- Weaker economic growth and higher mortgage rates continue to slow the economy in 2023. As a result, we expect a price decline between 2022 and 2023, but the average price will not revert to pre-pandemic levels. However, we expect this decline to bottom out sometime in 2023.
- We anticipate growth in prices, sales and starts for the 2023 – 24 and 2024 – 25 periods.
- We project housing starts to decrease in 2023 and remain well below recent levels.
- Homeownership is becoming increasingly unaffordable as mortgage rates rise and supply remains tight.
- The rental market will become more competitive, putting significant upward pressure on rents because there are fewer options available.
Our latest Housing Market Outlook provides housing activity projections for Canada and the 18 largest urban centres to the end of 2025.
A variety of factors influence housing markets. Our team of market analysts across the county uses a comprehensive approach to forecasting housing activity. This approach relies on sophisticated modeling tools and decades of expert market knowledge. They use this national outlook to inform their work at the metropolitan level.
Housing Market Outlook with CMHC Chief Economist Bob Dugan
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CHRISTELLE: Canada’s housing landscape has drastically changed since the COVID-19 pandemic and many factors influence Canada’s housing markets. CMHC’s Housing Market Outlook is an annual report that provides forward looking analysis into Canada’s housing markets. This helps anticipate emerging trends in Canada’s new home construction, resale and rental housing segments and their potential impacts on affordability and other challenges at the national and local levels. Relying on sophisticated modeling tools and our expert market knowledge, the HMO enables decision makers to better understand Canadians’ needs by shedding light on housing dynamics and explaining key housing market drivers in a short-term horizon.
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(Visual: Two people are shown in conversation. They sit across from one another at a boardroom table. The two individuals are Christelle Legault, Communications & Marketing, CMHC, and Bob Dugan, Chief Economist, CMHC.)
CHRISTELLE: Hello and welcome. My name is Christelle Legault. I’m pleased to be hosting this discussion today on CMHC’s outlook for Canada’s housing markets for 2023 and a glimpse into what to expect in 2024 and 2025. To talk to us a bit more about these factors, we are delighted to have with us today our chief economist, Bob Dugan. Bob, great to see you and welcome.
BOB: Thanks for having me.
CHRISTELLE: Alright, so let’s get right into it, Bob. What would you say are the main elements of CMHC’s latest forecast?
BOB: Let’s start with the economy and so we’ve seen in recent years inflation has crept up to fairly high levels and because of that, we needed to see interest rates increase to get that under control. That increase in interest rates had an impact in the housing market over the last year, year and a half that caused demand to come down for sales and for prices to come down. We now think with inflation moderating that interest rates can stay stable from now on for the rest of this year and that’s going to bring some stability to the housing markets. We actually think there’ll be a bit of a turning point in the middle of this year with sales and prices stabilizing and then eventually starting to grow.
Of concern though is on the new home market. We do expect new housing starts to decline from where they were in the last couple of years. That’s a concern because we need a lot more supply in the housing market to create affordability. We estimate that between now and 2030 we have to build an additional 3 and a half million homes and with starts slowing over the next couple of years, I fear that we’re moving away from that objective and that affordability is going to remain a challenge in the years ahead.
CHRISTELLE: Interesting. I guess this leads to my next question. Forecasting is difficult and you’ve been doing this for some time now but if supply is limited, there’s less housing starts and little to no inventory in the new home construction market, how does this drive declining prices? Wouldn’t these factors put pressure on demand and cause prices to increase?
BOB: We think that’s going to be the long-term trend, you’re absolutely right and so we’re seeing price declines this year but that’s a bit of an artefact of history and so the housing market peaked last year in about you know, February-March of last year and we’ve seen sales and prices declining ever since then and so when you calculate the averages for this year, the average price this year will be lower than last year but from this point forward, we do expect the stabilizing interest rates that demand is going to pickup and you rightly pointed out that supply is very limited especially in the existing home market.
There is not a lot of inventory of listings of homes for sale and so we’re already seeing in markets like Toronto and Vancouver upward pressure on prices because there’s just no homes available for sale and demand is starting to pickup again. We think that’s going to become more generalized across the country and so to the second half of this year, we do expect prices to start to rise again and that will continue into next year. And so again, affordability likely to deteriorate in the years ahead as homeownership demand puts upward pressure on house prices and we all know from our recent reports that the rental market is having some struggles with affordability as well.
