Canada Home Prices See Record Drop as High Rates Hit Buyers

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(Bloomberg) — Canadian home prices fell by the most on record in 2022, as rapidly rising interest rates forced a market adjustment that may have further to go. 

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The country’s benchmark home price fell 1.6% in December to C$730,600, bringing the total decrease since February’s peak to 13.2%, the Canadian Real Estate Association said Monday. 

The decline was the biggest peak-to-trough falloff since the group started compiling the data in 2005. Last year also saw the biggest price decline for a calendar year since records began, with a 7.5% drop overall.

With the economy in danger of entering a recession, and the Bank of Canada warning of more rate hikes to counter persistent inflation, the housing market may face continued pressure in the coming months. 

A record number of buyers used floating-rate debt for purchases during Canada’s pandemic-era real estate boom, and those borrowers may come under increasing strain if mortgage costs remain high. Job losses from an economic slowdown also would make it harder for people to keep up with loan payments and stay in their homes.  

Economists surveyed by Bloomberg predict Canada will enter a recession in the first part of this year. 

“As we look ahead to the crucial spring selling season, the all-important question is who will emerge from hibernation in greater force — buyers or sellers?” Douglas Porter, chief economist at the Bank of Montreal, said in a note to clients commenting on the new sales data. “We suspect that the market will still be digesting the rapid run-up in interest rates, and that buyers will be more reluctant to re-emerge, keeping prices under pressure for some time yet.”

Pulling Back

The housing slump so far has largely been driven by a pullback among buyers who’ve been priced out due to higher interest rates. The number of transactions in December was down 39% on a non-seasonally adjusted basis from last year, when the market was approaching its peak and before interest rates started rising. 

Read more: Global Central Banks Aren’t Declaring Victory Over Inflation Yet

Compared with November, the number of sales in December rose 1.3%, while new listings fell 6.4% as more prospective sellers opted to try and wait out the market weakness.

Part of that may be seasonal: Listings tend to slow during Canada’s winter months, then pick up again when the weather warms in the spring, traditionally the busiest time to sell.

So far, the decline in prices doesn’t seem to be enough to lure back many buyers because it’s been so outpaced by the rise in borrowing costs. From a record low 0.25% last March the Bank of Canada has raised its benchmark rate to 4.25% today, meaning prospective buyers looking for a 5-year mortgage now often face rates of about 6.5%. 

Despite the past year’s decline, prices rose so fast during the pandemic buying frenzy that the national benchmark in December remained 33% higher than it was three years earlier. A report last month by Royal Bank of Canada showed that for the typical buyer dependent on a mortgage, housing affordability deteriorated to its worst level ever as mortgage rates rose with prices still elevated.

(Updates with commentary from economist in seventh paragraph and additional context)