CMHC Predictions | House prices could fall by 5% with interest rate hike

Canadians considering buying a first home should be able to benefit from a slight price drop in 2023. Home prices could fall 5% in the country if the central bank takes a “tougher” approach to fighting inflation, the Canada Mortgage and Housing Association (CMHC) estimates.

Posted at 5:47pm

Hugo Joncas

Hugo Joncas
The press

That drop would occur in a scenario where the policy rate hits 3.5%, according to a CMHC note released on Monday.

With a more moderate increase to 2.5%, house prices would still fall by 3% by mid-2023, according to the organization.

Economists expect the Bank of Canada to hike interest rates further in the coming months, starting with a 0.75 percentage point hike on Wednesday. The key interest rate would thus rise from 1.50% to 2.25%.

Fixed rates close to 6%

If the central bank opts for a scenario of stronger hikes, “the fixed five-year mortgage rate would rise to 5.7% by the end of 2022,” suggests CMHC chief economist Bob Dugan. They are currently around 5.2%.

“Rising rates will slow economic growth, which will increase unemployment and reduce wage growth,” writes CMHC. Which makes access to property more difficult, which lowers prices.

“Weak recession”

CMHC expects gross domestic product (GDP) to grow by 3.4% in 2022 and 0.7% in 2023 under the “muscle” scenario of a rate hike. Economic growth would then bottom out. Canada would experience a “mild recession” for a short time, in late 2022 and early 2023.

Such a scenario would push the country’s unemployment rate to 7%. If the central bank instead opts for a limited hike in interest rates to 2.5%, CMHC forecasts the unemployment rate to hit 6.2% in 2023.

From 2024, the company expects a return to growth and stabilizing mortgage rates. According to the organization, real estate prices will then rise again.

“House prices should return to positive but moderate growth, supported by rising household incomes and immigration,” the statement said. Sustained high prices during the forecast period will weigh on home affordability. »

As a result, homeowners will not have to see their homes depreciate in value for the effort.

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