Maintaining a high quality of life has become a challenge for Canadians facing higher prices for basic necessities, with shelter costs representing a significant and rising expense for many households. The latest inflation report showed mortgage interest costs increased 25.4 per cent year-over-year in March, while rent prices jumped 8.5 per cent year-over-year. The state of the housing market has a multiplier effect, affecting economic growth, consumer spending, businesses – even internal migration to cities that offer affordable housing.
To unpack the latest housing trends, The Globe and Mail recently spoke with Robert Hogue, assistant chief economist at Royal Bank of Canada RY-T. He shared his perspectives on the housing market and ways to address housing affordability.
What’s your outlook for home prices?
We expect them to rise but very modestly at first. We’re not in the camp of expecting a big pop in either home resale activity or prices because affordability is still such a big issue that is going to keep so many potential buyers on the sidelines for some time.
We do expect the recovery to continue to unfold. It looks like the market turned a corner somewhere around the turn of the year. Around December, January, we saw activity pick up across Canada – not everywhere, but generally speaking. Also, prices on a month-over-month basis are starting to rise – that’s certainly the case in the GTA and in Vancouver as well.
The recovery is likely to be fairly subdued at first. Our view is that we’ll need to see significant interest-rate cuts to open that door for buyers and to have more heated demand in the market. Once the Bank of Canada cuts the interest rate fairly materially, this is when we would expect more buyers will get in the market and push prices higher at a more accelerated pace. This might start in the latter half of 2024, but our base case is not forecasting a sudden spike, it’s going to be more of a gradual ramp-up.
You mentioned that you expect home prices will increase modestly, meaning single-digit year-over-year changes?
Probably low single digits at first and then still in the single digits going forward.
Now, the Bank of Canada is paying attention to what’s happening in the housing market, and if it sees a market that starts to rebound very vigorously and price activity that starts to point toward an overheating in the market, it may be a factor that might push the bank to hold off on the pace of rate cuts that we’re expecting. I’m not saying that the bank will start to hike interest rates, but it might influence the pace of rate cuts.
When do you expect the Bank of Canada will begin to cut rates and where do you see rates headed?
Our call is in June. We expect a full percentage point of cuts this year and an additional percentage cut in 2025. The first rate cut is probably not going to make a huge difference for many potential homebuyers. But by the time we get a full percentage point later this year and probably more into 2025 with further rate cuts, I think this is going to start to make a difference to buyers that have been pushed to the sidelines over the last couple of years.
Now, I don’t want to come across as saying once the Bank of Canada is done cutting interest rates that suddenly the market will be affordable to everyone, everywhere in Canada. I think the deterioration in affordability that we’ve seen is unlikely to be entirely reversed any time soon.
What cities would you characterize as being buyer’s and seller’s markets?
In terms of a buyer’s market, the markets that come to mind are in parts of Southern Ontario. I’m thinking markets like Guelph or Kitchener-Waterloo that during the pandemic overheated but then the correction was quite significant, quite severe, when the Bank of Canada went into its rate hiking campaign. Those markets have cooled down significantly and they’re a little bit behind other markets like the GTA, for example, where things have rebalanced and prices have started to rise on a month-over-month basis.
At the hotter end, Calgary comes to mind. This is a market that is seeing tremendous population growth coming from waves of immigrants and interprovincial migrants, and that is boosting demand significantly. The Albertan economy has softened relative to where it was about a year ago, but it’s still fairly robust compared to other parts of the country, so that contributes to income gains, for example, and confidence that is quite critical for the housing market.
Earlier this month you published a report titled The Great Rebuild: Seven ways to fix Canada’s housing shortage. Of those seven ideas, which ones do you think may have the greatest impact on supply?
Removing obstacles to home building, so things like zoning and the length of project approval processes need to be addressed and very quickly.
Second, the construction industry has a capacity issue. We need to grow that capacity by increasing the construction labour pool from immigration or various programs to attract young Canadians to get into construction trades.
Also, to encourage the industry to build differently, and there I’m thinking, more specifically in prefabricated housing, modular housing, building either whole homes or parts of homes. Factories hold quite a bit of promise to be much more efficient, to get more units out on a per-worker basis.
