Is Affordability In Sight for the Canadian Housing Market?

Affordability is a hot topic in the Canadian housing market. Rising interest rates, intended to combat inflation, are significantly impacting homebuyers and, in turn, sellers. The good news is that home prices have begun to moderate from their record highs. The bad news is that the higher cost of borrowing is offsetting any savings. It is no surprise that affordability is such a focus for Canadians. Even before the 2020-2021 housing boom, affordability had been a chief concern, particularly in major urban centres. Of course, since the pandemic-era surge in home prices, housing affordability has become paramount for Canadian households.

This past fall, a RE/MAX Canada study found that affordability is playing an integral role in prospective homebuyers’ plans. From the rising-rate environment to a scarcity of housing inventory, a majority of millennial and Generation Z buyers are adjusting their plans to acquire residential properties.

How will this impact activity in the Canadian real estate market in 2024? Industry experts say that the data in the home stretch of 2023 might offer an indication of what will happen in the fresh calendar year.

A Look Into the 2024 Housing Market

The RE/MAX survey, conducted by Leger in the fall, found that 33 per cent of Canadians who are interested in purchasing a home or putting their property on the market in the next 12 months will take a wait-and-see approach to determine how interest rate changes will play before making that giant leap.

However, there is a divergence between the broader population and younger homebuyers. While more than half (51 per cent) of Canadians say that further rate hikes will not alter their personal financial situation or affect their real estate plans, younger Canadians (47 per cent of Generation Zers and 52 per cent of millennials) are more likely to adjust their plans on what the Bank of Canada (BoC) does over the next year.

At the same time, a lack of housing stockpiles remains top of mind for many Canadians. Once again, it is the younger generation that is more likely to alter their homebuying plans due to a lack of options in the open market.

Are these concerns weighing on demand?

According to the Canadian Real Estate Association (CREA), national home sales tumbled 5.6 per cent on a month-over-month basis in October, while the national average sales price rose 1.8 per cent year-over-year. Despite slowing sales activity, prices are rising, and this has to do with fewer newly listed properties, which dropped 2.3 per cent in October.

That said, there are mixed views on what will transpire heading into the new year.

“If the fall market is an early indicator for 2024 activity, we may see a very active first quarter as buyers and sellers take advantage of easing prices into the earlier part of next year,” said Christopher Alexander, the president of RE/MAX Canada, in the report.

However, Shaun Cathcart, CREA’s Senior Economist, says there might not be any rebound until the historically busy spring buying season.

“We know housing demand is extremely high all across the country, but October’s resale data was further confirmation that it probably won’t be manifesting itself in the existing home market for the remainder of this year and likely not until spring 2024 at the earliest,” said Cathcart in a statement. “The rebound in activity this past spring was an example of what we might see next year. It will really come down to whether the Bank of Canada has to increase interest rates again or whether by next March it’s simply a matter of how soon we’ll see the Bank make its first cut.”

As part of RE/MAX Canada’s five-year housing outlook, Benjamin Tal, Deputy Chief Economist, CIBC, noted that there are several factors beyond interest rates that will impact housing affordability across Canada. “It’s the pace at which interest rates increase that poses a greater risk to the housing market and economy in the short-term. In the long-run, factors such as rising immigration levels putting further strain on demand, limited housing supply, supply chain hold-ups, and the shortage of skilled labourers will be the greatest hurdles in overcoming Canada’s housing affordability crisis.”

In the meantime, let’s take a look at some of the regional Canadian real estate markets.

Western Canada and the Prairies

Average residential sale prices are anticipated to rise between 0.7 per cent and 4.5 per cent in Western Canada and the Prairies, including Calgary, Edmonton, Winnipeg, Vancouver and Kelowna. Across the region, there is a blend of balanced and seller’s markets, although this will mostly depend on property types, locations, and price points.

Ontario

In the nation’s most populous province, the housing market will mostly be a seller’s market, with 53 per cent of real estate markets in Ontario to favour sellers. Forty percent are projected to be balanced, while seven percent will be buyer’s markets.

When it comes to home prices, they are forecast to rise between one percent and five percent, be it in the Greater Toronto Area (GTA), Sudbury or Lakelands West. It will all depend on inventories and interest rates in the fourth quarter of 2023 and in the early days of 2024.

Atlantic Canada

The Atlantic Canada real estate market is in the middle of a housing shortage. The housing sector in the Maritimes is also anticipated to be impacted by rising interest rates, particularly for buyers with lower price points in Halifax or Prince Edward Island and first-time homebuyers in St. John’s.

Average residential prices are forecast to tumble as much as two percent in Halifax and Charlottetown. But they are anticipated to jump three percent in Moncton and be flat in St. John’s. For the most part, the Atlantic Canada real estate market will be considered sellers’ markets.

What’s in Store for the Canadian Housing Market?

Ultra-low interest rates and low supply contributed to record-high price growth throughout the pandemic. But there are other factors to consider. As Benjamin Tal reminds us, “In the long run, factors such as rising immigration levels putting further strain on demand, limited housing supply, supply chain hold-ups, and the shortage of skilled labourers will be the greatest hurdles in overcoming Canada’s housing affordability crisis. These must all be addressed in order to help balance supply.”

Elton Ash, Executive Vice President at RE/MAX Canada, noted in a report earlier this year that the recent market moderation is overdue. “The shifts we are seeing in the Canadian housing market, with prices starting to ease across the country in tandem with softening demand and sales, are an overdue adjustment. A healthy housing market is characterized by price appreciation in the mid-to high-single digits, and many markets across Canada are re-entering that comfort zone.”

The country has slipped into a technical recession, and it remains unclear how much it will intensify or improve in 2024. Economists say that economic downturns generally generate strong rebounds, especially when the Bank of Canada (BoC) cuts interest rates. As a result, real estate could be one of the most solid corners of the Canadian economy.

Meanwhile, looking ahead, urbanization will be a significant boon to future housing demand, as Canada’s urban population is projected to grow by 10 million by 2050.

One key to easing the affordability crisis is more homes. Last year, a study by Canada Mortgage and Housing Corporation (CMHC) determined that the country needs approximately 3.5 million affordable housing units by the year 2030 to accomplish the federal government’s affordability objective. This is in addition to the 2.3 million new housing units already on track to be built by 2030.

Shifting interest rates, housing supply, and the state of the economy are all critical factors to monitor as we enter 2024 and see what the real estate market has in store.