Bank of Canada Forecasts Further Drop in Real Estate Prices
The Bank of Canada is pessimistic that the current real estate downturn will soon reverse. In its most recent Monetary Policy Report, the Bank of Canada (BoC) outlined its forecasts for the Canadian housing market (MPR). The Federal Reserve believes that falling home sales will stabilize soon. But that won't be enough to stop housing from dragging the economy or to stop prices from falling even further. Even in the areas that have experienced the most growth over the past two years, they expect prices to continue to fall.
You can take a look at HOUSIFY’s article about Canada’s 2023 housing market and what this year holds for buyers and sellers in Canada.
The Bank of Canada predicts continued price declines.
It is expected that higher interest rates will continue to work in reducing prices. Increasing interest rates have the effect of reducing leverage by increasing servicing costs. This narrows the potential buyer pool and reduces the market's ability to absorb new buyers. Either buyers will need to make more money or prices will need to fall before anything will sell. In a practical sense, the former is more challenging.
Given that the BoC has no plans to reduce stimulus, it's easy to see why market participants think this trend will persist. "The slowdown in property activity that began in 2022 is going to continue over the near term," the MPR states.
There is an optimistic outlook for the real estate market in Canada.
After a precipitous drop, home sales in Canada are predicted to recover. In 2022, MLS-listed resales were down 25.2% from the previous year. It's reasonable to anticipate the volume to return to normalcy now that it's so far below the norm. It's likely that the slight decrease in home prices will entice buyers.
As the BoC puts it, "by the second half of 2023, the pace of new construction and housing resales will likely pick up, supported by low stocks and strong demand from immigration."
Canada's Housing Market Will Slow the Economy
The slowdown in the Canadian housing market is expected to put pressure on the economy in the coming months. In 2022, the BoC predicts that housing will have a negative impact on GDP growth of 1.0 percentage points, up from the previous prediction of 0.9 percentage points. Another downward revision is anticipated this year, this time by 0.7 percentage points. In the context of an economy expanding by a single percentage point, the change is marginal at best.
One real estate firm predicts that Vancouver will still be the most expensive city in the country in 2023, so it appears that this coming year might not be the one.
The Bank of Canada anticipates growth to resume in 2020, though it won't be as robust as in 2021. In 2024, they anticipate housing to be a contributor to growth of 0.3%. In contrast, it contributed 1.3% of economic growth in 2021.