Lastly, I think it’s really important to put a lot of emphasis in changing the housing mix that we build and have more rentals, because when we do projections for the coming years, our view is that demand for rental apartments is going to skyrocket. So we need to build a lot more purpose-built apartments as well as social housing, because a lot of Canadians will not even be able to afford market rent given the affordability crisis that we have. If affordability does not change enough, it’s going to affect the type of demands that we’ll have in the future. So any kind of incentives that can be put forward to stimulate construction of apartments would be significantly welcome.
What about the other side of the equation? In order of importance, what would you identify as suggestions to tackle the demand side of the equation?
What’s been talked about a lot has been immigration, especially non-permanent residents coming into Canada. We’re seeing booming numbers, and this is putting tremendous pressure on Canada’s infrastructure, including housing.
There’s been some measures announced by the federal government to put a cap on non-permanent residents, something that Canada has never done before. This should, in our view, provide a bit of breathing room for supply to catch up with the very strong demand that we’re having and we’re likely to have in the future. Capping immigration means that it’s going to slow down population growth. It also means that it’s going to slow down the growth in demand for housing. What it does not mean is that it’s cutting demand for housing, it’s just not allowing demand to grow as fast as it is now or that it’s been over the last couple of years especially. It will give the supply side a chance to catch up a bit more. And if those supply-side measures are successful, then hopefully we’ll get to balance more quickly. Demand-side measures, especially immigration, in and of themselves will not necessarily rebalance the market.
The government is targeting 485,000 new permanent residents in 2024 and 500,000 in 2025. What level of immigration can the housing market support?
It’s very hard to tell. The pressure on our housing stock comes from household formation. When you have a new household being formed, they need a housing unit. When you have pressures coming from affordability and this big boom in immigration, for example, it basically made people bundle up. They get together and several of them live in one housing unit. So they’re not revealing how many units would be ideal. For us, it’s difficult to really see through what those coping mechanisms are and discern what is the ideal outcome and the number of units that would be required. That’s a very hard question to answer.
Do you think we have to reduce immigration significantly temporarily until housing supply improves?
When you consider that Canada, over the next decade or so, we’ll see half a million baby boomers reaching retirement age every year, that is going to be drilling a fairly significant hole in the labour pool. And it’s not just from a labour pool perspective, it’s also in terms of a tax base for the government. The way we finance our social programs, for example, it’s largely from income tax. So you need to make sure that you’ve got the number of taxpayers, working people, still up there.
We understand the stress arising from this ballooning immigration that we’ve seen over the last couple of years especially. Most of that surge has been on the non-permanent resident side. We argued, before the government put in place some caps, we argued that part of it would be self-correcting because some of the increase in non-permanent residents was to address labour shortages. The job vacancy rate has dropped quite a bit over the past year, year and a half, and it’s probably going to continue in the very sluggish economy that we’re in. Also, part of this large influx of non-permanent residents has been Ukrainians fleeing the war in Ukraine, and that program has ended.
Some development projects were put on hold because of higher financing costs, higher cost of materials and labour. How is that situation now?
When you look at homes under construction, we are at record levels in Canada across many markets, so it’s not that homebuilding is weak. And even when you look at housing starts, it is not soft, it’s just not enough to meet the kind of demand that we’re having.
What we’ve seen in terms of preconstruction sales is that market completely came to a halt when interest rates went to a very high level over the past year-and-a-half – and this is not rebounding yet. What that implies is that the pipeline in new projects that will get started at some point is getting thin. But in terms of what is being started, what is being worked on, those numbers I would argue are historically robust – not enough relative to what we need, but they’re still pretty robust. The concern is that given that thin pipeline, which is not filling up sufficiently, a year from now or two years from now, those construction levels will fall. That’s a concern.
What were your thoughts on the federal government’s budget as it relates to housing?
It’s a very substantial plan with, by my account, something like 53 measures. Not all were new – a number of them were either an existing federal measure or extensions of existing measures. Nonetheless, it covers a lot of ground, but the portion that focuses on home building, in our view, is heading in the right direction.
Were there measures, or a particular measure, that you think will have the most immediate impact of meeting their stated objective of adding new supply quickly? And when may we see a meaningful increase in supply that helps balance the market?
It’s hard to answer in the sense that they’re firing from so many directions. It’s difficult for me to get a sense of which one will hit the target first.
