Canadian Mortgage Market 2022: From Peak to Correction in Ten Months

The Canadian mortgage market entered 2022 at full speed and then reversed sharply. In February, the national MLS Home Price Index was up about 29% from a year earlier.12 By December, the index was down 7.5% from a year earlier, national sales for the full year were about 25% below 2021,12 and the Bank of Canada's overnight rate had gone from 0.25% to 4.25% in nine months.17

This is the story of how Canada's mortgage market went from overheated to cooling in less than a calendar year, and what it meant for borrowers caught in between.

The February Peak

January and February 2022 were the final stretch of the pandemic boom. Buyers who had watched the 2021 market from the sidelines rushed in, expecting that rising rates would soon make borrowing more expensive.

In February, the national MLS Home Price Index was up about 29% from a year earlier. Competition for homes was strong in many markets, even though borrowers had to qualify at the stress test rate under OSFI Guideline B-20.1412

Then, on March 2, the Bank of Canada raised its policy rate for the first time since October 2018.110

Seven Hikes in Nine Months

The 2022 rate hike cycle was fast. Here is the timeline:1234567

Four hundred basis points in nine months. The overnight rate went from 0.25% to 4.25%, a 17-fold increase. Prime rate, which major Canadian banks set independently and have generally kept at about 2.20 percentage points above the policy rate in recent years, rose from 2.45% to 6.45%. For comparison, the 2017 to 2018 cycle raised the policy rate by 125 basis points, from 0.50% to 1.75%, over about 15 months. The 2022 increase was more than three times as large and came in a much shorter time.8910

The Bank's inflation target is 2%.11 Inflation was above that target for most of 2022, and the Bank kept raising its policy rate to bring it back down.

The Price Correction

Prices and sales both turned down during 2022. By December, the national MLS Home Price Index was down 7.5% from a year earlier. Actual national sales in December were 39.1% below December 2021, although sales rose 1.3% from November.12

Price changes were not the same in every market, and the national figure hides local differences. Check local board data for the area you are looking at.

Full-year 2022 national sales were about 25% below 2021, according to CREA's January 2023 year-end release.12

What Happened to Variable-Rate Borrowers

Variable-rate mortgages were popular in 2021 and early 2022, mostly because their rates were usually lower than fixed rates. From June 2022, fixed-rate mortgages made up the majority of new lending, at about 55%.13

The math turned against variable-rate borrowers quickly. A borrower whose rate was prime minus 1.00% (about 1.45%) in early 2022 would have been at about 5.45% by December, once prime reached 6.45%.7 On an unchanged $500,000 balance, four extra percentage points is about $1,667 a month in interest, before any change to the required payment.

For borrowers with fixed-payment variable mortgages, the payment can stay the same while more of it goes to interest. If the payment no longer covers the interest, the unpaid interest can be added to the balance. This is called negative amortization. The rate at which a fixed payment stops covering interest is often called the trigger rate. This is different from a trigger point, the balance level some lenders use as a contractual threshold; check your own contract for which one applies. Check your own contract to see how your lender handles it.

The Foreign Buyer Ban

The federal Prohibition on the Purchase of Residential Property by Non-Canadians Act received Royal Assent on June 23, 2022, and took effect on January 1, 2023. It generally prevents non-Canadians from buying residential property in Canada, subject to exceptions set out in the Act and its regulations. Read the Act for who is covered.15

The effect of the ban on prices was debated when it was introduced. This review describes the rules as they stood in 2022. Check the current rules before relying on them.

What This Could Mean for Borrowers

Illustrative scenario: a variable-rate borrower in Oakville faces payment shock.* A dual-income household buys a $1.1 million home in January 2022 with 20% down, a mortgage of $880,000. The variable rate is prime minus 0.90%, an effective rate of 1.55%, and the payment is about $3,540 a month on a 25-year amortization. By December, prime had risen to 6.45%, so the rate was 5.55%. Recalculated over the same 25 years at 5.55%, the payment is about $5,400 a month, an increase of about $1,860 (about 53%). Assumptions: semi-annual compounding, a new 25-year amortization at each rate, no prepayments, and insurance and fees excluded. The household is assumed to have qualified under the stress test and to have combined income of $165,000.

A payment increase of this size is a useful test for any household budget, even when a borrower qualified at the start. A payment that is manageable at one rate can be hard to carry at another.

* Real names have been replaced with fictional names. This case is illustrative.

Where Things Stood at the End of 2022

As of December 2022, the Canadian mortgage market was in an uncertain middle ground:

• Rates were still rising. On December 7, 2022, the Bank raised its target for the overnight rate to 4.25%. It said it was considering whether the policy rate needs to rise further to bring supply and demand back into balance and return inflation to target.7
• Prices had fallen but were still high. The national MLS Home Price Index was down 7.5% from a year earlier in December 2022. Whether prices kept falling depended on interest rates and how long they stayed high.12
• A renewal wave was coming. Borrowers who took five-year fixed rates in 2017 and 2018 were due to renew in 2022 and 2023, and many faced higher rates. Borrowers who locked in during the pandemic would renew later in the decade. See our renewal guide.
• Delinquencies were low but worth watching. Rate increases can take time to show up as missed payments, as borrowers use up their savings. Check current arrears data from the Canadian Bankers Association or the Bank of Canada before relying on any figure.
• Sales rose slightly in December. National sales rose 1.3% from November to December. One month does not show a trend.12

We have worked with borrowers through this cycle. The advice has not changed: understand your numbers, stress-test your own budget at a higher rate, and make decisions based on your timeline, not the headlines.