September 14, 2022

The real estate frenzy is over. The fight for affordability is not.

Just a short seven months ago, during the height of the real estate frenzy, we wrote about deteriorating housing affordability in Canada. To recap, this is how it happened. During the pandemic, the Bank of Canada (BoC) dropped the policy interest rate to a record-low 0.25% to support economic activity. And it worked; low rates supercharged demand, and buyers came out of the woodwork to secure a home at mortgage rates we may never see again. This surge in demand pushed home prices to their highest levels ever, and housing affordability (ownership costs as a % of income) deteriorated to the worst level in 31 years.

In our February commentary, we suggested a variety of measures that would re-balance the real estate market and restore affordability for Canadians. One suggestion was for the Bank of Canada (BoC) to raise the interest rate, which would increase the cost of borrowing money. While this would risk lowering affordability in the short term, it would have the longer-term effect of lowering home prices as the market returns to a balanced state. 

And lo and behold, in March 2022, the BoC did raise the interest rate to tackle inflation more broadly. In fact, the BoC raised the rate five times, bringing it to 3.25%, with more rate hikes on the horizon.

So, has housing returned to pre-pandemic levels of affordability? Find the answer below.

Exuberance is replaced by a correction


And here’s why.  

Pandemic-era price growth was extraordinary, especially in Canada’s priciest markets. Between March 2020 and March 2022, the benchmark price* in Vancouver went up by $272,700 (+29%), Toronto went up by $312,500 (+37%), and the Fraser Valley went up by $388,800 (+55%). By comparison, price growth in more affordable markets such as Calgary ($112,00; +27%) and Edmonton ($61,100; +18%) was more moderate over the same two-year period. Still, real estate markets across Canada shot up in price while the ability to pay (i.e., wage growth) did not keep pace.

Come spring 2022, the BoC finally stepped in and began its policy of quantitative tightening—raising interest rates to cool demand across the economy. As mortgage rates materially increased, more and more buyers were pushed to the sidelines, and house prices started to come down. By May, most major markets returned to balanced territory (where the number of buyers and sellers are roughly equivalent), and the massive pandemic-era price gains started to erode in expensive markets—Toronto, Vancouver, and the Fraser Valley—which are more sensitive to high interest rates. The latest data for July shows that the downward pressure on prices even landed a punch in Alberta, where markets tend to be more resilient.

Given the overheated pace of the last two years, a price correction is a welcome development that could ease some of the affordability issues burdening Canadians.


The kind of large-scale price decreases needed to return to pre-pandemic levels of affordability are unlikely.

RBC projects that the national benchmark price will only drop 12% from the 2022 peak. While this would represent a larger correction than the previous four national downturns in house prices, a 12% drop from the February 2022 peak would only bring us back to September 2021 prices—a mere five months earlier.

The prairies will see a smaller decline than the rest of the country (-2% to -5%), while British Columbia and Ontario will bear the brunt of the correction (-13%). After all, those who climb the highest have the furthest to fall.

In other words, the fight for affordability is not so easily won. In the short term, the BoC’s rate-hiking campaign will worsen affordability as monthly mortgage payments become more expensive. And even though house prices will come down in this higher rate environment, they will still be significantly higher than they were pre-pandemic—keeping home ownership out of reach for many Canadians.

Why won’t housing pricing fall further?

One factor preventing housing prices from falling further is rising construction costs.

After the pandemic hit, construction prices took on a new trajectory and increased rapidly. In fact, construction prices still haven’t levelled out.

Between April 2020 and April 2022, construction prices increased 43% (across 11 Canadian cities). The latest data show that the year-over-year increases are highest in Toronto (+27%), followed closely by Edmonton (+24%) and Calgary (+21%).

The story here isn’t new. Homebuilders face a variety of challenges, including supply chain issues for raw materials, labour shortages, and rising fuel prices. All of this means that it is now significantly more expensive (and it takes longer) to build a house than it did pre-pandemic. As long as these issues persist, they will continue placing upward pressure on construction costs and, therefore, new home prices.


While monetary policy is lowering home prices, rising construction costs are helping ensure they don’t fall too far. At the end of the day, prospective homebuyers may be no better off than they were in late 2021.

*The MLS® Home Price Index (HPI) model is used to calculate benchmark prices in key Canadian markets. A benchmark home is one whose attributes are typical of homes traded in the area where it is located and includes single family homes, townhouse/row units, and apartment units.

Emma Dizon, Policy Analyst



Explore Insights:

Share This