I would note this accelerated capital cost will probably move the needle as far as the rental apartment constructions. The government had previously announced a full rebate on the GST for new purpose-built apartment projects. Now, this accelerated capital cost allowance will be another measure that would be welcome in the industry and should give the green light to more rental projects going forward. Being able to deduct certain capital expenses more quickly, it means that you can make the project profitable more quickly. It used to be 4 per cent a year. Now, the government is boosting it up to 10 per cent a year. This helps the economics. It helps with the profitability of the project. This is probably not going to have an impact next month or six months from now but certainly will address this huge shortage in the rental stock. Over the medium term – three to five years – I think this is going to be a positive measure.
What do you think about the budget changes announced by the federal government such as the increase in withdrawals from RRSPs to $60,000 from $35,000 for first-time homebuyers making down payments and allowing first-time homebuyers of newly built homes to have a 30-year amortization term instead of 25 years? To me, these changes might stimulate demand, but since you still don’t have supply, it may increase prices and reduce affordability.
You think like an economist.
I totally get that the government and politicians want to help first-time homebuyers. The issue is that when supply is not sufficient, any measures that ultimately end up stimulating demand with a fixed supply, economics 101 will tell you that the adjustment mechanism is prices, and prices are going to go up. You’ve got to make sure that supply is ready to meet demand, otherwise it’s going to be counterproductive.
Now, the interesting part is that the longer amortization is for mortgages specifically for first-time homebuyers of new homes – it is very targeted. I would say that if you’re going to do something like that, that’s the way to do it. However, by putting all those conditions in there, the pool of people you’re going to end up helping is probably going to be much more limited.
On raising the ceiling on how much money you can withdraw from your RRSP, I’ll be just interested to find out how many young Canadians, or those who are contemplating buying a home, how many have $60,000 in there that they can draw upon. I’m not quite sure that the pool of potential people who will benefit from it is that large.
If you were to make Canadian housing market predictions over the next couple of years, what would they be?
I would say the rental market tightness that we have right now will get better. I’m not sure if it will satisfy everybody, but we should get some relief. I think in large cities affordability issues will probably still be around. Probably not as acute as they are today, but will still be something that we will talk about.
This interview has been edited and condensed.
(Bloomberg) — Canadian home sales were basically flat and prices dipped in March, a sluggish beginning to a spring market that some analysts believe will pick up soon as the Bank of Canada moves closer to cutting interest rates.
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The number of transactions nationally rose 0.5% in March on a seasonally adjusted basis after falling 3.1% in February, according to data released Friday by the Canadian Real Estate Association.
The benchmark home price fell 0.3% on the month to C$718,400 ($522,000).
Sales are currently about 10% below the average of the last 10 years. But housing demand appears set to accelerate in coming months as the central bank mulls lowering borrowing costs and Canada welcomes hundreds of thousands of newcomers every quarter.
Most economists surveyed by Bloomberg expect the central bank to cut in June, and traders are fully pricing a first cut by July. In a press conference Wednesday, Governor Tiff Macklem told reporters a June cut was “within the realm of possibilities” but said officials want to see more evidence that inflation is easing.
The number of newly listed properties fell 1.6% in March. A ratio of sales to new listings was 57.4%, slightly above its long-term average and in line with what the industry believes is a balanced market.
“While the official March monthly numbers were quite flat, anecdotal evidence from late last month and early April suggests activity is ramping up,” Larry Cerqua, the real estate association’s chair, said in a statement.
The Bank of Canada began raising its benchmark overnight rate in early 2022, triggering a slowdown in home sales and a drop in prices. Prices rebounded for a spell last year, and some observers see a sustained recovery on the horizon.
The bank’s April monetary policy report said a “moderate increase” in house prices is baked into its economic forecasts. But a sharp, unexpected increase in house prices is a key upside risk to the inflation outlook, the central bank said.
Policymakers anticipate “robust growth” in residential investment over the coming years, with strong housing demand driven by elevated population growth and tight supply.
While new construction has risen in recent years, housing starts have not kept pace with record immigration. Canada Mortgage & Housing Corp. estimates that 3.5 million more units, beyond what’s already projected to be built, will be needed by 2030 to restore affordability.
According to their updated 2024 forecasts, CREA expects home sales to increase 11% this year from 2023 levels to 492,083 transactions. They’ll rise another 7.8% next year, the group said, based on interest rates declining to “more normal” levels. The national average home price is expected to rise to C$760,120 in 2025.
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Let’s say you’re the typical household in Canada and want to buy a home.
