Even after shattering all sorts of records in 2021—for high sales and prices and low inventories—Canada’s housing market isn’t about to buckle. Plenty of unmet demand remains and will continue to fuel tremendous activity across the country. Still, we expect the Bank of Canada’s rate liftoff to turn down the market’s heat in 2022 as deteriorating affordability sends buyers to the sidelines. Higher interest rates and the likelihood of new anti-speculation measures will also prove a tougher proposition for investors. In all, we expect 579,600 existing Canadian homes to change hands this year. Though down 13.1% from the astounding 667,000 transactions in 2021, that’s still the second-highest amount in history. The ongoing construction boom will bring much needed new supply to the market, helping to ease severe shortages.

Home prices will keep climbing, though at a slower pace

Most of that increase in supply and cooling of the market will take place in the second half of this year. We expect demand-supply conditions to become much less favourable—though still broadly positive—for sellers by then, reducing upward pressure on prices. We think this will slow the pace of price appreciation, but not alter the direction (with some possible local exceptions). We project Canada’s benchmark price to rise 6.2% in 2022 or nearly a third of the record rate of 17.8% last year. The momentum will be even slower in 2023 with most markets returning to better balance.

Sellers will keep a tight grip on the market amid record-low inventories

In the near-term however, the outlook for prices remains super strong. Sellers ended 2021 in full control of virtually every local market. That’s bound to keep property values rising rapidly in the initial months of 2022. Demand-supply conditions were so tight in parts of B.C., Ontario, Quebec and Atlantic Canada at the end of 2021 that we wouldn’t be surprised to see prices accelerate even further at first. More moderate gains will set in once extreme tightness starts to unwind by mid-year.

The supply side will continue to be crucial to Canada’s housing story. So far in the pandemic, supply has been dwarfed by supercharged demand. Inventories of homes for sale have plummeted to historical lows as a result, leaving few options for buyers. We estimate the Canadian market was short 180,000 to 250,000 listings at the end of 2021. To reach a better balance, with exceptionally strong demand, active listings would need to at least triple.

Brace for more bidding wars in 2022

Competition between buyers will remain fierce beyond the always-hot Toronto and Vancouver markets. Inventories were at all-time lows in provincial housing markets accounting for 80% of activity in Canada at the end of last year—with only the Prairies, and Newfoundland Labrador seeing a milder scarcity of listings. Many smaller markets saw bidding wars for the first time. We expect this to continue in the near term.

Demographic factors will keep the fire burning

The changing housing needs of Millennials will continue to generate substantial activity in the market, especially for homes suited to families. Millennials (in their mid-20s to early-40s) have swelled the ranks of Canadians in their prime home-buying stage of life in recent years. There were 10.5 million people aged 25 to 44 in Canada in 2021. That’s up more than 800,000 (or 8.3%) in the past five years. If historical ownership patterns hold, Millennials will remain a major force in the housing market in 2022 and beyond. Ownership rates typically rise significantly between the ages of 25-29 (40%) and 40-44 (63%). Millennials will remain the biggest source of first-time home buyers and an increasing source of move-up buyers.

The immigration factor

Against all odds, the Canadian government met its ambitious target of welcoming 401,000 new permanent residents in 2021. To do so, though, it heavily recruited migrants who were already in the country on a temporary basis. We expect the government to draw more immigrants from overseas to achieve this year’s target of 411,000. This means the number of newcomers actually setting foot on Canadian soil and looking for housing is set to jump. We believe this wave of immigrants will impact the rental market first—as newcomers most often rent in their first few years in our country. But we also see a boosting effect on the ownership market, with some economic-class immigrants (mainly skilled workers, entrepreneurs and others coming to address labour shortages) ready to enter the market from day one. We expect the vast majority of newcomers to settle in Canada’s larger urban areas—Toronto, Vancouver and Montreal—further intensifying pressure on housing stock.

Gigantic savings to gradually normalize, leaving less for housing

Canadians on the whole are in remarkably good financial shape considering the severity of the pandemic’s economic shock. While mortgage debt is rising fast (by more than 10% y/y most recently), mortgage delinquency rates remain historically low. Households’ net worth is at a record high and savings have been massive in the past two years thanks to government support and fewer places to spend. Some of those savings flowed into the housing market. But we expect there will be less extra cash available in the year ahead as restrictions ease and spending patterns normalize. Many Canadians will want to reallocate budget room on things like travel and dining out at the expense of housing investment.

