Planning On Buying A Home In 2023? Here’s Some Things You Should Know Before You Do

After enjoying several months of soaring property sales between 2020 and 2021, local housing marketing came to a sudden halt in the latter half of 2022, as mortgage rates and inflation climbed at their fastest pace in more than three decades.

By the end of last year, Statistics Canada reported that mortgage interest rates were up 18% year-over-year, up from the pace of 14.5% recorded in November. Monthly rental increases eased, seeing a 7% jump year-over-year in December 2022, down from 7.2% a month earlier.

At the same pace, inflation remains elevated, with the Consumer Price Index increasing 6.3% in December, a decline from November’s reading of 6.8%.

The recent inflation figures support a final interest rate hike by the Central Bank of Canada, before pausing their aggressive monetary tightening.

With the cost of borrowing climbing, inflation still at an all-time high, and housing supply shrinking, would-be buyers are in for yet another bumpy year as the property market stabilizes against the backdrop of a looming recession.

It’s not just buyers that will struggle this year, tenants will also have a difficult time dealing with price and supply, as people start to return to urban areas, and development on new projects potentially slows due to labor shortages and higher building costs.

There’s a high chance that problems experienced in 2022 will carry over into 2023. The property market will have buyers, renters, and investors, feeling the headwinds on the back of persisting macroeconomic problems for the better half of the year.

Prices will remain elevated, while supply shrinks further

Canada’s housing market is still feeling the effects of higher-than-average mortgage rates, and stubbornly higher inflation. According to data from the Canadian Real Estate Association (CREA), housing prices increased steadily over the summer of 2022, only to come down slightly by the end of the year.

By November last year, the average home price decreased to $632,802, with British Columbia, Ontario, and Quebec reporting the highest average prices. Ontario had perhaps the biggest price increase throughout 2022, with average prices peaking at $1.08 million in March last year. The increase marked a 64% jump in housing prices in Ontario in just over two years.

Now, after reaching its peak, CREA predicts that prices in provinces such as British Columbia, Ontario, and Quebec will decrease over the coming months, but supply will remain the biggest issue for the local market.

Domestic supply continues to keep prices elevated, and will perhaps be the biggest factor in the new year. According to December figures, newly listed property declined by 6.4% month-over-month in December, with the most declines in British Columbia and Quebec.

The decline in inventory was among the lowest on record, as estimates predict that by the end of last year, Canada only had about 4.2 months' worth of available inventory.

CREA’s Senior Economist, Shaun Cathcart says, “Demand for housing continues to grow and supply remains the biggest issue across the entire spectrum. Whether that plays out in the rental market in 2023 or shifts back over into the ownership space is a matter of how quickly the Bank of Canada can get inflation under control and starts turning the dial back down on borrowing costs.”

Supply and demand will price buyers out of the market, more so in provinces that have experienced stratospheric growth in new residences.

Stubbornly high inflation means increasing interest rates

Ongoing inflation worries will mean that the Bank of Canada continues to raise its prime interest rates as an arsenal to tame rampant running inflation.

December core inflation figures presented a more optimistic outlook for the year ahead, with the central bank deciding to introduce one final interest hike before pausing its aggressive monetary tightening.

This has become a double-edged sword for buyers and investors. Despite inflation receding, the central bank is not following it by decreasing interest rates. If the central bank reverses rate hikes too quickly, they risk the potential of seeing an economic backslide that could lead to higher prices and even tougher economic prospects for the year ahead.

Bulging interest rates might be on the sidelines - for now - but inflation readings by early spring would prompt the central bank to hike rates once again, which could see more buyers being priced out of the market.

Prohibition on foreign property buyers will be a hit or miss

As of January 1, 2023, buying a home as an immigrant in Canada will be nearly impossible, with the introduction of the Prohibition on the Purchase of Residential Property by the Non-Canadians Act.

From the start of this year, all non-residents, and foreign investors looking to purchase property or real estate in Canada will be barred for at least two years. The new prohibition act will be federal enforcement for two years, looking to alleviate property inventory pressure and bring down housing prices.

The law could be a hit or miss, with some suggesting that driving out foreign investment could have a knock-on effect on both the local property market and the economy.

In an interview with CBC, spokesperson for the Deputy Prime Minister and Minister of Finance Chrystia Freeland said that the purpose of the ban is to make housing more affordable for Canadians, and dilute the idea of a real estate market that’s seen as an “investment asset for foreigners.”

Others feel differently about the new law. Brendon Ogmundson, chief economist at the British Columbia Real Estate Association says “I think this is very much a political policy, more than an economic policy." Ogmundson argues that the public has been convinced over the last several years that its foreign investment is driving up prices and depleting inventory.

Yet, not all new immigrants in the country will be in the position to purchase a new home or buy property the minute they land, as they will still need to build up credit, save up for large down payments, and have residence status before they can bypass the ban.

It does however raise questions for those immigrants that have settled and built enough financial backing to purchase a house in the coming months, as higher prices and growing interest rates will price them out of the market even further.

Whether the prohibition will provide a solution to the housing crisis, and alleviate prices and inventory pressures, we’ll only be able to see by 2025 once the ban gets lifted.

To finish off

The post-pandemic property market has not been easy to navigate, for buyers, renters, investors, and now immigrants as well.

Whether the move to ban immigrants from the property market is an economic or political strategy, the outcomes thereof can be double-sided. Higher inflation can result in climbing mortgage rates against the backdrop of a potential recession. Supply and demand remain a critical issue, while prices are set to remain elevated for much of the year.

The property market is about to experience another turbulent year, and for buyers who are ready to jump in, it’s best to time entry at the right time, and ensure you’re well prepared for any repercussions that can come at any time. It’s a hard ball to juggle, but perhaps this year shows slight improvements from the last two years of losses.