You earn the median household income of roughly $85,000 a year before tax and you’re looking to purchase an $800,000 home – a standard national price of late. After years of hard work and financial prudence, you manage to save enough cash for a 20 per cent down payment.
Mission accomplished, right? Not even close.
The ownership costs – monthly mortgage payments, property taxes and utilities – would eat up 63 per cent of your gross pay, according to calculations from Royal Bank of Canada.
Not only are these costs the highest that RBC has ever observed, but they are far in excess of what policy-makers deem affordable.
The math becomes even more stretched if you want a detached home or to buy in certain markets.
Ownership costs amount to 84 per cent of median household income in the Toronto area and 103 per cent in the Vancouver region. In other words, the typical household in Vancouver doesn’t earn enough to make payments on a representative home, even before taxes are deducted and other necessities – say, food – are paid for.
These are illustrative ways to describe the affordability crisis that Canada finds itself in. Practically speaking, the country’s chartered banks would never lend to someone so swamped by mortgage payments.
Still, the RBC numbers underscore a troubling trend: A typical household has little chance of getting into the housing market today. No wonder so many young buyers are tapping their parents for financial help.
In previous decades, the suburbs and smaller cities offered an affordable option for priced-out urban dwellers. But increasingly, those markets are getting swept up in the housing crisis.
Since the start of 2020, the benchmark home price has risen 89 per cent in Moncton. In Halifax, prices are up 68 per cent. And in the Ontario town of Tillsonburg (population: 16,815), prices have jumped 72 per cent. Throw in higher mortgage rates and it becomes near impossible for someone with a regular income to buy a home. The rental market doesn’t offer relief either. Tenants are facing the steepest rent hikes in decades amid high demand for a paltry number of units.
There aren’t simple explanations for how Canada ended up in this situation. Instead, a series of decisions and trends – some decades in the making, others quickly popping up – have coalesced to make homes way too expensive.
Not so high on supply
Like an upside down version of the famous Field of Dreams quote, Canada’s pace of home construction in the face of surging population is a case of they came, but we didn’t build it.
Housing undersupply is a chronic problem in Canada. But it’s become more acute since 2016, when population growth picked up in response to increased immigration targets, without a commensurate rise in housing starts. This dynamic was magnified over the past year, as the country’s population jumped by more than a million, while housing starts slowed from a 2021 peak.
As a result, affordability has gotten much worse over the past year. As Toni Gravelle, Deputy Governor of the Bank of Canada, put it in a recent speech, the widening gap “could explain why rent inflation continues to climb in Canada. It also helps explain, in part, why housing prices have not fallen as much as we had expected.”
It’s not that homes aren’t being built. Indeed, housing starts have been notably strong over the past three years, running around 20 per cent higher than the average in the years before the COVID-19 pandemic. A record number of homes, more than 350,000, are under construction. But the brisk pace of building is not enough to keep up with the country’s population growth, and there’s little evidence that the gap will close any time soon.
No vacancy
With demand for rental units outstripping supply, the rental vacancy rate has plummeted to a record low 1.5 per cent, from an average of around 3 per cent in the decade before the pandemic. That’s pushing rental costs up at a historic clip. Average rents across the country rose 8 per cent year-over-year in 2023, with much larger increases for units with tenant turnover.
The sharp decline in the vacancy rate corresponds to the surge in population over the past two years. Newcomers – immigrants, foreign students and temporary workers – tend to be renters. Meanwhile, inflated home prices and restrictive mortgage rates are forcing many would-be homebuyers to stay put, adding pressure on the rental market.
The lack of units designed for long-term tenancy and families is particularly glaring. Since the 1990s, developers have focused on condos instead of purpose-built rental buildings, which tend to have larger units and more security of tenancy. In the Greater Toronto Area, for example, almost 90 per cent of purpose-built apartments are more than 40 years old.
There’s been a pickup in purpose-built rental construction in recent years, spurred on by government incentives. But demand continues to outstrip supply. And it takes a long time to bring these buildings to market – an average of around eight years, according to Toronto’s Building Industry and Land Development Association.
Red tape headache
It can take years to get the necessary approvals for residential developments, an issue that is particularly problematic in Southern Ontario. Approval times aren’t much different whether a project has a few dozen units or a few hundred, according to a 2022 report from the Canadian Home Builders’ Association.
