This year, the Canadian housing market has been on fire, recording enormous gains and tremendous sales activity. As the country’s housing sector faces a supply squeeze, an affordability crisis has been looming from the Prairies to the Maritimes. This has left many young families and first-time homebuyers struggling to achieve the Canadian Dream.

With the average price for a residential property in Canada was $716,585 in November, it can be an incredible challenge to save for a down payment or even afford a mortgage, particularly with rumours of rising borrowing costs in 2022.

This current situation has the federal government on edge, with the nation’s housing agency ringing alarm bells about a substantial correction in home valuations, even as appreciation intensifies.

What Does the High-Vulnerability Rating Mean for the Canadian Housing Market?

In November, national home sales rose 8.6 per cent month-over-month, but Canadian real estate transactions tumbled at an annualized rate of 11.5 per cent year-over-year, according to the Canadian Real Estate Association (CREA). The actual (not seasonally adjusted) national average home price advanced 18.2 per cent compared to the same time a year ago, totalling $716,585.

A handful of cities are vulnerable to a significant correction, while several other cities see very little risk of vulnerability, says a new report from the nation’s housing agency.

The Canada Mortgage and Housing Corporation (CMHC) warned that the nation’s real estate market has shifted from a moderate to high degree of vulnerability in the second quarter of 2021. The quarterly assessment utilized four factors: overheating, price acceleration, overvaluation, and excess.

What are the top housing markets that are facing most of the risks in this environment? Toronto, Ottawa, Moncton, Halifax and Montreal.

Surprisingly, Vancouver, which has been one of the hottest housing markets in the country, witnessed its risk assessment subside. CMHC lowered its vulnerability level from moderate in the first quarter to low in the second quarter. Study authors attributed the improvement to the growing supply levels in the local housing market.

According to the federal housing agency, the increase in vulnerability stems from fierce pricing acceleration and overvaluations nationwide. If more of these imbalances and risks seep into more areas across the country simultaneously, vulnerability threats and mortgage troubles could escalate rather quickly.

“Even though we’ve seen a little bit of a moderation in some of the housing market statistics in the third quarter, when looking at the second quarter results … activity was still much stronger than even it is today,” said Bob Duggan, CMHC’s chief economist, in a statement.

Housing market activity is very strong, price growth is still very strong, and price levels are still very high, so it’s appropriate to signal the vulnerability,” Dugan added. “Hopefully people can take this information into account before it gets too out of balance, and while it’s still possible to get a more orderly adjustment in these imbalances.”

Other banks share CMHC’s sentiment. Swiss bank UBS, for example, recently stated that the Toronto real estate market is perhaps the largest bubble risk in North America today. According to its Global Real Estate Bubble Index, Toronto ranks behind Frankfurt as a major urban centre with overpriced housing that is not supported by incomes.

What does this mean for the Canadian real estate market in 2022?

Will Interest Rates Dictate Canada’s Housing Market Activity in 2022?

In 2020, the subject of the Canadian real estate market had been pent-up demand. In 2021, the theme of the housing sector has been dwindling supply. In 2022, the story of the national housing industry could be interest rates.

The Bank of Canada (BoC) has signalled that it will raise interest rates next year as it continues tapering its pandemic-era quantitative easing program. It should be noted, however, that Desjardins believes that rate normalization could begin in the second quarter, a quarter earlier than previously projected. The financial institution also warned that mortgages would balloon nationwide, especially for shorter terms.

At the same time, more borrowers may be impacted by the government’s higher threshold for the mortgage stress test, which went into effect on June 1 and will reduce the purchasing power of many mortgage applicants.

Experts warn that if rates were to go up 50 or 100 basis points, it could impact many new homeowners. Whether they got in the market before the increased mortgage stress test or face a personal financial emergency, rate hikes could have tremendous consequences for borrowers with oversized mortgages and negative equity.

With that being said, not everyone is hitting the panic button just yet.

“It’s very clear to me that the short-term interest rates and the variable rates will remain where we are until the second half of 2022. But then they will start rising,” said CIBC World Markets economist Benjamin Tal in an interview with TRNTO. “The good news is that, if they start moving early, namely by the third quarter of 2022, and go slowly, they might end up rising much less than if you wait and wait and wait and then they raise in panic. So the number one factor is to focus on inflation. The five-year rate is extremely, extremely cheap. And I suggest that it will not remain so cheap when we wake up and get back to semi-normalcy.”

Suffice it to say, Canadian real estate prices soared so quickly that they negated the benefits of low interest rates. Could this trend effectively reverse over the next two years? Market analysts will be monitoring the situation closely, as will keen homebuyers from coast to coast.