Photo: James Bombales

Ontario home sales and prices have been dropping ever since January, when a new mortgage stress test and interest rate hike delivered a serious blow to the province’s housing market.

Many pundits have worried about how the slump could affect the province’s economy. But, according to a new report, the home price correction won’t have as drastic an impact as many have feared.

“The current mix of stronger government spending and moderate interest rate increases suggests the Ontario and GTA economies are expected to grow more moderately but to continue to provide underlying support for provincial real estate prices in 2018 and 2019,” reads a new report from the Canada Mortgage and Housing Corporation (CMHC), released today.

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Currently, 40 per cent of Ontario household assets are tied up in real estate, after years of homeowners borrowing against their homes, spurred on by historically low interest rates.

“Consequently, a significant downturn in [home] prices could have negative repercussions on the broader Ontario economy and financial system,” writes CMHC Ontario regional economist Ted Tsiakopoulos, in the report.

But he’s quick to add that the current dip in prices doesn’t resemble the economic cycles of the 1970s and 1980s, where the underperforming housing market was exacerbated by shocks to energy sector and rising inflation.

“The current home price correction in Ontario will likely not persist as it fails to resemble the more serious downturns observed across time,” writes Tsiakopoulos. “While imbalances continue to persist, they are easing and fundamentals…will support home prices relative to historical price bust period experiences.”

Those fundamentals include high levels of immigration, balanced housing markets and increased levels of new housing supply, which should mean that the current price correction is short lived.

Tsiakopoulos predicts that home prices will grow at a moderate pace in line with the rate of inflation over the next two years. Prices are expected to range from $562,000 to $575,000 in 2018 and $570,000 to $595,000 in 2019.

“Inflation adjusted home prices in the province of Ontario should remain relatively stable and close to fourth quarter 2017 levels,” writes Tsiakopoulos. “This is good news for prospective buyers as fewer bidding wars will result in less urgency to act. For homeowners and investors it means home price expectations will need to normalize.”

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