Moreover, project delays can lead to substantial increases in construction costs. The same report found that for every month of delay, construction costs rose by $2,600 to $3,300 a unit, another headwind for affordability.
Warped construction times
Even once the hurdles of getting approval for a new residential project are complete, that’s just one part of a lengthy process for getting new homes built. Construction timelines have grown considerably longer over the years, and have gotten worse since the start of the pandemic.
Construction of apartments takes the longest in Ontario cities, averaging 32.6 months in February, according to the Canada Mortgage and Housing Corp., up from 29.5 months for the same period five years ago. And even though construction times have risen for single and semi-detached homes nationwide, the gap between them and apartments has also grown more cavernous.
CMHC has examined lengthening construction times in its housing supply reports. Apartments are taking longer in part because they’re getting taller. In major cities, they’re also increasingly being built on smaller sites than before that involve more complex construction requirements. Meanwhile, timelines for detached and semi-detached homes have risen in part because of supply chain disruptions and labour issues.
These stretched timelines matter because they result in the delayed delivery of new housing supply at a time when it is sorely needed, while adding risk for builders, since construction loans need to be carried for longer and builders are exposed to construction cost inflation for longer, according to a February report released by Building Industry and Land Development Association, an organization that represents Toronto home builders.
Output obstacles
The construction industry has a productivity problem. Output in the sector is back to where it was in the late 1990s, and the gap with the overall economy is growing.
There are particular issues facing the industry, CMHC deputy chief economist Kevin Hughes noted in a recent blog post. The building process is complex and varies by building type, and many aspects of production fall outside of the developer’s control, which can lead to delays. Moreover, the residential construction industry is quite fragmented and includes small players who focus on bespoke projects, but also lack the capital to make investments that would boost their productivity.
It’s not an easy problem to fix, although governments could offer incentives to builders who use more prefabricated inputs. The use of off-site construction could speed up completion times.
2×4 inflation
From wood and concrete to steel and glass, residential construction materials have soared in price compared to before the pandemic, ending years of steady and predictable cost increases. On a national basis, construction costs have jumped nearly 60 per cent since the end of 2019, and are up 80 per cent since 2017, far outpacing overall inflation.
The cost surge has directly fed into rising home prices, but has a knock-on effect because municipal governments also tie the fees they charge developers to Statistics Canada’s construction price tracker. In Toronto, for instance, development charges for a one-bedroom rental apartment jumped 22 per cent last year from 2022, and 42 per cent for a non-rental one-bedroom apartment. Add in rising wages for construction workers, which have outpaced the overall job market, and it helps explain why housing starts have slowed sharply even as politicians promise a rush of new housing to meet demand.
Bank of Canada rains on the parade
Canadians are used to seeing eye-popping house prices, especially in Toronto and Vancouver. What’s new is the rapid run-up in mortgage rates over the past two years, as the Bank of Canada tightened monetary policy to fight inflation. This combination – pricey homes and restrictive mortgage rates – has transformed a long-simmering housing affordability issue into a thoroughly middle-class problem.
Existing homeowners are seeing monthly mortgage payments jump by thousands of dollars when they renew. Would-be buyers are shut out of the market, unable to qualify for a mortgage at higher rates.
Around half of all homeowners with mortgages have renewed since the central bank began raising rates in 2022. Most of the rest will do so in the next two years. Homebuyers who overstretched in 2020 and 2021, when interest rates were at historic lows, are in for a particular big shock.
There’s hope the Bank of Canada will start lowering interest rates this year, with analysts betting on a first cut in June or July. But central bank officials remain cagey, and Governor Tiff Macklem has warned that rates are unlikely to fall as fast as they rose.
Priced-out millennials
Young Canadians are managing to buy homes, although not to the same extent as before. And because homes are so expensive, young buyers often rely on their parents’ wealth to get into the market.
In November, a Statistics Canada report found that adult children of homeowners were more likely to own a home than those whose parents were non-homeowners, and this likelihood increased with the number of properties owned by their parents. The children of multiple-property owners have lots of social capital, access to quality education and wind up in higher-paying jobs, on average.
“However, the analysis establishes a robust positive relationship between parents’ property ownership and the likelihood of home ownership for their adult children, even when controlling for income, age and province of residence,” the report read. “Inequality of home ownership appears to be reproduced across generations as parents’ property ownership conveys significant financial advantages to their children.”
