The market can look forward to "more rational expectations", Desjardins analyst says
A retreat from the historic highs seen earlier this year could bring the Canadian housing market much-needed balance, which in turn will help reduce fiscal risks, according to a new analysis by Desjardins.
“Canadian housing is coming out of two years of torrid activity. Some might even say it’s a bubble market,” said Jimmy Jean, chief economist and strategist at Desjardins.
“Now that inflation has veered out of control and the Bank of Canada has had to take aggressive action to get rates back to neutral, housing’s prominence in Canada’s economy will likely mean a significant slowdown.”
Desjardins has pegged a home price decline of as much as 15% from the non-seasonally adjusted peak of $816,720 in February, although the overall level would likely remain higher than pre-pandemic readings.
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“The trends over the last two years were both unsustainable and unhealthy. Buyers competing against each other felt compelled to submit bids well above asking prices. Some even bought sight unseen. In some markets, home inspection contingencies disappeared from offers,” Jean explained.
“This effectively increased prices for buyers by shifting the cost of repairing any home defects to them. And many first-time homebuyers turned to the Bank of Mom and Dad to afford swelling down payments, something previous generations didn’t have to do to the same extent.”
The deceleration trend would likely give the market sufficient room to regain its bearings.
“As the market cools, we can expect to see more rational expectations, less erosion of affordability, and yes, slower growth – all healthy side effects. Absent a recession, rebalancing should be manageable from a macro or financial system perspective,” Jean explained.
This should then give policymakers the space they need to prioritize new housing developments across the nation’s hottest markets.
“Lack of supply will be one of Canada’s major economic challenges for years to come, and we’ll continue to need a multi-pronged approach to address it,” Jean said.
