Will Canada’s Housing Market Crash in 2022?

Last updated on March 3rd, 2022 at 10:00 pm

Will Canada’s housing market crash in 2022? It’s the question on everyone’s mind, given that the Bank of Canada will raise interest rates at least three times in 2022. But in my view, we won’t see a crash in 2022. In fact, I think we’ll see prices increase, although more modestly than in 2021.

Read on to find out why.

Record Low Inventory

Record low inventory is the main reason we won’t see the residential real estate “bubble” pop in 2022. In their January update, the Canada Real Estate Association summarized the situation:

There were just 1.6 months of inventory on a national basis at the end of December 2021 — the lowest level ever recorded. The long-term average for this measure is a little more than 5 months.

CREA

So what does that mean? Well, it means there are not nearly enough homes for sale to meet current housing demand.

For home prices to begin declining, usually we need to see multiple months in a row where the sales-to-active-listings ratio falls to 20% or less. Looking at the past few years, we’ve been securely in a “seller’s market,” and so prices have been shooting up.

Canada is experiencing record low housing inventory.

There either needs to be a ton of new homes put up for sale, or the number of Canadians looking to purchase a home needs to decrease dramatically. In my view, neither of those scenarios will play out in 2022.

The following two points explain why.

High Population Growth

Much of the housing growth story in Canada comes down to a growing population that has outstripped our capacity to build. Homebuilders have hit max capacity, which is around 200k homes per year. Meanwhile, Canada is growing in excess of 1% per year, or about 300,000 new Canadians.

This long-term discrepancy between our population growth and home building was highlighted recently in a report from Scotiabank:

Canada has the lowest number of housing units per 1,000 residents of any G7 country. The number of housing units per 1,000 Canadians has been falling since 2016 owing to the sharp rise in population growth. 

Scotiabank

There are simply far too many people in need of homes and not nearly enough capacity to build them. And since the Canadian government has shown a preference for increasing our population through immigration even further, home buyers, investors, and landlords all see Canadian real estate as a “sure thing” and are willing to pay top dollar.

Canada immigration rate.
High immigration has been a core policy decision of multiple past governments but has become more ambitious under Trudeau.

But what is the purpose of having such high population growth?

I won’t fault you for thinking the goal is to prop up the housing market. But the truth is, that’s just a side effect. In fact, in early 2021, the Bank of Canada stated that they weren’t worried about a housing bubble at all.

A principal reason for having high immigration is to suppress wage growth, which was recently alluded to by Benjamin Tal, deputy chief economist at CIBC.

Immigration and its impact on wages give the Bank of Canada “enough justification to hike more slowly than what’s priced in by the market,” Tal said.

Tal also said household formation and the subsequent impact on housing demand could be understated due to the government’s increasing use of permanent residents as a source of immigration.

BNN Bloomberg

He later expanded on those comments:

“To put things in perspective, [Canada] got 410,000 new immigrants in 2021. In the U.S., altogether, they got 500,000,” said Tal, deputy chief economist at CIBC Capital Markets, in an interview Friday. “The last time I checked, the U.S. is ten times larger than we are. But the [level of immigration] is basically the same.”

Tal argued Canada’s mass immigration targets are helping ease our country’s labour shortage, which in turn is tamping down wage growth.

BNN Bloomberg

And so, both the government’s and the BoC’s interests are aligned: high immigration is needed to prevent wage growth. The fact that this stimulates real estate prices is only a side effect, and up until recently, hasn’t been a serious concern.

Interest Rate Increase? So What?

Most would-be homebuyers dream that a spike in interest rates will “pop the real estate bubble,” allowing them to buy a home at a huge discount. But history has shown that Canadian homeowners are resilient against the modest interest rate increases we expect to see in 2022.

Looking back to the last interest rate cycle, where rates were increased five times from late 2017 to the end of 2018, the housing market didn’t crash, and the bubble didn’t pop.

BoC overnight target rate from 2016 to 2021.

Instead, home prices increased just as the Bank of Canada started to raised rates. This induced demand can happen when prospective home buyers see an interest rate increase on the horizon and want to “lock-in” a lower fixed mortgage rate.

As the Bank of Canada continued to increase rates in 2018, home prices began to stabilize before accelerating again in late 2019.

Canada home price index.
Canada’s Home Price Index from 2016 to 2020.

So why are homeowners so resilient against higher interest rates?

Well, unless you are looking to refinance or your mortgage term is up, higher interest rates don’t really impact a homeowner’s day-to-day cash flow. A higher interest rate only decreases the portion of the mortgage payment going towards principal—the mortgage payment itself remains the same.

In addition, Canadians are stress-tested against a much higher interest rate to ensure they can continue to make payments on their home even if rates increase to 5.25% (as of early 2022).

Conclusion

To see a significant drop in residential real estate values in 2022, two important things must happen: there must be far fewer buyers at current prices and far more sellers.

But unfortunately for many, we won’t see a meaningful decline in homebuyers in 2022. Yes, rates will rise, but most likely too slowly to counteract what’s looking like a red hot real estate market this spring. In fact, we will likely see a surplus of Canadian’s looking to buy homes because of continued high immigration.

And we won’t see a surge in homes being put up for sale either. That’s because Canadian home owner’s are resilient against higher interest rates, especially the modest increases planned for 2022.

So sadly, if you’re an aspiring homeowner (like I was not too long ago!), I think the best you can hope for prices to increase less than they did in 2021.

If we look ahead to 2023 and beyond, there is a chance for sustained high inflation to force the Bank of Canada to raise rates far higher than we’ve seen in recent years. If that were to happen, purchasing power could be eroded enough that we’d see a pullback in housing prices. But it’s hard to say how likely that scenario is.

Thanks for Reading

If you’re looking to buy a home in 2022, you need to check out two of my recent article. The first is my guide to closing costs in Canada, which can show you what costs to expect when purchasing a home. The second article you should read is my post on how to get cashback from your realtor. In total, I received $3,500 in cash back, and you can too!

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