A flurry of recent housing forecasts is painting a conflicting picture of where the markets are heading, with some suggesting further declines in housing prices and others hinting at a more optimistic view, which leaves homebuyers and sellers alike wondering which way the wind is blowing.

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Oxford Economics, a financial advisory firm, recently predicted that Canadian housing prices will decline 30 per cent by mid-2023 from the peak observed in the first quarter of 2022. Its worst-case scenario foresees a 48 per cent drop from last year’s peak, but its best-case scenario, a 27 per cent fall, is not that great either.

Average housing prices have declined by 14 per cent over the past year, according to Oxford Economics, so its forecasted decline of 30 per cent implies a significant decline in prices in the next few months. That would have serious downside consequences for housing markets and the larger economy. We, though, believe these forecasted declines are unlikely to materialize.

Our expectations of housing price stability are partly based on recent market data and our long-held skepticism of the accuracy of empirical forecasts, which are a by-product of forecasters’ assumptions. The late George Box, a pioneer of statistical forecasting, cautioned that all forecasts (statistical models) are wrong, but some are useful. But what homebuyers and sellers need to ascertain is not necessarily the accuracy of the forecasts, but their usefulness.

The national average sale price in February was down by 18.9 per cent from their peak a year earlier, according to the Canadian Real Estate Association. But a more useful indicator is its MLS Home Price Index, which controls for the size and quality differences in dwellings transacting over time and is adjusted for seasonal differences. This measure is down by 15.8 per cent since February 2022, suggesting that smaller or lower-priced homes have transacted more frequently since the start of mortgage rate hikes in early 2022.

The seasonally adjusted (SA) composite sale price in February declined by 1.1 per cent from the month before. This is the smallest month-over-month decline since April 2022. However, a fall in the rate of decline suggests housing prices could reverse in the next few months. The non-seasonally adjusted composite benchmark price in February increased by one per cent from the previous month.

The composite benchmark price is an aggregated representation of housing markets across Canada. Hidden in the national averages are the distinct local housing market dynamics. For example, Calgary’s SA benchmark price was 1.8 per cent higher in February than a year earlier.

The decline in national prices is mainly influenced by the relatively large drops from peak prices in the Greater Toronto Area (GTA) and other less populous towns within a two-hour commute. During the pandemic, these housing markets experienced larger-than-usual pricing growth. The subsequent increase in mortgage rates has hurt prices more in southern Ontario, reversing part of the gains made during the pandemic.

A quick look at sales volumes suggests that, like prices, the current declining rate is decelerating rather than accelerating. The sales volume in February 2023 was 40 per cent lower than the peak observed a year earlier, but seasonally adjusted sales in February were 2.3 per cent higher than a month earlier.

Again, there are significant regional differences in sales activity, which was much more pronounced in large housing markets compared to the national increase of 2.3 per cent in month-over-month sales. For example, sales were up 15.2 per cent in February from the month before in Greater Vancouver, 8.5 per cent in the GTA and 3.7 per cent in the Montreal Census Metropolitan Area.

Other nascent signs of a housing market recovery are emerging. Some 62 per cent of previously frustrated buyers are expected to return to the housing market in the spring, according to a recent survey by Royal LePage. It found that 26 per cent of those who suspended their home purchasing plans last year because of mortgage rate hikes are expected to actively search for homes in the spring. Another 36 per cent indicated they would follow through with a home purchase if there are no more interest rate hikes. The anticipated return of buyers to the market is a likely reason for housing price stability.

A longer-term view of the markets also paints a picture of resilience. Despite the decline in housing prices since March 2022, prices are still much higher than they were three years ago. For example, the SA composite benchmark price was 28.8 per cent higher In February than three years ago.

Moreover, the expected return of homebuyers in the spring sales season and potentially slower growth in new listings suggest the decline in housing prices will at least be slower, while the odds of an increase are also non-negligible.

If the labour markets in Canada and the United States continue to demonstrate the strength they have recently shown, and interest rates stop their upward climb, the economic slowdown could be less than forecasted, resulting in fewer job losses. Consequently, stable labour markets are likely to support stability in housing prices, leading to only moderate to minor price drops in the near future.

Murtaza Haider is a professor of real estate management and director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.