The Canadian real estate market has been through some turbulent times lately, with rising interest rates and cautious investors causing stress. However, as we move into 2023, there are reasons to be optimistic about the future. This article will provide a recap of Canada’s 2022 real estate market, a short overview of the 2023 market so far, and an outlook on what we can expect going forward. Let’s look at what’s been happening in the Canadian real estate market.
The housing market in Canada experienced significant swings in 2022 due to changing housing needs, investor involvement, and the buildup from years of exceptionally low interest rates, resulting in a period of overheating in the market. It was not going to last forever.
The Bank of Canada’s aggressive interest rate hike campaign, beginning in March 2022, triggered a massive correction, resulting in monthly activity falling nearly 40% and benchmark prices dropping 13% from the February peak – the sharpest decline in the national MLS HPI on record dating back to the mid-2000s. For the year as a whole, home resales plummeted 25%, reversing outsized gains recorded in 2020 and 2021.
Despite this correction, the market is now gradually stabilizing in most parts of the country, with activity leveling off in the majority of local markets. The nationwide activity even picked up slightly on a month-to-month basis for the second time in three months in December 2022, consistent with the view that a cyclical bottom is approaching. However, prices will take a little longer to steady as poor affordability continues to weigh heavily on buyers.
We do expect prices to depreciate further in the near term. Still, the pace of price declines will continue to ease gradually thanks to stable demand-supply conditions, which have, in fact, tightened slightly in December following a 6% m/m drop in new listings.
A Short Overview of the 2023 Real Estate Market in Canada
According to a recent report from RBC Economics, the Canadian housing market correction is not over yet, but it is gradually letting up. Activity should hit bottom sometime this spring, and prices will level out a few months later, provided the Bank of Canada is done raising interest rates – something that cannot be taken for granted given the US Federal Reserve’s intent to keep hiking.
Home resales are currently at recession levels, and RBC Economics believes a bottom will form in the coming months. The report also highlights something we’ve been talking about for a number of years now – booming immigration as a key driver of demand. This should continue through the medium term, raising the odds of deep supply shortages in the future if homebuilding fails to pick up materially.
While the dramatic swing in the market since March 2022 is a cyclical event marking the transition out of highly unusual circumstances, structurally, the market is sound, with inventories still historically low and no signs of overbuilding virtually anywhere in the country. We may even be underbuilding, given some population + immigration targets in the coming decades. The report even cautions that homebuilding needs to ramp up considerably from this point on to meet supercharged demand and address the housing affordability crisis in many Canadian cities, which is not getting better despite a market pullback.
The Bank of Canada has paused its rate hikes, and the central bank is showing a willingness to diverge from monetary policy in the US. According to Benjamin Tal, deputy chief economist at CIBC World Markets, the Bank is comfortable taking a different path to the Federal Reserve, despite Powell’s comments on the likelihood of further hikes.
The Bank of Canada has given itself space to assess the landscape before deciding further action. Several factors could nudge the Bank towards further increases later in the year, and although the Bank opened the door to another move, if necessary, it’s indicating that it doesn’t have data to justify a rate hike at this point. Tal believes that stability in rates could empower people to get into the market, and developers could start rethinking their plans, but it won’t be a market changer. Additionally, the five-year Government of Canada rate could decline in the coming months, reflecting a possible calming in the market over the Bank of Canada’s future approach.
At Dorr Capital, we understand that the outlook for the Canadian real estate market in 2023 is uncertain, and it will still take some time for the market to settle into our new normal. Despite the potential for further rate hikes by the Bank of Canada in response to the Federal Reserve, we have a proven track record of success, and our rigorous underwriting process allows us to continue making informed and calculated decisions.
Given the current market conditions, we have been focusing on deals with strong fundamentals and stable cash flows. Communication is key – we are in frequent contact with our developer partners to listen and help navigate the changing environment, as well as with our lenders to understand their changing requirements and parameters for mortgages.
As we move forward, we will continue to monitor the market closely and adjust our strategy based on our underwriting expertise.
Navigating Challenges with Confidence and Communication
While the outlook for the Canadian real estate market in 2023 remains uncertain, Dorr Capital is well-prepared to navigate these challenges with a focus on communication, experience, and our rigorous underwriting process. We are optimistic about the long-term opportunities in the market and remain dedicated to working closely with all our partners to ensure success.
We understand that it will take time for the market to settle, but trust that our expertise and commitment to communication will ensure continued success. As always, feel free to reach out to us to chat; we are here to help and serve you.
The most significant land transaction in East York in the past 12 months is 1787 Bayview Avenue. The 0.47-acre parcel of land was purchased by CountryWide Homes Ltd. for $14.6MM. The City of Toronto Official Plan designates the property Mixed-Use Areas. The Zoning By-law classifies the property CR 2.2 (c2.2; r1.5), a commercial residential zone classification.
Year over year comparison
The chart below expresses the year over year (YoY) change. The average home price increased by 2.66%, and the number of units sold has decreased by 29% Year-over-Year in East York. In the land market, average land price per acre has seen a increase of 9% when comparing past 12 months transactions with transactions in 2021.
Condo Watch: East York
New condo data from RealNet states that the average price of a one-bedroom condo is $733,400 with an average size of 625 SF and a price per square foot of $1,173. 2-bedroom units has an average price $1,400,435, with size 1,119 SF and a price per square foot of $1,252. 3-bedroom units have average price of $1,662,195, with size of 1,443 SF and a price per square foot of $1,152. The new condo price and price PSF has increased compared to 2022 in East York.