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Moshe Lander, an economics professor at Concordia University University in Montreal, said the “weakness” in the market meant that home valuations had become more accurate. This decline in house prices is likely to continue into 2023, he said.
“House prices have been out of touch with reality for some time, and a rapid rise in interest rates could lead to a fairly rapid fall and sudden adjustment in house prices,” Lander said in a telephone interview with CTVNews. ”
The Bank of Canada has raised interest rates seven times in 2022, raising its key interest rate from 0.25% in February to 4.25% in December. By raising interest rates, the central bank’s goal is to reduce inflation, Lander said. Although annual inflation fell slightly to 6.8 per cent in November, the central bank’s target is to fall to about 2 per cent.
Lander said the purpose of raising interest rates is to reduce demand and discourage Canadians from opting for large loans such as mortgages. Doug Porter, chief economist at Bank of Montreal (BMO), said this has been reflected in some of the latest data from the Canadian Real Estate Association (CREA).
According to CREA, actual monthly sales in November 2022 are nearly 39 per cent lower than in November 2021. In November 2021, MLS systems in major Canadian cities reported 49357 residential sales. A year later, sales were 30135. Neither of these figures is seasonally adjusted.
“the overall trend has not changed significantly (since October),” Porter told CTVNews. Sales are significantly lower than the 10-year average. ”
Mr Porter said he expected sales to continue to slow in 2023. High interest rates will also continue to put downward pressure on house prices next year, he said.
According to non-seasonally adjusted data from CREA, the average house price of residential property in Canada has fallen by 12% from November 2021 to November 2022. According to BMO’s forecasts, average house prices are expected to fall by another 10 per cent in the next six to 12 months, according to Porter.
“this only reflects the impact of interest rates,” he said. From the end of last year to the beginning of this year, the market was overheated and there should be at least a small correction. ”
As interest rates rise, economists at Royal Bank of Canada (RBC) predict that Canada will enter a recession in the first quarter of 2023. The economic slowdown could also put downward pressure on house prices, Porter said.
The decline in house prices may not necessarily translate into an increase in housing affordability, as houses mainly continue to bear the cost of rising interest rates, Porter said.
The Bank of Canada is scheduled to issue a new statement on January 25. Although the central bank hinted that it might be prepared to suspend interest rate increases, it did not completely rule out the possibility of further rate increases.
According to Vice President Sharon Kozicki, the decision to continue to raise benchmark interest rates will depend on the latest economic data.
“We are moving from how much to whether or not to raise interest rates,” Kozicki said in a speech on December 8, adding that the central bank was still prepared to “take strong action” on interest rates if necessary.
BMO expects to raise interest rates by 25 basis points in January and keep them stable until 2024.
Porter said the Bank of Canada was unlikely to cut its benchmark interest rate any time soon. As a result, Canadians may have to say goodbye to the low interest rate environment throughout 2021.
“those days may have passed,” he said. Our current level of interest rates is closer to the level of interest rates we are likely to face in the next few years. “