns begin. Enough said.
March 2021: The Canadian Real Estate Association (CREA) forecasts the national average home price will hit $665,000 in 2021 and $679,341 in 2022. The average price reached $716,828 the following month.
March 2022: After peaking in February, home prices and home sales fall as the Bank of Canada (BoC) increases its benchmark rate for the first time in 2022. One or two more rate hikes should do it though, right? Right?

Where is Canada’s housing market headed in 2023?

In March 2023, the outlook is about as certain as it’s been the last three years. Predicting where the real estate market will go is incredibly difficult. Here are seven factors at play.

1. The BoC’s benchmark rate

On March 8, after a year of rate hikes that saw the Bank of Canada’s key lending rate rise from 0.25% to 4.5%, the Bank decided to press pause—welcome news for anyone shopping for a mortgage or paying variable interest on a loan. However, uncertainty persists here and south of the border. On March 7, Jerome Powell, chair of the Federal Reserve in the United States, talked about potentially needing to raise rates faster and higher than previously anticipated. However, the collapse of U.S.-based Silicon Valley Bank (SVB) on March 10 put the Fed’s plan back into question. In Canada, news of SVB’s failure sent government bond yields falling. Suddenly, there’s once again talk of rate cuts being in the cards for 2023.

The US banking crisis has government yields down in flames. Hardest fall since 1980s.

In just over 3 trading days:

• US 2yr: -101 bps
• Cdn 2yr: -84 bps
• Cdn 5yr: -69 bps

Markets now fully pricing in 2 @bankofcanada CUTS by July. Absolutely breathtaking turn of events. pic.twitter.com/Ba7hrURA6A

— Rob McLister (@RobMcLister) March 13, 2023

2. Inflation

The annual rate of inflation has slowed in recent months, falling to 5.9% in January. That’s likely an indication that the Bank’s rate hikes are cooling price increases. However, food costs are up 10.4% from a year ago, and some economists are questioning whether it’s even feasible in the short term to return inflation to its 2% target. Depending on inflation and the Canadian impacts of the SVB failure, the BoC may have to break its rate pause promise—which would further push down home prices.

3. Mortgage rates

Right now, variable mortgage rates (which are tied to the BoC’s benchmark rate) are higher than fixed rates (which take their cue from five-year government bond yields). Normally, the reverse is true. To complicate matters, fixed rates fell at the beginning of the year and began trending upward again, at least until the U.S. banking crisis sparked by SVB. For now, rates remain volatile. Though home prices have fallen sharply since their peak in February 2022, high rates are negatively impacting mortgage affordability, which limits the amount buyers can borrow for their home purchase. Prices may not recover until affordability improves.

What’s The Word On Fixed Mortgage Rates? DOWN Is The Word

With the failure of 2 US banks on the weekend and the shock that went through the markets Bond Yields fell yesterday and although they retraced a bit after today’s US inflation report: Lower Fixed Rates

2/

— Ron Butler (@ronmortgageguy) March 14, 2023

4. Housing supply

One of the reasons home prices skyrocketed early in the pandemic was that demand exceeded the supply of homes for sale. At the end of February, supply remained tight at 4.1 months (123 days), down from 4.3 months (129 days) in January and well below the long-term average of five months (150 days). An increase in the number of new listings in the spring could keep prices low for longer. In the meantime, some housing experts have observed the return of bidding wars in major cities as buyers compete over a limited number of listings.

Via @JohnPasalis, real-estate bidding wars are returning to the Toronto area. The reason: Lack of new listings. “During the second week of March, 44% of houses sold for more than the seller’s list price, the highest level since June 2022.” https://t.co/3lnGzHxocT

— Paul Vieira (@paulvieira) March 15, 2023

5. Housing builds

The federal and provincial governments want to build new homes fast to alleviate Canada’s housing shortage. How much housing do we need? Last year, the Canada Mortgage and Housing Corporation (CMHC) said we need an additional 3.5 million homes to be built by 2030 to restore affordability. That’s on top of the 2.3 million housing units we were on track to build. As long as borrowing rates remain high, it will be difficult for developers to build the amount of housing needed. In February, the number of Canadian housing starts grew 13% over the previous month, after having dipped 13% in January.

6. Rents

Renters are having a tough time, too. In February, the average advertised rent in Canada was just shy of $2,000 (down slightly from November 2022). In Vancouver and Toronto, new tenants can expect to pay more than $2,500 per month for a one-bedroom apartment. The high cost of renting today gives aspiring home owners more incentive to buy, adding fuel to the housing market, while simultaneously limiting their ability to save for a home purchase.

New https://t.co/f4aeLnUpnp rent data. Price to rent a one-bedroom apartment in Toronto has broken the $2,500 barrier.

Toronto, Kitchener, Brampton, Hamilton, London, St. Catharines all with 20% year-over-year increases in listed rents. pic.twitter.com/dgO8krXPGf

— Dr. Mike P. Moffatt 🇨🇦🏅🏅 (@MikePMoffatt) March 14, 2023

7. Immigration

In late 2022, the federal government announced a plan to welcome 500,000 immigrants to Canada each year—about 25% more than usual—for the next three years. Consider the impacts this will have on housing supply and rents (above). A recent Desjardins report says we’d have to increase the amount of new housing being built by 50% nationally through 2024 to “offset the price gains from the increase in federal immigration.”

You’re 2 minutes away from getting the best mortgage rates in CanadaAnswer a few quick questions to get a personalized rate quote*

I'm buying a home I'm renewing/refinancing

You will be leaving MoneySense. Just close the tab to return.

Planning a spring move? Bookmark these articles

Not being able to predict the future shouldn’t stop you from planning for it. If you’re considering a move, the articles below will help you decide on your best course of action—whether that’s buying, renting or staying put. We hope you’ll come back to them often in the coming months.

Also, if you were a fan of the 2022 Where to Buy Real Estate in Canada feature, know that the 2023 edition is launching this spring.