Will house prices fall when interest rates rise 2022?

The national house price is expected to decline by close to 15% by Q2 2023 from its historical peak in Q1 2022 as housing demand slows with rising interest rates and deteriorating economic and income conditions. 4 days ago

cmhc-schl.gc.ca - The road ahead for the economy and housing — fall 2022 update | CMHC

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The labour market performed well in 2021 and the first half of 2022. Employment growth was still robust in the first half of 2022 at 3.6% (annualized) despite declining from 6.5% in the second half of 2021. Tight labour market conditions — as reflected by the decline in the unemployment rate to its historical low of 4.9% in July — provided support to wages and households’ disposable income growth. However, from Q2 2021 to Q2 2022, the growth in compensation per employee did not exceed the increase in the cost of living. Consequently real — inflation-adjusted — disposable income per capita has been trending down. Recent figures from Statistics Canada’s Labour Force Survey suggest that labour market conditions started easing. Employment declined in September from its peak last May (-0.5%), mostly from declining full-time employment. The unemployment rate rose to 5.2% in September from its July 2022 historical low, reflecting softening labour market conditions. These will deteriorate further. With consumer price inflation staying above nominal income growth until early 2024, further declines are expected in per capita real disposable income (see chart 2). As for the monetary policy rate, mortgage rates are expected to increase further. We now predict that the conventional 5-year (fixed) mortgage rate will increase and peak at 6% in Q4 2022, a significant rise from its historical low of 3.2% in Q3 2021. Once the monetary policy rate starts declining as inflation converges back towards its 1-to-3% targeted range, this mortgage rate will decline and stabilize at 5.3% by the second half of 2024 (see chart 1). Population growth in 2020 was significantly slowed by pandemic-related restrictions and their impact on immigration. Population growth recovered close to its 2-decade average since then as these restrictions were relaxed. Between 2022 and 2024, we expect the population to continue growing and about 671,000 new households added.

Recent housing market developments and outlook

Housing markets in Canada performed strongly in 2020 and 2021 despite the pandemic-related economic downturn. Growth in housing demand was strong as workers in high-paid occupations were much less affected by the pandemic. A shift in preference towards larger properties from the growing need for telework and homeschooling also drove growth. Housing demand was also supported by fewer spending opportunities — due to public health restrictions — which significantly increased savings and hence the resources available to purchase a property. Other contributors to housing demand include historically low mortgage rates and, since 2021, the recovery in population growth. It recovered to its pre-pandemic rate with the relaxation of pandemic-related border restrictions.

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Robust growth in housing demand combined with Canada’s structural supply shortage and insufficient new listings to satisfy the demand on the resale market resulted in a sharp escalation in housing prices from Q2 2020 to Q1 2022. Over this period, the seasonally adjusted MLS® average price for Canada increased by about 53%. From Q2 2020 to Q1 2021, the increase was largely driven by a compositional shift towards larger and more expensive properties. However, this compositional effect partly reversed afterward, which slowed the increase in the average price despite the continued underlying strengthening in house prices. With Canada’s MLS® average price reaching its historical high in Q1 2022, the monthly income-share of shelter costs associated with a property newly purchased at this price exceeded levels seen in 1990 (see chart 3). This was a period when the 5-year fixed mortgage rate was above 10%. This ownership affordability indicator worsened further in Q2 2022 as the rise in mortgage rates dominated the improvement from the decline in house prices. We were already predicting housing market conditions to ease and house price growth to slow with the expected return to more balanced and sustainable conditions. But the higher-than-expected rise in interest rates and the resulting deterioration in economic and income conditions will continue to reduce housing demand in the coming quarters. At historical lows, ownership affordability for potential buyers will also weigh on housing demand (see chart 3).

cmhc-schl.gc.ca - The road ahead for the economy and housing — fall 2022 update | CMHC