CMHC expects housing markets to slow from historic levels in 2021

Canada Mortgage and Housing Corporation (CMHC) has just released its latest housing market Outlook (HMO) – and it promises (some) relief for first-time home buyers on the price front. But it will still not be easy for newcomers to the market to acquire property in the years to come.

In general, the National Housing Agency expects growth in prices, sales levels and housing starts to slow in 2022 from recent highs in 2021.

The level of home sales and the pace of price growth will remain high relative to long-term averages, but moderate from their scorching 2021 highs, according to CMHC. With higher mortgage rates and lower housing demand affordability, they predict these trends will continue.

According to the state-owned company, home sales and price growth will approach historical averages by late 2023 or early 2024, but high price levels will persist as price growth remains positive. These factors will put greater pressure on the affordability of homeownership. So while the record run may have slowed, the only bubble to burst will be that of many first-time buyers.

“We expect growth in prices, sales levels and housing starts to slow from recent highs, but remain elevated in 2022,” Bob Dugan, CMHC’s chief economist, said in the report. . “Improving employment and immigration levels should be a key factor as the impact of pandemic-related restrictions continues to diminish. In 2023 and 2024, price growth will approach long-term averages, with sales and housing starts expected to remain above the five- and ten-year averages. Price growth will likely continue to be dominated by low-listing markets, including Vancouver, Toronto and Montreal.

Housing starts will also decline from 2021 highs, but will remain above historical averages, according to CMHC. This reflects the expected support for the construction of new homes to fill current and growing gaps in housing supply. However, construction supply constraints will continue to impact Toronto and Vancouver; this will highlight the central role of housing supply in determining affordability.

Ontario, Quebec and British Columbia are likely to see the strongest price increases in 2022. This will largely reflect tighter supply constraints than in the rest of Canada. Price growth is expected to slow by the end of 2024.

Meanwhile, CMHC predicts that the Prairie provinces, led by Alberta, will likely experience relatively high levels of sales and housing starts and will be boosted by energy sector investment and rising prices. energy and raw materials. In the Prairies, price growth is expected to remain well below the national average, reflecting a better balance between supply and demand than in other regions.

Federal government promises new supply
house under construction

According to the HMO, the Atlantic region will likely see continued upward pressure on residential activity and price growth due to high interprovincial migration. The level of house prices will remain relatively low compared to the overall Canadian average.

Despite price moderation across the country, rising interest rates will make it difficult for many to enter the market.

“The economy has rebounded quite strongly from the pandemic. Real GDP in 2021 came in at 4.6%, and that follows a decline of around 5.2% in 2020,” Dugan said this morning. during a call with reporters. “The strong growth in the economy has been reflected in the steady decline in the unemployment rate to 5.3%, its lowest level in more than 40 years. The strong growth rate has exhausted any excess capacity in the economy, which, combined with supply chain disruptions and pressure on food and energy prices due to the war in Ukraine, means that interest rates inflation hit three-decade highs.

Dugan points to yesterday’s news that the consumer price index for March was up 6.7% from a year earlier.

“As we look to the future, we expect the economy to continue to grow at a fairly robust pace,” Dugan said. “GDP growth is projected at 4.3% in 2022 and a further 3.1% in 2023. This continued pace of above-potential GDP growth implies that the economy will shift to excess demand; which means that the upward pressure on the CPI will continue, which in turn means that interest rates will continue to rise. Dugan points out that in its baseline scenario, CMHC assumes that short-term interest rates will rise an additional 125 basis points by the third quarter of 2023.

“A very real risk however to this base case scenario is that larger increases in interest rates will be required to slow the economy enough to reduce the excess demand that we expect to create in the economy, so that the inflation can return to the 2% target,” Dugan said. “Longer-term interest rates are also expected to continue to rise, meaning homebuyers will face higher mortgage rates in the years to come. Rising mortgage rates are the primary reason we expect housing market activity to moderate from exceptionally high levels in 2021. Specifically, we expect existing home sales to moderate this year and the next year, but they will nevertheless remain close to a historically high level. levels. Similarly, new home construction will slow, but housing starts will remain at extraordinarily high levels for the next few years.

Dugan says the drop in activity will provide some relief to the rate of house price growth, but prices are still expected to rise (again, no bubbles have burst here). “After a 21.3% price increase in 2021, average price growth is expected to slow in 2022 and 2023, but we still expect price growth to continue,” he says. Dugan points to an alarming lack of housing stock to exacerbate affordability challenges not just for aspiring homeowners, but also renters, and says there needs to be “a lot more” supply. “A lot of these aspiring homeowners could stay in the rental market,” he says.

In the rental market, recent trends in the Canadian market are also expected to continue over the forecast period. Downward pressure on rental vacancy rates and upward pressure on average rents will likely continue to affect rent affordability, according to Dugan. That is, unless new supply can offset those demand pressures, he says.