Bank of Canada rate hikes: a turning point

The main event this year for the market will be the Bank of Canada’s rate hike liftoff. We expect the central bank to initiate rate increases this spring culminating in a series of six rate hikes totaling 150 basis points in a little more than 18 months. This increase, on its own, will have a significant cooling effect on demand. Exceptionally low interest rates have been a powerful tonic for homebuyer’s appetites throughout the pandemic.

We expect this to fade after a few rate hikes make buyers’ interest payments tougher to swallow. Tremendous price escalation and rock-bottom mortgage rates have rendered mortgage payments twice as sensitive to interest rate changes as they were 15 years ago.

The broad increase in rates—we expect both variable and fixed rates to rise materially—is likely to pressure up the mortgage qualifying rate at some point in the second half of this year (or possibly sooner). We think that would push some buyers to the sidelines at least temporarily.

Rate hikes will deliver the biggest punch in most expensive markets

Buyers in Toronto, Vancouver and Victoria will feel the pinch of rising rates more intensely than their counterparts in less expensive markets. That’s because the larger mortgage sizes—and larger mortgage payments—in higher-priced cities are much more sensitive to a change in rates. We believe a rising rate environment would maintain the appeal of smaller, more affordable markets, if not augment it at the margin.

New policy actions could change the game for investors

A Bank of Canada rate hike will also alter the equation for investors. This category of buyers played a larger role in the market last year, accounting for slightly more than one-in-five purchases. Those considered ‘speculators’ by policymakers will soon face stricter regulations. The federal government is working to introduce measures that would: ban foreign buyers from purchasing non-recreational properties for two years; tighten down payment requirements for investment properties; tax gains on flipping properties; and curb excessive profits on investment properties. Details on most of these initiatives have yet to be announced though we expect the spring federal budget to provide some specifics. Federal measures would be in addition to plans being pursued at the local or provincial levels—most notably in Vancouver and Toronto—to curb speculative activity. We believe higher interest rates and policy efforts will cool down investment activity by a few degrees.

Calming effect will be welcome in frenetic markets

While a less accommodative monetary policy would no doubt deliver a blow to the most stretched prospective home buyers—especially first-time home buyers—the general calming effect on the market will be welcome. We believe this is a key part of what’s needed to rebalance the market and tame runaway prices. From a market risk perspective, we don’t think the kind of rate increases we’re contemplating would derail activity or cause prices to crash. We expect positive demographic factors to largely mitigate such risks, with the net result a soft landing over a two- to possibly three-year period.

New supply is already on the horizon

There’s reason to believe 2022 will finally be the year more supply makes its way to market. Housing starts have surged in the last year, reaching levels unseen since the mid-1970s. Some of those units have recently been completed and barring prolonged construction delays (supply chain bottlenecks and labour shortages pose significant challenges), we expect builders to boost completions materially in 2022 to nearly 250,000 units. This would be up significantly from an average of 190,000 units annually over the past five years. The increase is unlikely to fully address the supply shortage on its own. But alongside calmer demand, we believe it will noticeably reduce the imbalance.

And Canada’s builders aren’t done yet

There’s scope for completions to rise even more in 2023 and possibly beyond. Municipalities have considerably ramped up building permit issuance in the past year and this will keep the residential construction boom going. We’re glad to see all levels of government recognize the need to build more housing to tackle the affordability crisis. Many (including the federal government) have pledged more resources or incentives to municipalities to speed up project approval processes and rethink zoning regulations. This would allow medium-density development (the so-called missing middle) in exclusively low-density areas.

A year of transition, not transformation

The overall landscape for housing will begin to shift in 2022 but we don’t expect abrupt changes. These will be the first steps on a long road to normalization. We do expect 2022 will be a remarkable year by almost any standard… unless you compare it to 2021.


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Robert Hogue is responsible for providing analysis and forecasts on the Canadian housing market and provincial economies. Robert holds a Master’s degree in economics from Queen’s University and a Bachelor’s degree from Université de Montréal. He joined RBC in 2008.

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