Industry observers anticipated the Canadian real estate market would slow down ahead of the Bank of Canada’s (BoC) monetary policy tightening crusade. It could be challenging to fathom, after the unprecedented growth of Canada home prices and market activity during the last two years.

According to the Canadian Real Estate Association (CREA), national home sales tumbled by 5.3 per cent in July, with monthly activity clocking in 29.3 per cent below last July. Home prices were mixed. On a month-over-month basis, they edged down 1.7 per cent in July. However, on an annualized rate, the MLS® Home Price Index (HPI) advanced 10.9 per cent to $629,971.

This is a nationwide trend, too, association data show. Sales activity was down in three-quarters of Canada’s local markets, including in some of the country’s largest cities: Toronto, Vancouver, Calgary, and Edmonton.

The reason for this notable decline? Interest rates and market uncertainty says Jill Oudil, Chair of CREA.

“The demand that was so strong just a few months ago has not gone away, but some buyers will likely stay on the sidelines until they see what happens with borrowing costs and prices,” Oudil said in a statement.

But the worst is still to come, according to a recent research note from TD Economics.

TD Expects Canada Home Prices to Drop 19% by 2023

In a June 2022 report, TD Economics downgraded its forecast for the Canadian real estate market from the March report. Economists cited the central bank tightening pandemic-era monetary policy at an accelerated pace.

When the note was published, the BoC had increased the Overnight Lending Rate (OLR) three times to 1.5 per cent. Since then, however, the institution took everyone by surprise and pulled the trigger on a 100-basis-point rate hike to 2.5 per cent.

As a result of this ultra-hawkish approach, the financial institution anticipates a peak-to-trough decline of 33 per cent from the first quarter of 2022 to the first quarter of 2023. Overall, home prices will tumble 19 per cent during this span.

We’ve downgraded our home sales and price forecasts significantly compared to March, as monetary policy has tightened more acutely than anticipated. Indeed, the overnight rate is forecast to rise an additional 175 bps from its current level, hitting 3.25% in 2022Q4,” wrote Rishi Sondhi, a TD economist, in the market outlook. “Rising borrowing costs will continue to weigh heavily on housing activity. We forecast a 33% peak-to-trough decline in Canadian home sales from 2022Q1 – 2023Q1. Beyond that timeframe, activity should begin to firm (while remaining at low levels) through the remainder of next year as interest rates drop from their multi-year highs. This dynamic results in a 23% annual average decline in Canadian home sales in 2022 and a 12 per cent pullback in 2023.”

TD Economics also assessed how the provinces’ respective housing markets could perform in 2022 and 2023:

British Columbia

Average home prices are projected to climb 3.2 per cent this year and tumble 8.1 per cent in 2023. Home sales are forecast to plunge 30.9 per cent in 2022 and 13.5 per cent in 2023.

Alberta

Sales activity in the Alberta real estate market is expected to be flat this year and plunge by nearly 18 per cent next year. Average home prices are predicted to swell 7.6 per cent in 2022 and dip by 1.2 per cent in 2023.

Saskatchewan

Provincial home sales are forecast to plunge 10.5 per cent in 2022 and 7.5 per cent in 2023. Average residential property prices are being pencilled in to edge up 3.1 per cent this year and 1.8 per cent in 2023.

Manitoba

In 2022 and 2023, home transactions are projected to fall 20.7 per cent and 1.7 per cent, respectively. However, prices are expected to go up 13.5 per cent and 1.1 per cent in those two years.

Ontario

In perhaps the biggest surprise, sales activity in the Ontario real estate market is anticipated to endure a 31.7 per cent crash this year and a 13.3 per cent drop next year. On the pricing front, TD Economics projects a gain of 3.8 per cent this year and a decline of 9.4 per cent in 2023.

Quebec

The Quebec housing market can expect to experience a 16 per cent and 4.7 per cent decrease in 2022 and 2023. Average home prices are estimated to climb 8.3 per cent in 2022 and slip 5.3 per cent in 2023.

Atlantic Canada

Here is a look at the provincial markets in Atlantic Canada:

New Brunswick

  • 2022 Home Sales: -19.5 per cent
  • 2023 Home Sales: -6.5 per cent
  • 2022 Average Home Prices: +19.8 per cent
  • 2023 Average Home Prices: -7.1 per cent

Nova Scotia

  • 2022 Home Sales: -19.2 per cent
  • 2023 Home Sales: -13 per cent
  • 2022 Average Home Prices: +18.2 per cent
  • 2023 Average Home Prices: -7.1 per cent

Prince Edward Island

  • 2022 Home Sales: -10.4 per cent
  • 2023 Home Sales: -18.3 per cent
  • 2022 Average Home Prices: +11.1 per cent
  • 2023 Average Home Prices: -5.8 per cent

Newfoundland & Labrador

  • 2022 Home Sales: +0.5 per cent
  • 2023 Home Sales: -11.1 per cent
  • 2022 Average Home Prices: +6.8 per cent
  • 2023 Average Home Prices: +2.3 per cent

By province, home sales and prices are likely to decline the most in B.C. and Ontario, on average, in 2022 and 2023,” the bank said. “Prices should hold up better elsewhere in Canada, with the best affordability conditions in the country cushioning other markets in the Prairies and Newfoundland and Labrador. Strong population growth and tight conditions should offer near-term price support to the rest of the Atlantic, although activity in this region should cool as rates ratchet higher.”

A 20% Drop in Canada’s Real Estate Market?

TD Economics is not the only institution pencilling in a double-digit decline. BMO Capital Markets warned clients in a research note last month that the national price drop will likely fall more than 20 per cent, essentially revising its outlook downward.

Canada Real Estate Trends in Context

“We’ve all heard the hype: Canadian real estate is facing the deepest market correction in the last 40 years. But this isn’t the first time that experts have forecast corrections or crashes, none of which have materialized in recent history,” said Christopher Alexander, President at RE/MAX Canada in a recent op-ed. “Prices are plateauing from the meteoric rise we experienced throughout 2021 and in early 2022. The MLS Home Price Index edged down 1.7 per cent month-over-month in July, but it was still up 10.9 per cent year-over-year. While we have seen some easing in prices, the sky is nowhere near falling. In fact, there is relative stability in terms of market conditions, so buyers shouldn’t expect big bargains. Sales-to-active listings remain squarely in balanced territory overall and even tight in some areas.”

Tougher market conditions and a possible recession will be major market hurdles, but history reminds us that recessions often bring strong rebounds, and real estate has traditionally stood the test of time. Looking ahead, urbanization alone will be a significant boon to future housing demand, as Canada’s urban population is projected to grow by 10 million by 2050.

CIBC Economist Benjamin Tal recently said in a podcast that we’re enduring short-term pain for long-term gain, and this adage will certainly apply to Canadian real estate in 2022 and may filter into 2023, until greater stability returns. The Bank of Canada holds the key. If they are too aggressive, they will trigger a recession, Tal warned in his economic insights as part of RE/MAX Canada’s housing outlook to 2027. If they proceed with caution, they should be able to bring inflation back to its target rate of two per cent and markets will settle. Time will tell.