Many economists say Canada's housing market, a key pillar of the economy, will likely see more weak sales activity and home price declines through next year.
Robert Kavcic, director and senior economist at BMO Capital Markets, figures "we're only about halfway there" when it comes to home prices finding a floor. BMO's official call is for a 20 per cent decline in the national benchmark home price. The Canadian Real Estate Association's MLS Home Price Index shows the seasonally-adjusted benchmark price of a home fell to $756,200 in October from its February peak of $840,000, a reduction of about ten per cent.
"I would say easily another 10% (decline) on the national house price over the course of the year and we'd probably find a bottom sometime in the later stages of the year," he told Yahoo Finance Canada via phone.
The investor class is gone until this market gets repricedRobert Kavcic, BMO Capital Markets
Affordability is still stretched for many homebuyers as any moderation in prices has been negated by soaring borrowing costs.
David Doyle, Macquarie's head of North America economics, says home prices would have to fall by another 15 per cent to return to the affordability levels of around 2018.
Meanwhile, an RBC Economics report predicts the trend of suppressed sales demand and declining prices will continue into early next year, "conditional on the Bank of Canada halting its rate hiking campaign this month."
RBC believes the central bank will pause its rate hikes following December's 50-basis-point increase that brought its overnight rate to 4.25 per cent.
A recent RE/MAX Canada report struck a comparatively more upbeat tone on prices, forecasting a modest 3.3 per cent average fall across the country next year.
The report touted the market moving towards more "balanced conditions" as homes take much longer to sell, months in many cases, rather than a matter of days common during the height of the real estate frenzy.
Rural markets to be hardest hit
The dynamics of the softening housing market are much different regionally this time around compared to the brief pullback Canada saw around 2017, Doyle says.
During the pandemic, Canada's rural housing markets saw some of the biggest price increases as buyers moved further away from major cities, whereas in 2017, skyrocketing prices were generally confined to the hottest urban centres.
Those rural areas are what Doyle is most concerned about.
"Those are the areas, the areas that ran up most severely or significantly during the pandemic, that I would be most nervous about in 2023. I suspect that they will see disproportionately large price declines," he said.
"If you're in the core of a city, I think that probably you're still looking at price declines, but they could be less significant or less severe because you've still got population inflows into those areas that should provide some relative stability."
It's a somewhat different story for the Calgary and Edmonton housing markets, which had been battered over the past several years after enduring the impact of two oil price collapses (in 2014 and 2020) in addition to the pandemic.
"At the top of the list in terms of least bad outcomes over the course of next year, Calgary is probably right at the top. And from what we're seeing right now, that market has actually balanced out relatively well and prices are holding. So I think that continues," BMO's Kavcic said.
"There's quite a bit of affordability there. People are moving there. The economy is probably going to be top of the list in terms of growth next year."
"Nothing makes sense" for real estate investors
While higher interest rates have sidelined many end-users (buyers who intend to live in the property), many economists also don't see investors returning to the market for some time.
"The investor class is gone until this market gets repriced, basically," Kavcic said.
"Nothing really makes sense right now (for investors) so I think, for the most part, they've just totally left the market. And you see it in the volumes because we know that a third of activity, before the Bank of Canada started to tighten, was investors."
In the latest third-quarter GDP report, Statistics Canada says housing investment represented 8.2 per cent of GDP, a decline from the double-digits seen in early 2021, but still an elevated number compared to other major economies.
History shows residential investment ebbs with economic downturns, which is why Doyle expects further declines in investment levels next year as the economy continues to weaken.
"The fact that residential investment, while it's down from its peak, is still highly elevated, suggests to us that the recession will be more severe in Canada than the U.S., and more severe than at least Canada has experienced recently in downturns.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.