Desjardins predicts 15% housing price drop when market correction starts

Analyst expects prices to stay above pre-pandemic levels

Desjardins predicts 15% housing price drop when market correction starts

Rising interest rates and sluggish activity will likely bend, but not break, the Canadian housing market, according to new research from Desjardins' economics team.

Desjardins Senior Director of Canadian Economics Randall Bartlett and Senior Economist Hélène Bégin wrote in a note to clients that prices might decline 15% from their February 2022 peak by the end of next year but would still be higher than pre-pandemic levels.

“Looking ahead, we believe ever-higher borrowing costs are going to weigh on housing market activity as increasingly interest-sensitive households batten down the hatches for the impending storm. This is expected to lead to sustained weakness in sales activity, thereby keeping persistent downward pressure on prices,” they said.

Citing the Canadian Real Estate Association, BNN Bloomberg reported that property prices in Canada have been falling for the past two months after reaching a non-seasonally adjusted high of $816,720 in February.

The drop occurred when the Bank of Canada began aggressively boosting its benchmark rate, increasing it by half a percentage point in each of the last two sessions to combat inflation that had not been seen in three decades.

The previous supersized rise by the central bank occurred 22 years ago.

The Desjardins team expects the drops to be uneven, with more pain felt in places where prices surged owing to an inflow of Canadians who were able to work remotely during the pandemic's restrictions.

 “As we look ahead to how the national housing market correction will play out at the provincial level, in some ways it’s expected to be the inverse of what we saw during the pandemic,” Desjardins said.  

With the slow return to work, Desjardins' team believes there may be some pain in Ontario housing markets that are just a little too far away to commute into the major cities, though this might be mitigated by immigration and hybrid work plans.

“Communities within a few hours’ drive of Toronto are likely to see sales activity and prices cool the fastest as borrowing costs rise and commuting becomes more common,” they said.

“But again, we don’t anticipate average home prices in any of these regions to fall below their pre-COVID starting points due by and large to high levels of international migration and ongoing hybrid work arrangements.”

After the recent turbocharged run higher, Desjardins believes the correction will return the domestic housing market to more balanced settings.

“It looks as though the Canadian housing market correction we expected has begun, though it’s still concentrated in a small number of markets. But there’s no need to panic,” they said.
“While a correction in the range of 10% to 20% is likely by the end of next year in most provinces, average home prices are expected to remain above the pre-COVID level and trend. As such, the anticipated correction should bring more balance to the Canadian housing market.”