Active, hyper-active or subdued; rally, correction or crash? How might Canada’s housing market look like in 2022?

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By one measure, it might be just like 2021 – the same pandemic refusing to retreat, mortgage rates sitting at record low, government yet to end wage and rent support measures and no signs of a cooling housing market.

By another measure, it might be a different year – vaccinations are continuing and central banks around the world are battling inflationary pressures and may finally be forced to hike rates, putting even more affordability pressure on households.

2021 housing market recap

A report by the Urban Reform Institute and the Frontier Centre for Public Policy in February 2021 looked at house prices in multiple world cities during the third quarter of 2020. Vancouver ranked second and Toronto fifth in terms of housing unaffordability. Hong Kong topped the list.

By March, the average house price in Canada had peaked to C$716,000. For the next few months, the price continued to fall amid subdued sales activity. In October however, the price rose sharply to reach March levels. CREA says that 2021 was the “busiest year ever” for the housing market.

Separate reports confirmed that the housing rally in Canada wasn’t restricted to big cities alone. In small communities and rural areas, local buyers faced the heat as their income levels were no match against that of buyers parachuting from other cities. Families were looking for countryside homes to avoid the stress of big cities. The work from home regime played a key role.

That the hot housing market was punishing first-time buyers was the most dominating narrative.

The government echoed this sentiment on multiple occasions. The snap election in September was fought in the backdrop of both the leading political parties promising various measures to rein in rising prices.

The Office of the Superintendent of Financial Institutions made availing a mortgage loan a littler tough by announcing new stress tests. The new rule kicked in from June, but whether it could deter even a single loan-seeker in Canada can be a subject of a new debate. Ironically, some argue that stress tests made borrowing tougher for the most vulnerable households.

The Liberals formed the new government in September 2021. One of their election promises included an end to blind bidding in Canada. There is little consensus on whether the measure could help cool house prices.

No discussion on the hot housing market of Canada could be without a mention of low benchmark mortgage rates.

Rates have been sitting at near-zero for almost two years and this has resulted in record-low mortgage rates in Canada. In mid-2021, the variable mortgage rate fell below one per cent. The Bank of Canada, which included housing unaffordability in its multiple policy documents released during 2021, has steered clear of raising rates. This is when inflation has hit an 18-year high in Canada. In its last policy decision of 2021, the central bank kept rates unchanged. But rate hikes are expected to come in the first half of 2022.

But there were other factors as well that pushed house prices in 2021. Though the pandemic dealt a blow to the economy by compelling businesses to shut operations and lay off employees, the advanced economy of Canada has enough room to support families and businesses. The CEWS and CERS government programs maintained cash levels in the economy. A CIBC report estimated that Canadians could be sitting on hundreds of billions of dollars in excess cash.

Those two factors – mortgage rates and government cash support – will shape the trajectory of Canada’s housing market in 2022.

Uncertainty may rule

Discussions around a bubble in Canada’s housing market are so frequent that Wikipedia even has a page on it.

When the market entered a brief subdued phase after March, the bubble prophecies seemed to have come true, but prices breaching $700,000 again in October was the clear sign that the rally is here to stay.

For 2022, there are a lot of “maybes”.

Maybe the Bank of Canada will hike rates – in that case, at least a little correction in the medium term is likely.

Maybe the new subsidy schemes from the government will cut cash support – in this case, too, correction is likely.

Maybe rising living costs due to high inflation will impact discretionary spending – then the housing market will cool off.

But maybe neither the rate hikes nor the spending capacity of Canadians will slow the housing market.

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