Why even falling prices won't make housing affordable any time soon

Canada's red-hot housing market is finally showing signs that it may be cooling. Sales volumes and listings have fallen as interest rates have started to rise. But even a dramatic drop in prices won't put home ownership back into reach for many of those priced out of the market.

"It's a drop in the bucket," said house hunter Gillian Newing. She's been trying to buy a home for five years. She works in advertising in downtown Toronto, and has spent years saving and watching the real estate market.

"I make upwards of six figures a year," she said. "But as a single person, I don't stand a chance of getting my foot in the door."

• Are you having a hard time cracking into the housing market? Tell us about your experience by sending an email to ask@cbc.ca 

She was trying to buy a starter home or a condo, but found the prices were always just out of reach. After prices shot up during the pandemic, she's worried she'll never get in.

"I did everything they told me I ought to do in life," said the 36-year-old. 

"I went to school, I got my degree, I paid off those debts right out of school. I banked money from the get-go and still, every time I go to look I'm probably $50,000 to $100,000 behind what I need to put up front to buy a house."

'Someone turned the lights out'

The housing market has been on an absolute tear, especially in cities like Vancouver and Toronto. People have been writing warnings about Canada's too-hot real estate for decades.

Even by those standards, the sharp increase in prices since the onset of the pandemic was utterly astounding.

The home price index compiled by National Bank shows the national average soared 31.2 per cent in the two years since COVID-19 crashed into the world. Economist Daren King says, over the pandemic, demand has skyrocketed and supply has fallen leading to some record-setting statistics.

"Vertiginous price increases have been recorded in many cities included in the index over the past two years, including a 65 per cent increase in Halifax, 55.4 per cent in Hamilton and 39.8 per cent in Ottawa-Gatineau," he wrote in a report.

But in April, when the Bank of Canada hiked its key overnight lending rate by 0.5 per cent, the major banks quickly followed suit — increasing the amount they charge to borrowers.

And suddenly, the housing market isn't quite as absurdly hot as it was even just a month ago.

"January, February was kind of peak insanity," said Vancouver real estate agent Steve Saretsky. 

"It kind of feels like someone turned the lights out."

Falling prices forecasted

RBC economist Robert Hogue says it's not just sales activity that's falling; prices are falling as well.

In a report last week, he forecast that prices would peak this spring, and decline on average by 2.2 per cent in 2023 — whereas previous forecasts called for a 0.8 per cent rise in 2023.

"We think the national benchmark price could drop close to five per cent on a quarterly basis from peak to trough," wrote Hogue.

Saretsky says it will be worse. He's already seeing properties sell for 10 or 12 per cent lower than comparable homes sold just six or eight weeks ago.

"That's comparing it off a peak price, where I think people in February had lost their marbles and were paying way too much," he said.

If you bought a home in February and see your neighbour coming into a similar home today at much lower prices, Saretsky says you're bound to feel like you overpaid.

But don't those falling prices present an opportunity for house hunters like Gillian Newing? She's not so sure. "Cooling" prices don't actually bring these homes back into an affordable range for her.

"Cooling doesn't begin to address the problem," she said. "It doesn't need to cool, it needs to drastically change."

WATCH | Slight price drops seen after interest rate rise: 

Canada’s housing market sees signs of cooling as interest rates rise

3 years ago

Duration 2:03

Experts say higher interest rates are causing a slowdown in Canada’s hot housing market, leading to fewer sales and a slight drop in the average selling price in March.

Buyers squeezed

A 2.2 per cent decline (as RBC economics is calling for) wouldn't even drag prices back down to levels we saw in March. Even Saretsky's more ominous 10 per cent warning would only do so much.

In fact, if you use the MLS home price statistics released by the Canadian Real Estate Association, a 30 per cent fall would only take us back to prices people were paying in late 2020.

Back then, buyers and experts were already sounding the alarm about a potential housing bubble.

And even if prices fall — say, by five per cent — interest rates are expected to rise by about two percent this year alone.

Realtor Sarita Raisinghani says surging inflation means many household budgets are already maxed out.

"There is a frustration," said Raisinghani with Better Homes and Gardens Real Estate in Toronto. Buyers she represents are finding homes increasingly out of reach.

"The buyers will reach their max and after that, they're out," she said. Raisinghani says the costs, insurance and taxes add up pretty quickly.

All that leaves prospective buyers feeling hopeless.

"I lose no matter what," said Newing. "Now even if I do buy, I know I'm buying something that's overpriced for what it is, and if they do figure out how to correct it in five to 10 years, I'm the one who bears the brunt of that. I pay one way or the other."