CHRISTELLE: Absolutely. To say we live in uncertain economic times is quite an understatement but how difficult is it to provide the most accurate forecasting when these trends are changing rapidly and constantly?
BOB: Well, it has been very difficult and that’s why you know over the past couple of years we’ve provided more updates to our forecast than we normally would so we normally do an annual forecast but you have to sort of keep track of a rapidly changing environment. For example, the inflation I talked about a few minutes ago, no one really saw that coming in a sustained way and I remember initially when we started seeing inflation, we were talking about baser effects, it’s transitory, it won’t last and even experts at other institutions were struggling to understand how sustained the rate of inflation was going to be and so it is a rapidly changing environment.
We’ve seen this pandemic where you know, it created disruptions to supply chains and all kinds of things that were very hard to foresee coming and so we’re in a very unusual environment and so it’s very difficult to forecast but we do our best to take all the information that we have at our disposal and try to come up with our best guess scenario as to what’s going to happen in the economy in the housing market as well as you know, try to think in terms of alternative scenarios to see well ok, here’s our best guess at what’s going to happen but you know, what could go wrong and what are some of the factors that could cause an underperformance in the economy or the housing market and try to understand that so that we can give people a range of views that are you know, well thought out.
CHRISTELLE: And so in this year’s Housing Market Outlook report we have baseline and alternative scenarios. Can you explain a bit what these represent and why we did it this time?
BOB: Right. So the baseline scenarios I mentioned earlier is you know, are what we think is the most likely outcome for the economy in the housing market and so in that scenario, we see a stabilization of interest rates this year, inflation continues to moderate towards the Bank of Canada’s target and eventually next year as inflation continues to improve, we can actually see interest rates declining and so that’s going to have an impact on the economy and it’s also going to have an impact on the housing market but you know, we are in this sort of a unique situation where you know, past experience with how interest rates affect the economy could be a little bit different and so for example in Canada, there’s a very high level of household debt and so how sensitive will consumers be to this higher level of interest rates given that they have so much debt.
These are things that we try to take into account in order to try to see what could go wrong and could there be a deeper pullback in the economy as a result of this high level of household debt. Could inflation be more persistent because of high levels of immigration adding to demand and these kinds of things. These are all different kinds of things that we try to consider as we’re looking into the future and trying to see well, how could these things impact our outlook in a different way than we anticipate, and we try to give people a range of outcomes so that using these alternate scenarios so they can understand how different trends could play out in the economy.
CHRISTELLE: What’s the likelihood of the worst-case scenario happening?
BOB: Well, our best-case scenario is of course what we think is the most likely and so in terms of our alternative scenario, it’s a lower probability, call it somewhere around you know, 25% probability of that outcome. We put most confidence in our baseline scenario because that’s in our opinion our best sort of guess at what’s likely to happen. I use the word guess, it’s based on a lot of modeling, a lot of analysis, a lot of thinking around the economy but you know when we look at things, when you’re looking into the future and as you pointed out, there’s a lot of uncertainty, it’s difficult to sort of say what’s going to happen in the future with certainty and so we put a high probability in our baseline but we have to consider alternate scenarios because it’s always possible you know, if the pandemic taught us anything, it’s possible to have a wrong forecast.
CHRISTELLE: Absolutely. And so what could you say about markets that are more vulnerable I guess with regard to affordability particularly Canada’s largest markets?
BOB: Well, you know, Canada’s largest markets are some of the markets that attract the strongest population growth so when we have strong levels of immigration, places like Vancouver and Toronto tend to get a lot of that population growth. These are also centers that are fairly expensive to live in and centers where the supply of housing is less responsive than in other centers so in Toronto and Vancouver there’s not a lot of extra land lying around in order to expand the housing stock and so supply becomes a challenge in these markets and particularly with population growth it can cause a deterioration in affordability and so you know, over the 2010 to 2018 period we saw a big rent up in house prices in these 2 centers.
