Real estate prices in Canada are slowly dropping after they saw massive appreciation during the pandemic. In April, with sales down by 12.6 per cent compared to March, average home prices dropped by 3.8 per cent. Prices are still up by 7.5 per cent compared to April 2021.

“This is a remarkable turn of events,” says Robert Hogue, assistant chief economist at RBC Economics. “Property values soared at the fastest pace on record during the fall and winter, as super-strong demand and scarce supply fueled bidding wars from coast to coast. We expect our central bank’s ‘forceful’ monetary policy normalization will further cool demand in the period ahead.”

Ontario saw the largest average price decline, dropping by 6.3 per cent. Prices were also down in New Brunswick. They were up by 2.1 per cent in Manitoba and Quebec and flat in the other provinces.

“Toronto seems to be a real outlier, as sales and prices dropped more than in the country overall, and supply/demand balances are now close to favouring buyers,” says Rishi Sondhi, economist with TD Economics. “Note that Toronto experienced one of the worst affordability erosions of any major census metropolitan area during the pandemic.

“Moving forward, we expect prices to continue falling, reflecting the cooler demand backdrop,” says Sondhi.

Most housing observers believe the price boom from the last couple of years was unsustainable. The news that prices actually dropped brought cheers from those who are currently priced out of the market. 

“A calmer outlook for the market should be welcome news,” says Hogue. “We expect the burgeoning price correction seen in Ontario and parts of British Columbia to deepen and spread to other markets as market sentiment sours but it’s unlikely to morph into a meltdown. Positive demographic factors will provide a safety net against a hard landing.”

Housing analyst Will Dunning recently wrote, “I think it would be healthy for prices to fall back to the same level as mid-2021,” but he noted that “retreats can be awfully hard to manage and often turn out a lot worse than expected.” 

He says reversing six to nine months of price growth would impact a small number of people, and while it might be hard on them, the overall economic impact would be limited. But Dunning says a larger price drop would be increasingly risky and impact consumer confidence, “which can result in severe economic consequences.”

The Canadian Real Estate Association uses the MLS Home Price Index to calculate prices and trends, because average and median prices don’t always provide an accurate measurement. For example, if there are lots of transactions at either end of the price spectrum it can skew the average prices in that direction.

In April, the benchmark price nationally fell by 0.6 per cent, but it is still up by 23.8 per cent year-over-year.

CREA senior economist Shawn Cathcart says sales dropped sharply because “typical discounted five-year fixed (mortgage) rates have, in the space of a month, gone from the low three-per-cent range to the low four-per-cent range. The stress test is the higher of 5.25 per cent or the contract rate plus two per cent. For fixed borrowers, the stress test just moved from 5.25 per cent to the low six-per-cent range – close to a one-per-cent increase in a month! It won’t take much more movement by the Bank of Canada for this to start to affect the variable space as well.”

CREA reports that just over half of the real estate markets in the country have now moved into balanced market territory.

“In many markets, anyone who bought a home in the first quarter of 2022 is going to be looking at a value below purchase price for awhile,” says Robert Kavcic, senior economist and director at BMO Economics.

He says that suburban real estate markets in Ontario “look the shakiest, with some already seeing meaningful price declines from February peaks. Single-detached and townhomes look to be cooling quickest, while the core of the Greater Toronto Area (including condos) is sturdier. Other regional markets with better valuations should continue to hold up better, but the jump in mortgage rates will still be tough to power through.” 

How much will prices come down? “Let’s just say that we’re just getting started,” says Kavcic. “Market psychology and affordability has been seriously tested by 75 bps of Bank of Canada tightening and we expect another 100 bps of rate hikes through July and 125 bps by the end of the year. That effectively means that the market will go from being priced at mortgage rates of roughly 1.5 per cent to somewhere in the 3.75 per cent to 4.5 per cent range, depending how bond yields evolve.”

Kavcic says, “It is quite common for localized price corrections in Canada to take two to three years to bottom (economic downturn or not) and four to five years to fully recover. Ultimately, we still see strong demographic and supply-side fundamentals lending support.”

Hogue adds: “The Bank of Canada’s setting out to aggressively normalize its monetary policy is a game-changer for the market – turning what has been a tremendous tailwind into a stiff headwind for the market.”