The Canada Mortgage and Housing Corporation (CMHC) expects a significant decline in home prices, with the economy entering a "mild recession" by the end of the year, according to Bloomberg.

The national average home price is expected to drop by about 15% by the second quarter from the peak level of 770,812 Canadian dollars (558,720 US dollars) earlier this year, according to a report published Thursday by CMHC.

The agency indicated that the higher-than-expected increase in interest rates, and the significant deterioration in economic conditions and income conditions resulting from that, will lead to a continued decline in housing demand in the coming quarterly periods."

Housing Affordability

Even with the decline in the real estate market, housing affordability will not improve, because the rise in borrowing costs offsets the gains from falling prices, according to economists at CMHC. In this context, rent prices will continue to rise, as those wishing to buy a home are forced to rent instead.

Further Decline

The new forecasts differ significantly from CMHC's July predictions, where the company had expected home prices to drop by only 5% by mid-2023.

Meanwhile, Romy Bowers, CMHC's CEO in September, indicated that these forecasts will be updated according to a decline of 10% to 15%, because "inflation has been more persistent than we originally expected, and the Bank of Canada is taking more stringent measures."

In this context, the central bank has raised the key interest rate by three percentage points since March, reaching 3.25%. More increases are expected, which may lead to higher mortgage costs. CMHC sees this rate peaking at 4% by the end of the year, with the Canadian economy beginning to recover from the recession in the second half of 2023.

Home prices are also expected to fall by 6.2% in 2023, on an average annual basis, according to CMHC, before modestly rising in 2024 as the economy recovers.