Seniors staying put
Over the past decade of rising house prices, anticipation has built around the idea that a wave of aging baby boomers will sell their homes and flood the market with new supply. That isn’t happening. Instead, more seniors are aging in their houses longer, a November report by CMHC found. The sell rate of homeowners aged 75 or older who sold their homes has fallen steadily since the early 1990s, dropping to new lows in the 2016 to 2021 time period.
If there is a seniors’ sell-off coming, it won’t be any time soon. The report found the sell rate among those aged 75 to 79, the leading edge of the first wave of baby boomers, was 21.5 per cent. Sell rates didn’t rise significantly until people were in their late 80s and into their 90s, when rates rose to 55.3 per cent to 72.4 per cent.
Of course, even if seniors did start selling en masse, it might not help much. Last month Statistics Canada reported that millennials now outnumber baby boomers in Canada, thanks to the influx of permanent and temporary immigrants.
Note: RBC’s affordability calculations use a five-year fixed-rate mortgage amortized over 25 years. The mortgage rate is the weighted average of those offered by chartered banks for insured and uninsured mortgages. RBC uses benchmark home prices from RPS Real Property Solutions, and it adjusts Statscan income data for timeliness. The bank assumes the buyer makes a 20 per cent down payment.
Housing has become one of Canada’s most vexing and all-consuming quandaries. This article is part of a Globe and Mail series that examines the country’s affordability crisis, its myriad causes and prospective solutions.
Canadian home prices were flat in February after falling for five straight months, a potential sign that the country’s housing market may be rebounding after last year’s slump.
The national home price index, which excludes the highest priced properties, was $719,400 last month, which was the same as in January, according to the Canadian Real Estate Association or CREA.
The last time the home price index rose was from July to August last year, a month after the Bank of Canada shocked the market with back-to-back interest rate hikes. The surprise move had led to a slowdown in sales and a drop in home prices as many would-be homebuyers had a tougher time qualifying for a large enough mortgage to make a purchase.
But now that the central bank has kept its benchmark interest rate steady at 5 per cent for more than six months, would-be buyers are starting to gain confidence that borrowing costs will no longer continue to rise. Prospective buyers who delayed their purchases last year are starting to look again and make bids. The real estate industry said there is pent up demand after months of lacklustre activity.
“People are itching to get going,” said Samantha Villiard, regional vice president for RE/MAX real estate agency. “More people are slowly getting comfortable getting back into the market,” she said.
Realtors have reported an increase in showings and bids in areas that experienced heavy competition during the pandemic’s real estate boom. That includes the suburbs of Toronto and Chilliwack, inland of Vancouver. Over the past month, the home price index rose in Oakville, Milton, Hamilton and Burlington, as well as Chilliwack.
At the same time, the home price index continued to fall in other markets that overheated when interest rates were nearly zero. That includes some parts of Ontario’s cottage country and less populated cities like Guelph.
Across the country, home sales fell 3.1 per cent from January to February after removing seasonal influences. B.C. and Ontario, the country’s largest real estate markets, led the way down with homes sales declining 7 per cent month over month in both. That followed a flurry of sales in December and January. Last month’s volume of sales is still higher than in the fall when homebuyers were still adjusting to the higher interest rates.
TD economist Rishi Sondhi said that activity is still below pre-pandemic days due to lower sales in Ontario, B.C. and Quebec. “This suggests that significant pent-up demand remains in these markets,” he said in a research note.
New listings rose 1.6 per cent from January to February with more homeowners putting their properties up for sale in B.C. and Alberta.
Editor’s note: This article has been update to clarify that Chilliwack is located inland of Vancouver.
By Ismail Shakil
OTTAWA (Reuters) – Greater Toronto area home sales jumped in January while new listings increased more slowly, in a tightening of market conditions that could lead to a resurgence in house prices in the coming months, data showed on Tuesday.
Sales surged 37% on an annual basis as some home buyers started to benefit from lower borrowing costs associated with fixed-rate mortgages, while new listings increased 6.1% from January 2023, according to Toronto Regional Real Estate Board (TRREB) data.
“Once the Bank of Canada actually starts cutting its policy rate, likely in the second half of 2024, expect home sales to pick up even further,” TRREB Chief Market Analyst Jason Mercer said in a statement.
