Falling Canadian Home Prices Good News for Newcomers Looking to Buy

As immigration surges, home sales in Canada fell for the sixth month in a row, dropping by one percent in August compared to July.

At the same time, listings fell by  5.4 percent, month-over-month. 

And while Scotiabank's housing economist Farah Omran points out that August’s decline was indeed the sixth monthly decline in a row, it was the smallest "as the size of the decline has been tapering each month."

Sales closer to pre-pandemic levels

"The national decline brings the level of sales closer to pre-pandemic levels," writes Omran in her Canadian Housing Market Report, "with August’s sales hovering around 9 percent above the month’s long-term average."

The national home price index fell 1.6 percent to $777,200 from July to August on a seasonally adjusted basis, according to the Canadian Real Estate Association (CREA). Over the past six months, the home price index is down 7.4 percent. (The index excludes the high end of the housing market and is the industry’s preferred measure of home prices.)

Prices have fallen since the spring when the Bank of Canada started hiking interest rates in an effort to combat inflation. The benchmark lending rate since March has risen by three percentage points to 3.25 percent.

The central bank has signalled that it plans to continue with its rate hike strategy. Housing market watchers say that continuing to increase the cost of borrowing will force more potential buyers out of the market, thus putting increased downward pressure on the price of homes.

Good news for newcomers planning to buy

"Housing markets in Canada continued their adjustment in response to changing market and policy conditions in August," says Omran. "Since the Bank of Canada began hiking its policy rate in March of this year, national sales have declined by 32 percent, bringing them closer to pre-pandemic levels."

On Sept. 30, Canada’s independent Parliamentary budgetary watchdog warned of a scenario that could see home prices fall as much as 23 percent from peak levels this year alone, as rising interest rates make current price tags increasingly unaffordable for would-be buyers.

The continuing drop in prices has been good news for newcomers to Canada planning to buy before or soon after arriving. 

A recent Ipsos Public Affairs survey released earlier this year showed that newcomers to Canada are looking to buy their first new home faster than ever. The study showed that immigrants to Canada typically are homebuyers within their first five years of arriving and are overall more focused on owning a home than non-newcomers.

Canada is on track to meet or exceed its target of 431,645 new immigrants in 2022 which experts say will definitely have a significant impact on the future direction of the housing market. 

The country hit a record-breaking level of immigration in 2021 with 405,970 new permanent residents. Canada has set targets of 447,055 newcomers for 2023 and 451,000 in 2024. 

Despite the lower housing forecast, there were large gains in housing prices in the first two months of 2022. This means that the average annual price will still be higher than in 2021. 

Right now, CREA is forecasting an increase of 4.7 percent to $720,255 for 2022. That falls lower than CREA’s earlier forecast in June of a 10.8-per-cent increase.

Southern Ontario cities hit hard

In Ontario, Canada's most populous and second largest province, the housing market has slowed considerably. 

In Ontario cities that were hotspots during the first two years of the pandemic have seen the typical home price fall by at least 10 percent.  They encompass much of  Southern Ontario and regions near the city of Toronto (including the cities of  Barrie, Brantford, Guelph, London and Simcoe).  In the west end of the GTA, the affluent  GTA Oakville-Milton region has witnessed a  17 percent drop. Cambridge, which is part of the Kitchener-Waterloo area,  is down almost 19 percent.

In addition, CREA also changed its sales forecast. It now forecasts that sales will fall by 20 percent year over year. That's steeper than the earlier predicted decline of 14.7 percent.

Mortgage payments deterring potential buyers

Nadia Cawley, a realtor with Right At Home Realty, told The Globe and Mail's Rachel Younglai that “some of them just cannot afford it right now,”  

Cawley told Younglai that two of her clients were set to buy a home this year, but following the Bank of Canada’s interest rate hikes and the resulting increase in mortgage rates, they concluded that they couldn't handle the monthly mortgage payments.

The popular five-year fixed mortgage rate is now hovering around 5 percent, while in early 2021 it was below 2 percent.

On the plus side, Omran points out that supply-demand conditions have been easing in many parts of the country, with the national market now in "balanced territory." 

"The recalibration in the housing market has so far been a reasonably orderly—and welcome—process," said Omran, "with many factors, including higher mortgage rates, leading to less demand for homes and creating much more balanced markets than seen earlier this year."

Expectations of some sellers are unrealistic

Meanwhile, some homeowners are still expecting their properties to sell for prices seen at the height of the pandemic’s real estate boom, Cawley told The Globe. 

“They’re not getting the amount that they thought they would,” she said, adding that some sellers are deciding to take their property off the market.

Nationally, the number of new listings dropped 5.4 percent from July to August, according to CREA.

Will prices bottom out in 2023?

Private-sector economists are predicting home prices will bottom out next year, with some saying the national average price could fall as much as 25 percent from February’s peak.

Clarrie Feinstein, reporting in The Toronto Star, says the Royal Bank of Canada now expects home prices to drop 14 percent below the recent nationwide peak as homebuyers recoil from higher interest rates.

Omran said she expects housing markets to continue to moderate into next year. She believes that in the longer term, demand fundamentals, including the acceleration of immigration and the existing challenges to increasing supply, are expected to end the declines.

Higher population growth expected

"Higher immigration targets in the next few years should translate to higher population growth relative to 2021," she said, adding that unlike last year when the government met its immigration target mostly by making already-in-Canada temporary residents permanent (effectively generating no population growth) this year’s target is increasingly being met by newcomers arriving in the country. 

"This means that the following years’ immigration targets will actually translate to more population growth and more demand for housing, whether owned or rented," she explained. 

Speaking with Josh Sherman of Storeys.com, Marc Desormeaux, principal economist at Desjardins, like Omran, isn’t calling for a crash either, again partly because of Canada’s post-pandemic immigration targets, which aim to add 1.3M permanent residents by 2024. 

Is a crash on the horizon? I am not calling that at the moment - Edgard Navarrete, Central 1 Credit Union

“That’s a positive for housing demand, and we think it will provide tailwinds for the housing market, particularly in big centres like Toronto and Vancouver,” he told Sherman.

Meanwhile, Edgard Navarrete, regional economist for Central 1 Credit Union, believes it's too early to predict what is going to happen to the housing market. 

“Is a crash on the horizon? I am not calling that at the moment,” Navarrete told Storeys.com. “What is happening is that some hot air is being let out from the market."

Pandemic was a crazy housing period

In reality, Canadian home prices would have to fall a long way before hitting pre-pandemic levels. As Storeys.com points out, even with the latest price declines, Canadian home values are still up 21.8 percent from February 2020, according to a Central 1 analysis of CREA data. 

“The residential market is just coming back down to earth after a very crazy period during the pandemic,” says Navarette. “Now, if the Bank of Canada continues to raise interest rates even higher, as they signalled this [past] week to control inflation, we may have to have another conversation.”

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