The Canada Mortgage and Housing Corp. is forecasting home prices could match peak levels seen in early 2022 by next year and reach new highs by 2026.

The agency’s latest housing market outlook, released Thursday, says despite an increase in rental housing coming on the market in 2023, supply is not forecast to keep up with demand, leading to higher rents and lower vacancy rates in the coming years.

“Unfavourable financing conditions are expected to make it more difficult for homebuilders to start new rental projects in 2024,” CMHC chief economist Bob Dugan said in a statement.

“We anticipate by 2025-2026 lower interest rates, continued government support, and policies encouraging greater density in urban centres should make more projects viable.”

The CMHC said affordability in the home ownership market will also be a concern for the next three years, as declining mortgage rates and the country’s strongest population growth since the 1950s will likely spur a rebound in home sales and prices.

Home sales dropped by around one-third from their peak in early 2021 to the end of 2023, while prices fell by nearly 15% over that time, CMHC said.

“During this time, the pool of potential homebuyers grew through robust population growth, increased savings and higher incomes,” the report said.

“As mortgage rates and economic uncertainty decrease in the second half of 2024, we expect buyers to start returning to the market.”

It said the resurgence would also be driven by a shift in demand toward lower-priced homes and markets across Canada.

The agency predicts sales activity from 2025 to 2026 will slightly surpass the past 10-year average but remain below the record levels recorded from 2020 to 2021, due to how expensive housing remains.

CMHC also says housing starts in Canada are expected to decline this year before recovering in 2025 and 2026, reflecting the lagged effect of higher interest rates on new construction.

A report last week from the agency showed construction began on 137,915 new units last year across Canada’s six largest cities, a level that was roughly in line with those of the past three years due to a surge of new apartments.

On a regional basis, the CMHC forecasts Ontario and BC will drive the decline in national housing starts this year, warning developers may struggle to boost even apartment construction amid challenges such as financing costs.

It expects the Prairie provinces to perform well, citing affordable home prices and a stronger economic outlook which will likely attract homebuyers and job seekers, leading to increased construction.

In Quebec, housing starts are expected to grow but remain below post-pandemic levels after a sharp decline in new home construction last year.

It said the Atlantic region will likely see less pressure on new home construction than it has since 2022 from unusually strong migration, as starts in certain eastern provinces “will remain historically robust but will realign more closely with weaker population growth.”

CMHC Report : Home Prices Could Reach Peak Levels by Next Year, Set New Highs in 2026 by Sammy Hudes | The Canadian Press | BIV