On a seasonally adjusted basis, sales rose 9.6% month-on-month in January, the second consecutive increase after a 19.5% growth in December. Seasonally adjusted new listings increased 4.6% in January after a 12.7% decline in the previous month.
The seasonally adjusted average home price fell 6.5% in January from December to C$1,062,111 ($784,599).
“There will be more competition between buyers in 2024 as demand picks up and the supply of listings remains constrained. The end result will be upward pressure on selling prices over the next two years,” Mercer said.
The central bank has held its key overnight rate at a 22-year high of 5% since July to cool inflation, but the bank said last month its focus is shifting to when to cut borrowing costs rather than whether to hike again.
While recent data, including an uptick in the inflation rate in December, has dampened hopes for a rate cut in the first half of 2024, money markets still have a 25-basis-point cut fully priced in for July.
($1 = 1.3537 Canadian dollars)
(Reporting by Ismail Shakil; Editing by Sandra Maler)
Lower home prices and declining interest rates on new fixed-rate mortgages are starting to translate into affordability gains in some Canadian cities, a Globe analysis has found.
While many Canadian cities have seen sizable home price drops over much of 2022 and 2023, soaring borrowing costs over that period have, until recently, wiped out any affordability gains for homebuyers. But with lenders lowering fixed rates on new five-year mortgages over the past two months, that’s beginning to change.
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The Globe and Mail compared the mortgage payments homebuyers would have to carry if they purchased an average-priced home in their local market today to what they’d have paid if they’d bought in February, 2022, right before the Bank of Canada began its rate-hiking campaign. In a handful of housing markets, those payments would be lower, the numbers show.
The analysis shows it currently takes a home price decline of around 25 per cent or more from February two years ago to produce a mortgage payment decrease of more than $100 a month.
But the good news for homebuyers is limited. The gains are typically modest and concentrated in mid-sized cities and smaller communities in Ontario, which saw the sharpest housing corrections since early 2022.
And in the absence of sizable increases to the housing supply, any affordability gains are likely to be short-lived, with buyer demand bound to quickly push up prices, CIBC Capital Markets deputy chief economist Benjamin Tal said, commenting on The Globe’s analysis.
“What we’re seeing now is a situation in which we are planting the seeds for some increasing prices down the road,” Mr. Tal said.
The Globe calculated mortgage payments in more than 20 markets tracked by the Canadian Real Estate Association. The analysis relies on estimates of the price of a typical home in February, 2022, and in December, 2023, the latest available data.
To calculate mortgage payments at the peak of the pandemic housing boom, The Globe used a rate of 2.94 per cent. That was the lowest nationally available five-year fixed rate for purchases that don’t require mortgage default insurance in mid-February of 2022, according to MortgageLogic.news.
For an estimate of mortgage payments for today’s buyers, The Globe used a 5.29 per cent rate, the current lowest five-year fixed rate. The calculations assume buyers have a 20-per-cent down payment and will take 25 years to pay off the mortgage.
Those steep price declines are mostly found in Ontario. In Cambridge, for example, where prices have dropped 28 per cent from their peak, a buyer today would likely face monthly mortgage payments around $300 lower for a typical home. Buyers will find similar conditions in London, Waterloo, Hamilton and Oakville.
The province also dominates the ranking of markets where prices have fallen by around 20 per cent, which currently produces mortgage payments that are roughly equal to those buyers faced two years ago, before the central bank began raising rates. Chilliwack, B.C., is the only city outside of Ontario among those analyzed to also exhibit these conditions.
In much of the rest of Canada, buyers are still contending with higher mortgage payments. In Halifax, for example, the monthly payment on a typical home is still roughly $400 higher, even though home prices are 6 per cent lower.
In Calgary, where prices are up 10 per cent since February, 2022, a new buyer would have to shoulder nearly $1,200 more a month in mortgage payments for an average home.
But for many buyers, strong wage growth over the past two years should help soften the financial pinch, said mortgage analyst Robert McLister, who runs MortgageLogic.news.
“You would find that the total affordability is not as bad as it would seem in some places if you factor in that,” Mr. McLister said.
And lower home prices mean down payments can go further to reduce the size of a mortgage and its monthly instalments.
With borrowing costs still elevated, Mr. Tal expects only a modest revival in housing activity this spring. But the affordability gains realized so far are so little that even small price increases would erase them in the absence of further interest-rate declines, he said.