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Posthaste: Housing market correction is hitting these cities the hardest — and they're not Toronto or Vancouver Back to video

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Good Morning,

Canadians have watched a historic housing correction unfold over the past year, but much of the attention has been focused on the major cities, especially Toronto and Vancouver, the country’s most expensive markets.

Yet a closer look reveals that it is smaller communities that are feeling the worst sting of Canada’s housing boom and bust, according to a new report by Desjardins economists Randall Bartlett and Marc Desormeaux.

“Many smaller centres saw the most eye-popping price gains during the pandemic and are now experiencing the most significant home value declines as the housing correction proceeds,” said the economists.

The pandemic fuelled a red-hot housing boom that swelled prices in some centres by more than 50 per cent. But that bubble deflated quickly after the Bank of Canada began rapidly hiking rates in March 2022 to tame inflation.

All provincial housing markets have declined but Ontario and British Columbia, the provinces whose economies are most exposed to real estate, have seen the biggest drops, says Desjardins. Of the two, Ontario has experienced the largest correction so far.

During the pandemic, the necessity of working and educating children from home fuelled a desire for more living space, causing many residents to leave the big cities in search of greener and cheaper pastures. The “unprecedented” demand drove up home prices and some of the biggest increases were seen within a few hundred kilometres of the Greater Toronto Area, they said.

“Home prices rose significantly in the GTA, but not nearly as much as they did in smaller Ontario communities or nationally for that matter,” said the economists. “And these places are expected to continue seeing the biggest correction.”

Desjardins’ chart below shows that the outsized gains in pandemic housing prices stretched beyond communities close to the GTA to places further afield like Windsor, Sudbury, London, Kitchener and St. Catharines. Their declines since the peak to January 2023 have outstripped Toronto.

Smaller communities such as Bancroft, Parry Sound, Quinte, Renfrew, Northumberland Hill, Muskoka and Haliburton, Woodstock‑Ingersoll and North Bay saw average home prices double between December 2019 and their peak.

“These communities have also seen the largest price declines, and that trend is expected to hold going forward,” said the economists.

So what happens now?

Most economists believe we have not seen the bottom of this correction yet. In a recent survey of experts by personal finance comparison site Finder, 88 per cent said they expect property prices to decline further this year and 55 per cent said they believe prices will drop another 10 per cent by the end of 2023 from January.

RBC Economics thinks price declines are about half way there. Their economists forecast a 15 per cent decline peak to trough in the national RPS Home Price Index, a less volatile measure than MLS, and estimate half of that is still to come.

“What happens next will disappoint housing bulls,” wrote RBC assistant chief economist Robert Hogue in a report yesterday.

Recovery will come but it will be slow. RBC expects the market to hit bottom in the spring with prices levelling out a few months later, if the Bank of Canada has finished raising rates.

But it doesn’t see the pace picking up until 2024, provided we are through the economic downturn, inflation is tamed and the central bank starts cutting interest rates.

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Saskatchewan, as you can see above, stands out for capital spending in Canada this year. Overall, spending growth is expected to cool to 4.3 per cent after two years of double-digit gains, said BMO senior economist Robert Kavcic, who brings us today’s chart. The prairie province is benefiting from construction of the world’s largest potash mine by BHP Group Ltd., a $7.5-billion project located 140 kilometres east of Saskatoon.

Quebec’s spending growth is in utilities and manufacturing, said Kavcic.

Near the bottom of the spectrum sits Alberta, where capex is less than half its 2014 peak, mainly because oil and gas spending this year is more about maintenance than investing in new projects, he said.

“That shouldn’t hold back the province from leading growth this year, with the population booming and housing proving to be very resilient,” said the economist.

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The First Home Savings Account (FHSA) is expected to arrive in April offering Canadians a new way to save for their first home. Essentially, this account combines the benefits of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). Interested? Our content partner MoneyWise has the story on how to get the most out of this new savings tool.

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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