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Canadian home prices reach ceiling

House Price Growth Has “Hit a Ceiling,” Says Moody’s

Canada’s housing market is showing signs of “returning to earth,” with slower price growth expected for much of 2022, according to a new report from Moody’s Analytics and Real Property Solutions (RPS).

That will, in part, be driven by the expected gradual rise in interest rates over the coming years.

“Given that Canadians’ high debt loads make them relatively more sensitive to changes in interest rates, house price appreciation is likely to reach a near-standstill in late 2022, but avoid any significant contractions,” reads the report. “Because of the gradual evolution of the policy environment, we expect that households will be able to adjust to the increase in debt-service obligations.”

While price appreciation is expected to “slow considerably” through 2022 and into 2023, Moody’s notes that Canada’s high population growth relative to other industrialized nations “supports an upbeat long-run outlook.”

The Canadian Real Estate Association (CREA) is also forecasting a moderation in house-price growth in 2022. In its latest estimates released in September, the association said it expects prices to rise 5.6% to an average of $718,000 in 2022, following an expected 19.9% annualized increase in 2021.

Inventory Relief on the Way

Tight housing inventory has plagued the real estate market throughout most of the pandemic, but Moody’s pointed to additional supply in the form of new construction that should soon start to alleviate the housing shortage.

“Housing starts have been elevated throughout the pandemic at unseen levels,” but a lag effect means it will still take time for those units to be completed and come to market, the report said. “The lag in completions reflects the various pandemic-related disruptions, as well as the time taken to complete a unit, depending on the property type. Completions will rise through next year as builders complete units started before and during the pandemic.”

As more supply starts to come online, there are signs that the demand side of the equation is starting to become exhausted, Moody’s added.

“Beyond the rock-bottom borrowing costs, pandemic-induced shifts in preferences sent potential buyers flocking in search of larger homes,” reads the report. “However, with the advent of widespread vaccination and the normalization of public health conditions, this dynamic appears to be nearly played out.”

Despite an increase in new home construction, a recent report estimated that in Ontario alone, an estimated one million homes will need to be built over the next decade to meet demand.

Currently, about 70,000 housing units are brought to the market in a typical year, meaning that will need to increase to at least 100,000 units, according to the Smart Prosperity Institute.

Regional Forecasts

The report from Moody’s and RPS offered some regional forecasts for home prices. Here are some of the highlights:

  • Alberta and Saskatchewan: These are currently considered “undervalued” housing markets, but “will do better despite weaker economic fundamentals, precisely because they have retained better affordability.”
  • Ontario: The strongest house price appreciation rates are expected in smaller metro areas, such as Brantford, Kitchener, Kingston, London, Windsor and Ottawa.
  • The Greater Toronto Area: While this region currently “suffers from overvaluation…their house prices have also shown less sensitivity to overvaluation in the historical data since 2005, so they will likely experience less downward price pressure.”
  • British Columbia: Housing markets here, too, are overvalued, particularly in Vancouver and the province’s other metro areas, Moody’s notes. “Given their overvaluation, the British Columbia metro areas will continue to have a downward pull on their house prices due to reduced affordability.”
  • Quebec: Moody’s says Quebec presents important contrasts. “Montreal is the only metro area in Quebec not in the ‘correctly valued’ range of plus or minus 10% and will continue to experience a downward pull on its house prices due to reduced affordability.”
  • Nova Scotia and New Brunswick: The highest home price appreciation is expected to occur in the metro areas of Moncton and Halifax.
  • Newfoundland & Labrador: Aside from the Prairies, this is the one Atlantic province that is expected to see house price growth “advancing at the fastest rate.”