And in our most recent rental market report when we look at you know, rents in units that turned over versus units that didn’t turn over, there were very large gaps there which indicate a lack of supply in the rental market and so this isn’t just about house prices getting more expensive and it’s not just deterioration and affordability for homeowners but the lack of supply also creates a deterioration and the affordability for renters and that’s a large concern because renters often have nowhere else to turn. You know, homeownership is a choice, the rental market for many lower income Canadians is not a choice, it’s a need and if we don’t have affordability in that part of the market, it can create a lot of stress on families that need affordable housing.
CHRISTELLE: Yeah, interesting times indeed. This last question given what you’ve just explained, the HMO is an important report for various stakeholders and decision makers to understand what’s going on with the housing market and looking at those future trends. What do you think you would want these stakeholders to know about our latest forecast?
BOB: Well I would say one of the things is you know, the short term dynamics have been really dominated by interest rates and what that does to homeownership demand but the longer term concern that I have that remains I’d like people to sort of see through this cyclical short term period and see that in Canada we have a lack of housing supply. I mentioned earlier that we need 3 and a half million additional units to be built between now and 2030 if we want to restore affordability in the housing market.
I worry that we’re not moving in the right direction, that starts are slowing and that affordability could really deteriorate and so I think when you think about the HMO and what it’s trying to say, I think it’s sort of a call-to-arms that we have to, like all hands-on deck in order to build more housing. We have to find innovative ways to do that in order to get affordability restored for Canadians, especially lower income Canadians across the country.
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CHRISTELLE: You said it best, more supply and all hands-on deck. That’s great, Bob. Thank you so much Bob for taking the time to walk us through this major report, this has been truly insightful and thank you to our viewers today. Please check out the description below to see a link to CMHC’s full Housing Market Outlook report and we want to hear from you. We’d love to get your feedback on this report as well as this discussion and stay tuned for more conversations with more of our housing experts and be sure to subscribe to our newsletters as well as our YouTube channel and don’t forget to follow us on Twitter, LinkedIn and all of our other social media channels. Thank you very much.
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Downturn in economic growth, housing prices and starts projected for 2023
Weaker economic growth will continue to impact the housing market in 2023 and as a result, we expect home prices to decrease nationally from 2022 levels. Our forecast lines up with other experts in the industry.
We don’t anticipate the average national price to return to pre-pandemic levels but expect the price drop to bottom out sometime in 2023. Price decreases are largely the result of the negative impacts of higher mortgage rates as well as slower income and job growth. These factors make it harder for potential buyers to buy a home.
We anticipate housing starts to decline in 2023 and remain well below the levels seen in recent years.
Higher mortgage rates and limited supply make housing less affordable
While home prices are decreasing overall, they’re still elevated in some markets. Higher prices combined with increased mortgage rates and a limited supply of new housing mean that homeownership will be even less affordable in 2023.
Tightening rental markets
Affordability challenges in the homeownership market continues to drive up demand for rental units. This will push up rents, making them more unaffordable. Canada’s most expensive markets — Vancouver and Toronto — will be impacted the most by soaring rents and limited housing supply.
Economic recovery and immigration will add to the demand for housing in 2024 and 2025 and the lack of affordable options and new supply will continue to create challenges. This calls for creative solutions from across the industry to boost affordable rental housing supply.
Recovery projected some time in 2023 or 2024 — and onwards
Starting in 2023 or 2024, we expect prices and sales to rise again and forecast inflation to hit its 2% target by the end of 2025. Mortgage rates are expected to become more affordable after 2023. These changes, along with renewed growth in income and employment will support housing demand and supply.
Download the full Housing Market Outlook (PDF)
- We expect more positive housing market conditions in the prairie provinces than in other regions. Interprovincial migration and more affordable homeownership are contributing to these market conditions.
- Ontario, British Columbia and Québec are expected to see significant declines in housing starts compared to other regions. This will impact key markets like Toronto, Vancouver and Montréal which are already struggling with supply constraints.
- Our analysis shows that the Atlantic region's economy and housing market conditions are projected to remain stable and moderate in 2023 compared to the other regions.
All CMHC analyses and forecasts of market conditions are established by using a range of quantitative and qualitative tools. To account for the numerous sources of uncertainty, the report outlines a range of forecasts.
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We will publish a series of reports over 2023 to help to deepen our understanding of housing supply challenges in Canada and inform better policies and decision-making.