Oxford Economics forecasts deeper home price and sales declines as rates rise

Canadian home prices and sales are forecast to fall further this fall and into early next year as mortgage rates rise, according to a new report from Oxford Economics. The firm expects two more interest rate hikes from the Bank of Canada by the end of this year, adding pressure to an already weak housing market. High energy prices, economic uncertainty and stretched valuations are also expected to weigh on activity. Oxford Economics director of Canada economics Tony Stillo said the rapid rise in bond yields will continue to push borrowing costs higher.

"We expect home sales volumes and prices to slide this fall and into early next year as mortgage rates rise," said Stillo. He noted that home prices remain raised relative to incomes, presenting further risk. The firm expects a 25 basis point hike at the Bank of Canada's Oct. 28 meeting and another in early December. Stillo said next week's hike may be delayed by recent weak employment data, but he still sees a 50 basis point increase by January, bringing the overnight rate to 2.75 per cent.

Stillo explained that the catalyst for rate hike expectations is energy prices, not an overheated economy. Brent crude is forecast to remain above US$100 per barrel for six months, which Oxford calculates will push headline inflation into the mid-3 per cent range in late 2026 and early 2027. "A rapid rise in bond yields will continue to push borrowing costs higher throughout the economy, weighing on interest-sensitive sectors like housing and spending on consumer durables," warned Stillo. Higher interest rates will not be the only factor working against housing. "A weak job market weighed down by the ongoing trade war with the US, squeezed household incomes from high fuel prices, and a shrinking population will hurt housing demand," explained Stillo. He cited the loss of 68,000 jobs in September, and roughly 110,000 over the past two job reports, as evidence that hiring will remain weak in the short term. A combination of higher fuel costs, tariffs and trade uncertainty is weighing on businesses.

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Population declines are a less certain factor. Stillo expects the population to decline if policymakers maintain their goal of shrinking the share of non-permanent residents to 5 per cent of the population by the end of 2027. Oxford is awaiting Ottawa's immigration update before revising its demographic forecast. For households, raised debt will constrain spending and make them vulnerable to job losses, higher interest rates and a resurgence in oil prices.

Oxford does not see the downturn lasting forever. The firm expects a housing recovery to start in the second half of 2027 through 2028. Before then, rising borrowing costs and weak demand point to a near-term slump. However, with prices still stretched relative to incomes, Oxford warns the correction could prove deeper or longer than its baseline forecast. Your Space Hamilton reported in October that the sales-to-new-listings ratio fell to 41.6 per cent, its weakest September level since 1994.

With files from Better Dwelling