Risk of housing price slowdown in 2022 across Canada

Home prices (existing) were up 15.47% at the end of last year across Canada, making 2021 one of the strongest years for real estate on record. In December, inventory levels of unsold brand new homes were down almost 25%, and housing starts across the country were barely growing at 0.26%. For anyone who has spent any considerable amount of time in the Canadian housing market, it's clear there are still way more buyers than sellers.

However, about halfway through 2021, existing home price growth on a year-over-year basis started to taper off, with growth decelerating from a peak of 18.37% in August. We're now watching a number of trends unfold which are increasing the risk that home price growth could slow further this year.

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3 TRENDS INCREASING RISK OF HOUSING PRICE SLOWDOWN

The new construction market is where the risk to price growth is perhaps most evident. In August, prices were up over 12%, a level of growth only comparable to the housing booms in 2006 and the late 1980s (when price growth actually briefly exceeded 16%!). This level of growth, historically speaking, has not been sustained by the market; after reaching the 12% growth level the trend has typically reversed. In fact, within 3.5 years of reaching the 12% growth level, prices have typically entered contraction.

The odds are now high that we see a repeat of this pattern. This means that growth could decelerate to around 6% year-on-year in 2022 in the national aggregate new home price index.

Inventory statistics give strength to this theory. If we look at unabsorbed new construction numbers, or the number of unsold new homes on the market, we can see that the decline in inventory is beginning to slow. In June 2021, unsold new homes levels were down over 46%. This was the biggest drop on record in the data available from Statistics Canada. But as of December 2021, it was down to less than 25%.

Based on the pace of the slowdown in the decline, it is possible that we could start to see a return to growth in the unabsorbed inventory as soon as the end of this year. That kind of scenario would not translate immediately into discounts or lower housing prices, but it would at least stabilize the situation in the market and make it things more conducive to that 6% growth level mentioned above. It should be mentioned that the level of new homes under construction was up almost 15% in December. There is a lot of new housing that will come online later this year.

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Lastly, as of September 2021, home sales volume has been shrinking on a year-over-year basis. When the pandemic hit, Canada was in the midst of a significant housing sales boom. The pandemic interrupted it, but it quickly bounced back, hitting a high of over 61% in March 2021. Part of this latest sales volume collapse (-14% as of December) is due to the super low inventory situation across housing markets. However, with low sales volume you also get low mortgage issuance, which statistically equals low mortgage credit growth. As we've demonstrated for years now, you need high outstanding mortgage credit growth to sustain high housing price growth.

At the moment, outstanding mortgage credit growth is still hovering above 10% year-on-year. However, with mortgage issuance now contracting (last down -2.5% in November), it is safe to assume that this level of mortgage growth is unlikely to be sustained. Add to this mix increasing borrowing costs (in the form of rate hikes) and you have good odds that mortgage growth will tapper off this year.

Obviously, these trends are not likely to play out evenly across the country, and they may at least partially reverse. But at the moment they're hard to ignore, so a slowdown in price growth to around 6% in 2022 should not be ruled out.