Housing market outlook for Canada in 2022

Key findings:

• In Toronto, the average price for a detached home hit more than $2 million in February, with prices projected to climb further throughout 2022.
• The recent Bank of Canada announcement sent mortgage shoppers online to compare quotes. RATESDOTCA saw a 208% day-over-day increase in mortgage quotes for new purchases and a 195% day-over-day spike in mortgage refinancing quotes on March 2, the day of the hike.
• More homeowners are looking for long-term certainty regarding their mortgage rates and are even considering 10-year terms with slightly higher rates.

In March 2020, the Bank of Canada made a series of emergency rate cuts in response to the COVID-19 pandemic, sending mortgage rates plummeting to historic lows and staying there for nearly two full years. At first, home sales fell as economic uncertainty set in. However, it was not long before rock-bottom mortgage rates and record-high consumer savings put fuel on the fire, only intensifying the already hot housing market.

With more people ready to leap into homeownership, bidding wars and low supply sent real estate prices skyrocketing. According to the most recent Royal LePage House Price Survey, the average home price in Canada reached $779,000 in the fourth quarter of 2021, a 17% increase year over year. In Toronto alone, the average price for a detached home hit more than $2 million last month.

As home prices continue to climb and mortgage rates increase throughout 2022, here’s what homeowners and buyers can anticipate.

What to expect across Canada’s real estate market in 2022

In February, the housing market showed no sign of slowing down. Home prices jumped 28% over last year in the Greater Toronto Area (GTA), according to the Toronto Regional Real Estate Board (TRREB). However, prices may balance as interest rates rise.

On March 2, the Bank of Canada announced the first of many hikes, raising its benchmark interest rate by 25 basis points to 0.50% — a move toward returning inflation to the 2% target. Inflation is currently at 5.1%, an 18-year high, with the Russian invasion of Ukraine adding further pressure on prices.

The Bank’s move pushed many prudent homebuyers to act and compare rates online. According to RATESDOTCA data, new purchase mortgage quotes increased by 208% on March 2 from the day before.

Homeowners looking to refinance also reacted to the rate hike by shopping around. RATESDOTCA saw a 195% day-over-day increase in mortgage refinancing quotes on the day of the announcement.

But what does this rate increase mean for the housing market?

“A quarter-point increase from the Bank of Canada isn’t going to make a significant impact on the market because it does take time for the rates to trickle down into real estate,” says Sung Lee, RATESDOTCA expert and mortgage agent. “By the time we start seeing three or four increases, or at least a good 100 basis point increase, then it will have some sort of effect on easing the market.”

As mortgage rates increase, buyers’ purchasing power decreases, and affordability wanes. Higher borrowing costs may even price more people out of the market. Still, low inventory levels and high demand will thwart price growth from slowing for some time.

Economists predict as few as four rate increases and as many as six by Q4 2022, with the potential for interest rates to surpass pre-pandemic levels. This may explain the more conservative forecast provided by Royal LePage, with the average home price projected to increase by 10.5% nationally by the end of the year.

Homeowners and buyers should anticipate higher mortgage costs

Rising borrowing costs will mean higher weekly or biweekly payments if you have a variable-rate mortgage.

“If you have any sort of borrowing that is tied to the prime rate, overall, your payments or minimum payment requirements will all increase,” says Lee.

Price increases have become more prevalent, and mortgage costs are only a small part of that. In fact, food prices have risen, along with transportation costs and many other consumer goods. Gasoline prices surge to historic highs, with analysts predicting gas prices will reach $2.20 per litre in Ontario come April. All of this will leave some Canadians feeling squeezed, including homeowners with fixed-rate mortgages and first-time buyers.

“Your payment when you get that mortgage is going to be higher than what it would have been prior to that [rate] increase,” says Lee. “You have to factor in a higher payment versus what you may have envisioned when you started the process of buying.”

Homeowners should also prepare for higher payments upon renewal. It’s essential to shop around before your mortgage term is up to ensure you get the best rate.

“Don’t just sign back with your current lender,” says Lee. “I would never recommend that to anyone because usually, they won’t give you the best offer. You’re just going to sign off and hope that you are getting a good deal, but that’s the best time to shop around to see what else is out there.”

While renewing with your current lender can help you bypass the stress test, you may pay a higher interest rate for that privilege. Compare mortgage rates to see if you can get a better rate.

The best type of mortgage in 2022 is situational

The type of mortgage a buyer chooses often depends on their risk tolerance and five-year plan. For instance, if a homeowner plans to move in, say, five to seven years, a variable-rate mortgage could reduce the mortgage penalties they would owe for breaking their mortgage early. However, that homeowner would have to be comfortable with market fluctuations and potentially payment increases.

“A lot of people are still looking at a variable rate, even though we are expecting rates to go up because there is such a big discount. The spread would be about 125 basis points now, more or less, so it’s still cheaper,” says Lee.

“Historically, variable rates have been a lot more attractive and, in almost all cases, won out over a fixed rate. But you have to be willing to take on that risk and fluctuation.”

In its most recent announcement, the Bank of Canada hinted that rates would need to rise further to keep inflation in check. So, if you are comfortable with rates increasing throughout the year, you might sway toward this option to reap the potential savings. If cash flow is crucial, however, a fixed rate can offer peace of mind.

Less popular mortgage options to consider for 2022

Someone looking for a greater sense of security and who adheres to a strict budget might select a fixed-rate mortgage — although they would likely pay a slightly higher interest rate. Those looking for a long-term safety net in the face of rising rates may even decide to lock in for longer than the standard five-year term.

“We’ve seen an increase in 10-year term inquiries, which usually represent about 10% of mortgages in Canada,” says Lee. “With multiple rate hikes projected over this year and the next, some clients are willing to pay slightly higher rates now for the long-term certainty.”

There is also the option of a hybrid mortgage, where some lenders allow buyers to have different mortgage segments. For example, if you have a $400,000 mortgage, you could designate a $200,000 portion as a five-year fixed-rate mortgage and the other $200,000 portion as a five-year variable rate.

“If there are fluctuations, only 50% [of your mortgage] would be impacted,” says Lee. “It’s kind of like diversifying your mortgage portfolio.” A hybrid mortgage offers protection if the rates increase, sparing you from making higher payments on the entire balance of your mortgage, but it also offers savings if rates drop. Speaking to a mortgage broker or agent can help you determine the right mortgage type for your lifestyle and risk tolerance.

As the year progresses, however, homebuyers must remember that rate hikes are on the horizon and, as a result, home sales may slow — albeit modestly. So, heed this word of caution: if you plan to purchase a property, there is no better time than the present to get a low mortgage rate.