By Indradip Ghosh
According to analysts polled by Multibagger, home prices in Canada are expected to barely rise in 2024 and only modestly in the coming years, despite anticipated interest rate cuts. Affordability is improving but remains stretched in Canada's interest rate-sensitive housing market.
Despite a surge of nearly 55% during the COVID pandemic, average prices have only declined by 14% from an early 2022 peak, even after 475 basis points worth of Bank of Canada rate hikes through July 2023.
Although housing affordability is currently at its worst since 1990, two 25-bps rate reductions since June, with more expected in 2025, have not significantly boosted demand, despite some signs of improving supply.
Analysts predict that average Canadian home prices, down 1% this year, will rise approximately 1% in 2024, lagging behind overall inflation expected to be 2.5% this year. Forecasts suggest prices will climb by 2.8% and 3.0% in 2025 and 2026, respectively.
"Interest rate cuts have so far failed to stimulate the housing market, although the sharper drop in borrowing costs will provide more support," said Olivia Cross, a North America economist at Capital Economics.
Improving supply and weak demand may put downward pressure on prices in the coming years. Housing starts rose by 16% in July, but home sales fell by 0.7%, indicating a potential oversupply in the market.
More Canadians are expected to list their properties for sale as they face mortgage renewals with rising borrowing costs. Roughly C$300 billion ($222.4 billion) worth of mortgages will come up for renewal next year.
While all but one analyst believe that purchasing affordability for first-time homebuyers will improve in the coming year, the impact remains uncertain. Some respondents suggest that significant rate reductions will be necessary to make a noticeable difference in ownership costs, especially in Canada's priciest markets.
High house prices could further strain rental markets, potentially causing rents to rise faster than home prices over the next few years.
Analysis:
In summary, despite expectations for more interest rate cuts, home prices in Canada are forecasted to see minimal growth in 2024 and modest increases in the following years. Affordability remains a key concern, with analysts suggesting that significant rate reductions may be needed to make a substantial impact on ownership costs. The housing market is expected to face challenges due to improving supply and weak demand, potentially leading to downward pressure on prices. For consumers, this could mean better affordability for first-time homebuyers but continued strain on rental markets.