Average home prices in Ottawa will not revert to pre-pandemic levels this year: CMHC

Home for sale sign in front yard

The average home price in Ottawa is projected to fall this year but rents will likely rise at a higher rate than last year due to growing demand and a scarcity of available units, the Canada Mortgage and Housing Corp. says.

The federal housing agency is predicting that home prices in the capital will come in at an average of $640,000 on the low end and $700,000 on the high end in 2023. Last year’s average price was about $692,000.

If CMHC’s predictions hold true, it would mark the first time in nearly three decades that Ottawa house prices declined year-over-year.

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The agency says rising interest rates that make mortgage payments more expensive will continue to dampen the market, adding that “rising consumer spending has made it harder for households to save up to finance a home purchase.”

Still, CMHC says price decreases will be “moderate” and affordability will “remain an issue of concern.”

The agency expects to see some recovery in 2024 and 2025 as migration picks up and interest rates stabilize. Price growth in those years should be “similar to the increases recorded before the pandemic.” 

But if interest rates keep rising, it would cause “a further decline in activity on the resale market,” CMHC says in its latest housing market outlook. “This scenario would position sales and prices at the lower end of the forecast range.”

Meanwhile, the agency is predicting Ottawa’s rental vacancy rate will drop from 2.3 per cent last fall to 1.3 per cent by the end of 2023.

CMHC cites rising immigration, a shortage of rental apartment inventory and a lack of affordable starter homes as key factors that will push down vacancy rates.

“Growing demand and the scarcity of available units should put upward pressure on rents,” the report says, adding rental rates will likely rise faster than they did in 2022, when two-bedroom rents increased 4.8 per cent.

Across the river in Gatineau, the situation is similar.

CMHC says it expects high mortgage rates and slower employment growth to cool the housing market in 2023. 

It’s projecting average prices in the range of $425,000 to $485,000. The average price of a home in Gatineau in 2022 was just over $463,000, CMHC said.

“Although resale prices continued to rise in 2022 despite declining demand, this trend should end in 2023,” the agency added, noting prices have already been falling “for a few months.”

Rental vacancy rates are expected to remain at historically low levels, fuelled by rising migration and baby boomers selling their homes and relocating to rental properties.

CMHC is projecting a vacancy rate of one per cent in Gatineau this year, up slightly from 0.8 per cent in 2022. Average two-bedroom rents are expected to rise from $1,269 last year to $1,370 by the end of 2023.

Nationally, the agency says the average home price will not revert to pre-pandemic levels in 2023 because the recent declines in prices are tapering off in many markets and are expected to bottom out this quarter before starting to rise again.

In its outlook released Thursday, CMHC predicted home prices and sales will see year-over-year declines in 2023 and by the end of the year, leave the country with an average annual price below the 2022 level.

CMHC chief economist Bob Dugan said average home prices, which have already dropped by about 14 per cent between March 2022 and March this year, are now “levelling off.”

“A low supply of listings means that prices should start to grow as sales pick up,” Dugan told a news conference, noting such activity is already underway in Toronto and Vancouver.

“We expect average prices, in fact, to rise by about 7.9 per cent in Canada in 2024 and by about 7.5 per cent in 2025.”

Should predicted periods of negative economic growth fuelled by higher interest rates and economic uncertainty materialize in 2023, CMHC’s baseline forecast shows the average home price will be $643,325 this year compared with $703,875 in 2022. Under this scenario, CMHC expects the average price will then tick up to $694,196 next year and $746,410 in 2025.

Sales will amount to 423,128 this year, followed by 473,357 next year and 505,215 in 2025. Sales in 2022 totalled 498,269.

However, “vulnerabilities in the economy,” including high levels of household debt, pushed CMHC to also consider an alternative forecast, where Canada faces a longer period of high inflation and interest rates.

In this scenario, the average price for 2023 would be $637,829, followed by $664,600 next year and $708,391 in 2025. Sales would move from 393,005 this year to 397,734 in 2024 and 425,620 in 2025.

However, the declines expected this year won’t blunt much of the market’s heat because CMHC foresees a more significant drop in housing starts – a measure of when construction on homes begins and a key indicator of how Canada is addressing housing supply gaps – in 2023 than was experienced between 2020 and 2022.

CMHC’s baseline forecast accounts for 211,917 housing starts this year, followed by 223,783 in 2024 and 235,347 in 2025.

The alternative scenario will see 176,890 starts this year, 197,551 next year and 230,865 in 2025.

“This is a downward revision from our previous forecast and is alarming given the need for more housing supply in order to improve affordability,” Dugan said.

By comparison, starts totalled 217,880 in 2020, 271,198 in 2021 and 261,849 last year.

In Ottawa, CMHC is calling for a low of 8,500 starts in 2023 – well below last year’s total of 11,000 – and a high of 10,300. 

Starts in Gatineau are also projected to be below 2022 levels, with a low-end forecast of 2,950 – compared with last year’s total of 3,991 – and a high-end projection of 3,850.

CMHC previously estimated about two million new homes would be built between 2023 and 2030 and an additional 3.5 million homes would need to be constructed to restore affordability to housing in Canada.

“In other words, we need a much higher level of starts than is currently being forecast if we want affordability to improve,” Dugan said.

He sees some recovery in housing starts in 2024 and 2025, but expects supply gaps in Canada’s most expensive and supply-constrained housing markets, including Vancouver and Toronto, to worsen.

Rental affordability will also be strained as demand outpaces rental supply because interest rate hikes have curbed borrowing power and buying intentions.

“If housing supply doesn’t increase dramatically, affordability could continue to deteriorate in years to come,” Dugan said.

– With additional reporting from the Canadian Press

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