Photo: James Bombales

As Canadian year-over-year home sales and prices have continued to drop, many economists have predicted that activity will begin to heat up again in the second half of the year. But according to one economist, prices aren’t going anywhere fast.

“Recent policy actions and rising interest rates will take the wind out of home prices’ sail this year in Canada,” writes RBC senior economist Robert Hogue, in a recent note.

Hogue predicts that aggregate prices will increase by only 1.8 per cent nationwide in 2018, after surging 10 per cent on average in the past two years. The cause? A series of policy changes and a rising interest rate environment, which are putting a downward pressure on home prices.

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“Ontario’s Fair Housing Plan triggered the cooling process in April 2017 and three interest rate hikes since July reduced the market’s heat even more,” he writes. Add to that the new stress test introduced on January 1, and you’ve got a recipe for a cooler market.

“The new stress test will reduce the home purchasing power of many qualifying borrowers,” writes Hogue. “This will fuel demand for lower-priced units at the expense of more expensive options.”

What’s more, higher interest rates will mean that many homeowners will be facing higher mortgage rates in the very near future.

“For the first time since 2008, fixed-rate mortgage holders will face an increase in mortgage rates when renewing a maturing five-year term,” writes Hogue. “This will throw some sand in the gears of move-up buying activity in certain markets.”

Hogue forecasts that home resales will decline by 4.3 per cent to 493,900 units in 2018, following a 4.5 per cent drop in 2017.

“We predict home resales to dip for the second straight year — something Canada hasn’t seen since the mid-1990s,” he writes.

But if all this sounds worrying, Hogue doesn’t think it should be. He writes that the downward pressure on prices is a natural correction that is long overdue.

“We see the risks of a major price correction nationwide as contained,” he writes. “We expect demand-supply conditions to remain balanced in the majority of local markets, including Ontario and British Columbia. Solid economic demographic fundamentals will maintain steady support.”

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