By the middle of this year, the rapid price growth we’ve been experiencing in Quebec and Ontario could cool off, according to recent research by Desjardins.
As interest rate hikes kick in and begin to impact borrowers, prices will increase more slowly in 2022 as predicted by senior economist Hélène Bégin in a Desjardins Economic Studies report published this month.
In 2021, major urban centres in Ontario and Quebec reported steep price growth. Home prices in Gatineau, Sherbrooke and Trois-Rivières climbed over 25 per cent annually, while values in all Ontario census metropolitan areas (CMAs) were up between 15 per cent and 30 per cent last year. Specifically, average home prices increased 17.9 per cent, 21.9 per cent and 18.5 per cent during 2021 in Toronto, Ottawa and Montreal.
With the number of available homes still extremely low, alongside buyer demand and a notable presence of investors, this situation is expected to continue “for a while,” but could shift mid-year.
Bégin forecasts that a lull will take hold around mid-2022 as the effects of climbing interest rates set in, a change that could dampen the pace of price increases this year. Growth could fall between five per cent to 10 per cent in Quebec and Ontario, a pace “well below,” 18.9 per cent and 22.8 per cent last year.
With mortgage rate increases projected into 2023, this could “slow the demand for housing even more,” leading to a potential three per cent drop in prices in Quebec and Ontario next year.
“The anticipated interest rate hikes are generating a certain urgency among buyers, a situation that should last until at least the spring. The extremely low inventory of properties for sale will continue to put pressure on prices for now,” noted Bégin in the report. “Still, the increases should ease off as demand slows in response to higher mortgage rates, and prices may even adjust next year.”
New and first-time homeowners could be hit hardest by rate hikes
In the second-half of 2022, rising rates could ease demand for Canadian homes. However, first-time home buyers will feel these changes first, as “loans will be granted based on the interest rates in effect.”
Even if loan amounts are to remain unchanged, new homeowners will see the difference in their monthly payments. With new home buyers making up about 47 per cent of all property purchases according to the Bank of Canada (BoC), “the demand for housing should slow.”
The growing presence of investors in the housing market has also been contributing to first-time buyer challenges. According to the BoC, about 20 per cent of property purchases in Canada were investments by national investors taking out a mortgage.
“This type of acquisition is exacerbating the lack of homes available for households as well as putting additional upward pressure on prices,” said Bégin’s report, which pointed out that new buyers typically have a smaller budget and less room to manoeuvre in multiple-offer situations.
Those with a variable-rate mortgage will notice the change with each 25 basis-point increase, the first one expected next month followed by three more by the end of 2022 and potentially two more in 2023. This would send the target rate from its current value at 0.25 per cent to 1.75 per cent by the end of next year.
Fixed mortgage rates have already been on the rise after hitting bottom a year ago, and will continue to creep upward over the coming quarters.
“Mortgage holders with a fixed interest rate won’t necessarily see their monthly payments increase when the term expires,” said Bégin. “Everything will depend on whether the interest rate in effect at the time the mortgage is renewed is higher than the one when the loan was initially granted.”
Quebec new construction starts to wind down
At the start of 2021, housing starts were on the rise, with a historic high of 113,548 new homes in Quebec during January. Throughout the year, starts gradually fell to 52,011 units by December, signalling a return to pre-pandemic norms.
According to Bégin, Desjardins is forecasting that Quebec will see 55,000 new homes this year, followed by 52,000 in 2023, quite a difference from the 67,810 units started in 2021.
“Higher interest rates will affect new construction, especially single-family homes,” said the report. “In contrast, the construction of rental units will remain strong.”
