Q2 2022 Mortgage Review

Uncertainty, inflation and rising interest rates have cast a shadow across the Canadian housing market. The last quarter saw marked declines in home sales and prices. Forecasts for the rest of this year and into 2024 have all been pulled back.

Higher Borrowing Costs

The Canadian Real Estate Association has adjusted its projections downward based almost solely on rising interest rates and the federal mortgage stress test.

“A critical element of the story has been the impact that discounted 5-year fixed mortgage interest rate levels have had on the stress test. In April 2022 alone, discounted 5-year fixed rates increased from the low 3% range to the low 4% range. The stress test is the higher of 5.25% or the contract rate plus 2%. For fixed rate borrowers, qualifying for the stress test has moved from 5.25% to the low 6% range – close to a 1% increase.

Variable rates will now be playing catch-up over the balance of 2022,” said CREA in its abbreviated 2nd-quarter report.

Slowing Sales

The Association expects to see about 568,300 homes change hands by the end of the year. That is down from the more than 621,000 forecast at the end of Q1. Even though it represents a 15% drop from 2021, it would still leave 2022 as the second best year on record. Looking ahead to 2023, CREA predicts sales will pull back another 3%, to about 552,400 units.

Canada Mortgage and Housing Corporation sees an even sharper decline for sales, looking forward to the middle of next year.

The chief economist with federal housing agency, Bob Duggan, has developed projections based on the Bank of Canada’s Policy Rate going as high as 3.5%. Give that the rate is now 2.5% and more increases have been promised, 3.5% seems quite realistic.

In Duggan’s scenario, sales will drop by as much as 34% by mid-2023 compared to the record setting levels reached earlier this year. He expects sales to return to their long term trend as mortgage rates stabilize and the economy starts to recover heading into 2024.

Pricing Projections Mixed

Duggan expects rising mortgage rates will trigger a modest decline in home prices of between 3% and 5% from their current, elevated levels. 

On the other hand, the Realtors see reduced, but still impressive, price growth, with the national average home price rising nearly 11% to more than $762,000 this year. A further gain of about 3% is forecast for 2023, which would push the national average to more than $786,000. But both of those numbers are lower that the forecasts in CREA’s Q1 report.

Overall Decline

In a recent report, well known real estate economist Robert Hogue issued an overall downgrade.

“We project home resales to fall nearly 23% this year and 15% next year in Canada, and the national benchmark price to drop more than 12% from peak to trough by the second quarter of 2023,” Hogue wrote.