Since the COVID-19 pandemic struck the world, several sectors saw their earnings and profits go spiralling down. The real estate market of Canada also faced the brunt of the pandemic, as housing affordability plummeted significantly in 2021, hitting a 31-year low.
Much of the low affordability is because homebuyer demand is high, creating competition between them, thereby pushing prices up. As we enter 2022, the unsustainable price gain should balance out slowly, but demand will continue to exceed supply until the mid of the year.
Prediction of sales dip
The Canadian Real Estate Association, which releases forecasts for real estate sales through the Multiple Listing Service (MLS), anticipates that the average home price will likely increase by 5.6 percent, reaching $718,000 in 2022. The number of sales activities peaked in 2021; about 656,000 properties were traded through MLS.
Also, in 2022, the national-level forecast for home sales is estimated to plummet to 577,000 units, marking a fall of 12.1 percent. The association concluded that the sales forecast for Canada’s real estate market is moderate this year, but the prices are likely to go higher owing to tight supply conditions. Although unstable, monthly sales of homes over MLS were not as volatile in 2021 as they were in 2020. This trend could be compared to what was seen during the financial crisis of 2008-2009 but on a much higher and graver scale.
Price hike in major cities
Canada’s two biggest real estate markets—the Greater Toronto Area and Metro Vancouver—are getting the most attention as usual. It is expected that prices of properties in these big cities are likely to see the most increase. The price appreciation is driven mainly by out-of-province demand, which is expanding to fringes outside the city center. Annapolis Valley, Winnipeg, Calgary, Edmonton, and Regina are cities where home prices are likely to rise significantly in 2022.
Ongoing demand for new listings
The supply crunch is certainly an unprecedented occurrence in Canada’s housing market, but there are also other factors that are likely to influence the buying and selling conditions in 2022. For instance, the demand of a large number of households for new listings is ongoing and strong. Many of these listings will most likely show up as current homeowners continue to cope with the results of the pandemic.
Higher interest rates
Lastly, 2022 is also likely to bring headwinds for the Canadian real estate market as interest rates skew upwards. The Bank of Canada has laid the foundation for a tightening cycle to start by April 2023, mortgage rates are also starting to climb higher. Those are the rates that borrowers are actually getting. However, in Canada, borrowers will have to qualify for their mortgage loans at a stress test rate, which is presently set at 5.25 percent.
The rate lies somewhere in the range of 275-basis points over and above the usual discounted five-year rate. At the moment, the increase in mortgage rates is affecting monthly installment payments, though, with a 275-basis point stress test rate, these loans are still affordable for homebuyers.