There’s more downside to come in Canadian housing prices, but households and banks are still in a strong position as prices slide, according to a new report from Fitch Ratings.

The rating agency said it expects to see home prices drop by another 5% to 7% in the coming year, taking prices down by about 15% from their peak. Higher interest rates, inflation and slowing economic growth are driving the decline.

Despite the drop, home prices are still about 20% higher than pre-pandemic levels, Fitch noted, as tight supply and strong demand continue to provide fundamental support.

“Along with the U.S., Canada had the greatest increases in home prices globally since 2020, but house price declines in 2023 will not be as severe as seen in Denmark and Australia, given lack of supply and high demand,” it said.

Markets such as Vancouver and Toronto, where housing supply is most constrained, are seeing some of the biggest price drops following the largest gains during the pandemic. However, continued strong demand and limited supply point to net gains relative to pre-pandemic levels in those markets, the report said.

“When prices dip, buyers on the sidelines jump in, offsetting downward price pressure,” it said.

Additionally, while mortgage delinquencies are expected to rise as higher interest rates flow through to higher mortgage payments, defaults are expected to remain below pre-pandemic levels, Fitch said.

“Significant consumer savings built up during the pandemic have helped to cover higher payments, and borrowers have sizeable equity in their homes,” it said.

The stress testing requirements and strong home equity positions also mean the ongoing correction in home prices “will have a minimal impact on Canadian [banks’] covered bond asset performance,” Fitch said.