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New figures from the Canadian Real Estate Association show existing home sales and prices both fell in April, suggesting a cooling in Canada's housing market.Tijana Martin/The Globe and Mail

Economists are predicting that Canadian home prices will fall as much as 20 per cent this year as higher interest rates begin to hit the country’s booming real estate market.

Mortgage rates are expected to climb again as the Bank of Canada aggressively hikes interest rates to deal with runaway inflation. Economists expect higher borrowing costs will lead to a significant price drop in some of the hottest markets.

Toronto-Dominion Bank economist Rishi Sondhi forecasts a double-digit percentage decline in the national average home price over the March to December period this year. Bank of Montreal senior economist Robert Kavcic predicts a 10-per-cent to 20-per-cent drop in the home price index in certain regions.

“When we speak of housing correction it’s not a question of if, but where, how much and for how long,” Mr. Kavcic said in a research note. “Suburban markets in Ontario look shakiest,” he said.

The national home price index, which adjusts for pricing volatility, fell 0.6 per cent to $866,700 from March to April on a seasonally adjusted basis, according to the Canadian Real Estate Association, or CREA. That was the first drop since April, 2020, when homeowners struggled to sell their properties amid the pandemic economic lockdown.

The current drop in home prices was led by smaller markets in Southern Ontario. Oakville-Milton’s home price index was down 5.6 per cent from March to April, while London was off 4 per cent and Cambridge was down by 3.9 per cent, according to CREA.

The housing slowdown has been triggered by a rapid increase in borrowing costs over the past few months. The Bank of Canada’s next interest-rate announcement is scheduled for June 1. The central bank is widely expected to hike interest rates by another 50 basis points.

Realtors have described a sudden change in buyer sentiment. Some homes are not fetching any offers and sitting on the market for upward of a month. That is in contrast to the first two years of the pandemic when homes drew dozens of bidders and sold for hundreds of thousands of dollars over the listed price.

“The pandemic housing boom is clearly winding down. Bidding wars are easing and prices are beginning to flatten,” said Phil Soper, chief executive officer of Royal LePage.

“When markets overshoot as they have for the past two years, they correct,” he said, adding that it was too soon to say that the pendulum had swung completely over into a buyer’s market and that he is observing instances of both multiple offers and homes not selling.

Over all, CREA said the number of resales fell 12.6 per cent from March to April on a seasonally adjusted basis, a sharper drop than the previous month, with volumes falling in most regions across the country.

Cailey Heaps, a realtor who has been selling homes in Toronto for more than two decades, said she is still seeing multiple offers above the listed price but also said: “We are not seeing the same frenzy that was present in the early months of the year.”

CREA said a little more than half of the country was in a balanced market for the first time since June, 2020, when the economy was starting to reopen. Although the number of new listings fell from March to April, buyer demand has also waned.

Even if home prices drop by 20 per cent over the latter half of this year, values will still be higher than before the start of the pandemic. Since January, 2020, the national home price index is up 52.2 per cent.

Compared with April of last year, the home price index is up 23.8 per cent.

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