Canada's housing market - a chart that reads "Mortgage-holders see their monthly payments soar as monetary tightening continues" showing a sharp increase in the conventional mortgage lending rate, 5-year term in 2022

Higher mortgages and falling home prices will dent consumer confidence and spending

The double whammy of fast-rising mortgage rates and falling home prices will lead to belt-tightening and result in higher price sensitivity across the board. Consumer-facing MNCs should expect shifts in Canadians’ spending patterns, such as reduced discretionary spending—particularly on big-ticket items, such as cars and home appliances—and trading down. Firms selling products closely related to housing activity, such as furniture, white goods, and construction inputs, should also prepare for slower growth in 2023.


  • The Canadian housing market has been one of the hottest in the world in the last 25 years, with home prices increasing by 529% in that time, thanks to a combination of low interest rates, housing stock shortages, and immigration-led population growth.
  • During the COVID-19 pandemic, home prices rose by over 50% as Canadians made the most of high savings, near-zero rates, and increased geographic freedom stemming from shifting work-from-home habits.
  • However, sky-high prices and a rapid rise in mortgage rates have hit affordability, and therefore demand, for housing.
  • House prices have fallen for eight consecutive months, pointing to a correction in Canada’s housing market.

Our View

Warning signs are flashing red in Canada’s housing market, which will witness a correction in the coming months and act as a drag on consumer spending. First, the country’s proportion of mortgage-holders on variable rates is high relative to its peers (28% in Canada compared to 15% in the US), making Canadians much more vulnerable to interest rate increases. Higher mortgage rates will force consumers to dedicate a wider share of their income toward repayment and away from discretionary spending; analysis by the Bank of Canada shows that recent homebuyers could see increases of up to CAD 1,020 in their monthly mortgage payments, a 45% increase. Mortgage-holders unable to meet the higher monthly payments will be forced to sell their homes at discounted prices, further exacerbating the downward trend in housing prices.

Second, with real estate representing 76% of Canadians’ household equity, a significant and generalized fall in home prices will damage the confidence of homeowners. However, given the rapid rise in home prices during the COVID pandemic, a significant drop would still see house prices at above pre-pandemic levels.

Finally, higher mortgage rates will impede some would-be homebuyers from acquiring a home and therefore keep them in the rental market, which will become more competitive as a result and push rent prices up, providing upward inflationary pressure. This is likely to be exacerbated by Canada’s latest decision to increase immigration into the country to address labor shortages.

Canada’s fragile housing market presents a dilemma for the Bank of Canada. Inflation, despite showing signs of easing (+6.9% YOY), remains far above the bank’s target rate of 2% YOY, implying a need for further monetary tightening. However, the features of Canada’s housing market make it particularly vulnerable to rate hikes, and the bank could push Canada further into recession by tightening financial conditions too much. MNCs should expect the Bank of Canada to slow the pace of rate hikes moving forward, at the risk of stamping out inflation more slowly than it would like.

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