CMHC expects 5% decline in home prices by 2023 if interest rates spike

CMHC expects 5% decline in home prices by 2023 if interest rates spike

Roger Pettingell Sarasota Real Estate

A surge in interest rates could drag national home values down by five per cent by the middle of 2023, but would not lead to a collapse in prices, according to a new report from Canada’s housing agency.

The report, authored by The Canada Mortgage and Housing Corporation chief economist Bob Dugan,

forecasts scenarios

for aggressive and moderate rate-hike paths, in each case projecting that a broader economic slowdown and raging inflation will weigh on prices and slow the pace of home construction.

In the high-rate scenario — in which the policy rate would hit 3.5 per cent in early 2023 — national average home prices would fall five per cent to as low as $742,970 in the second quarter of that year before steadily climbing back up. The number of homes changing hands would also decline 34 per cent compared to sales volumes seen in early 2022.

In the more moderate rate-hike scenario — in which the policy rate reaches 2.5 per cent in early 2023 — the Crown corporation expects national home values would slip by three per cent while sales would drop roughly 29 per cent.

The Bank of Canada has so far raised the overnight policy rate three times this year

to 1.5 per cent

. Many economists are

expecting a supersized rate hike of 75 basis points

during Wednesday’s monetary policy announcement, which would bring it close to the 2.5 per cent scenario, a “neutral rate” that would neither stimulate nor hinder the pace of economic growth.

Despite the price drops in both scenarios, the CMHC expects housing values will remain elevated.

“Supported by rising household income and higher immigration, house prices are expected to return to positive but moderate growth,” Dugan said. “Elevated price levels persist over the forecast horizon placing pressure on homeownership affordability.”

The CMHC points to several reasons why higher rates are warranted and would disrupt the exuberance in housing markets that became rampant during the pandemic.

The agency noted that during the rebound from the COVID-19 pandemic, household demand has greatly outpaced the supply of goods and services, a situation made worse by supply chain snarls stemming from China’s zero-COVID policy and the Russian invasion into Ukraine.

As the Bank of Canada moves to get ahead of decades-high inflation, the CMHC expects economic growth will begin to ebb, and with it, demand for housing. The report also said the demand for home ownership could decline further than expected with the high costs of living and borrowing.

“Rising rates will cause economic growth to slow,” Dugan said. “This leads to higher unemployment and less wage growth, which coupled with higher mortgage rates will make access to home ownership more challenging.”

Dugan added that rising rates will also boost construction costs and make housing projects more expensive. With labour shortages already in the mix, housing supply is expected to be constrained.

“Taken together, the Canadian housing markets are expected to experience a downturn by mid-2023.”

The CMHC had come under fire for predictions it made during the onset of the pandemic when it

forecast price declines

of between nine and 18 per cent in June 2020. The agency also tightened mortgage insurance rules, though it

reversed the changes

roughly a year later.

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