Canadian housing prices continue to drop, but listings don’t tell the whole story

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Housing prices will continue to drop well into the first quarter of 2023, but home ownership remains an elusive, if not unfeasible, milestone for young Canadians. 

Since their peak in February of this year, average housing prices in Canada have decreased by about 11 per cent.  

In a housing outlook released last month, the Canada Mortgage and Housing Corporation predicted a sharp decline in the Canadian housing market in early 2023.  

The outlook claimed that housing prices will fall 14.3 per cent by the end of the first quarter of the new year, relative to the historical peak in February.  

“It’s not too surprising. Interest rates have gone up a lot and the monthly cost of a mortgage now is pretty expensive,” Jason Dean, assistant professor of economics at King’s University College at Western University, said.  

“People really care a lot about the monthly carrying cost of owning a home, so it’s not surprising that prices are falling.”  

Whether prices will continue dropping into the new year, as the CMHC has predicted, depends on whether interest rates continue to rise.  

The relationship between housing prices and interest rates is complex but also, in some ways, intuitive.  

It starts with the Bank of Canada – a Crown corporation that controls the overnight rate (the interest rate at which commercial banks trade with one another). At the end of a given day, some banks will have to borrow funds in order to settle whereas others will have excess funds. This creates supply and demand and fixes a certain interest rate.   

If a commercial bank needs to borrow money, they can always borrow from the Bank of Canada at the bank rate. Part of changing the target for the overnight rate is that this bank rate also increases. An increase in the bank rate will reliably increase the interest at which commercial banks can lend money to borrowers.  

This game of percentages also directly impacts housing prices. Even a one per cent increase in a homeowner’s mortgage rate can lead to dramatic increases in the size of monthly payments.  

Using a simple mortgage calculator, Dean demonstrated just how significant such increases can be.  

If you have a $500,000 mortgage and your mortgage rate increases from three to four per cent, your monthly payment will increase by $200 per month. “That’s half the cost of a car payment.” 

Listing prices decrease when interest rates rise like this as home ownership becomes a less attractive option for prospective buyers.  

Interest rate hikes can also prove troublesome for people who already own homes. If someone has been paying a (relatively) low fixed rate mortgage and their renewal period is creeping up, they might feel as though stuck between a rock and a hard place.  

With high and unpredictable rates, they will lose out if they lock in another fixed rate mortgage and rates drop. Likewise, they will also lose out if they choose a variable rate mortgage and interest rates rise.

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A recent history of overnight rate increases. SOURCE: ( 

So, with housing prices already down from earlier this year and expected to fall by an additional 4.3 per cent in the first quarter of 2023, would young Canadians be reasonable to show glimmers of hope?  

The answer is probably not. Listing prices do not tell the whole story about homeownership; not even close. If prices are lower, it’s because the interest rate is higher. Monthly costs, then, end up coming close to resembling levels before price reductions.  

“I feel really bad for younger people,” Dean said.  

“It’s not only homes, too … a lot of people borrow [money] to buy a new fridge or people borrow to buy a new car, it’s going to be roughly similar.”  

While listing prices will likely continue dropping into the new year, the housing market remains an inaccessible frontier for young Canadians. Moreover, with an economy that showed a 6.9 per cent increase in inflation over the last twelve months, just about every market might feel inaccessible at this point – and understandably so.  

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