Canadian home prices could fall another 5% to 7% in 2023, according to the latest forecast from Fitch Ratings.
The agency says homebuying demand is likely to remain under pressure due to the effects of “high interest rates, inflationary pressures, a stagnant economy and worsening affordability.”
Fitch says that would result in a peak-to-trough decline in prices of roughly 15%. It noted that prices remain about 20% above pre-pandemic levels, and remain supported by tight supply and continued strong demand, despite the declines seen so far in the second half of 2022.
“Along with the U.S., Canada had the greatest increases in home prices globally since 2020, but net home price changes in 2023 will not be as severe as seen in Denmark and Australia, given lack of supply and high demand,” Fitch said in its report. “Our loan loss model assessment of sustainable property values indicates that Canadian housing is 29% overvalued, although this will likely be revised downward based on end-2022 data.”
The average home price fell to $612,200 in January, according to the latest monthly data from the Canadian Real Estate Association.
Housing supply remains most constrained in the key markets of Toronto and Vancouver, which saw the largest run-up in prices during the pandemic.
“These areas are now seeing some of the larger price corrections, although demand, driven by local buyers and high immigration, and limited supply are still supportive of net price gains relative to pre-pandemic,” Fitch noted. “When prices dip, buyers on the sidelines jump in, offsetting downward price pressure, similar to market movements in Vancouver in 2017.”
Mortgage delinquencies have so far held steady near historic lows, despite sharply higher mortgage payments for many borrowers, Fitch noted. And it expects delinquencies to remain below pre-pandemic levels.
“Significant consumer savings built up during the pandemic have helped to cover higher payments, and borrowers have sizable equity in their homes,” the report reads.
It added that the mortgage stress test as part of OSFI’s Guideline B-20 has also helped “cushion” borrowers from higher payments.
“Guideline B-20 sets a stressed rate threshold relative to a borrower’s debt service capacity to qualify for a mortgage, providing a cushion to absorb the increase in mortgage payments as a result of higher rates,” Fitch said. “In addition, banks proactively work with borrowers to avoid defaults.”
