Market recovery in Canada will be moderate and somewhat unpredictable over the next few years
Author of the article:
Murtaza Haider and Stephen Moranis
Published Jul 17, 2024 • Last updated 1 day ago • 3 minute read
The housing market in Canada has slowed because people who would be buying homes now purchased them during the pandemic to take advantage of ultra-low interest rates. PHOTO BY POSTMEDIA
The Canadian Real Estate Association (CREA) is the most data-rich entity in Canada, monitoring housing sales and prices. CREA has revised its latest housing market forecast, lowering its expectations for sales and price appreciation.
Earlier in April, CREA was hopeful of a resurgence in markets because of the anticipated interest rate cuts. Those hopes have since been tempered by the latest sales data, along with consumer surveys confirming the lack of buyer response.
In early June, the Bank of Canada reduced its prime rate by 25 basis points. However, this initial rate cut, coming as it did after 10 successive rate hikes, was insufficient to persuade sidelined buyers to re-enter the housing market. While additional rate cuts are anticipated, uncertainty around their magnitude and timing continues to contribute to market instability.
CREA projects that 472,395 homes will be sold through the Canadian MLS Systems in 2024. Although this forecast represents a six per cent increase from last year’s volume, it falls short of earlier projections. Furthermore, the anticipated transactions for 2024 remain below the long-term trend, as indicated by the 10-year moving average. The moderate sales growth forecasts extend into next year, as CREA estimates 501,902 sales in 2025.
On the surface, CREA’s forecasts might suggest a struggling market. However, if one excludes the COVID-19-induced housing frenzy from the equation, the sales volume in 2024 and 2025 would align with the longer-term average sales volume.
In other words, the pandemic-driven sales surge distorted the market, mainly due to the phenomenon of forward buying — whereby consumers accelerate their purchases to take advantage of time-limited incentives, such as significant discounts or low interest rates. By 2019, an average of 500,000 dwellings were bought and sold annually through the MLS system. However, the drastic interest rate cuts in 2020 and 2021 led to a significant acceleration in sales, adding an estimated 238,000 transactions that most likely would not have otherwise occurred.
Dr. Dogan Tirtiroglu, a professor of real estate at the Ted Rogers School of Management at Toronto Metropolitan University, explains that housing is a durable good. The heightened homebuying in 2020 and 2021 partially exhausted the demand from a relatively finite pool of prospective buyers. Consequently, the anticipated rate cuts may not significantly boost sales, as many of those who would have purchased homes in 2023 or later had already done so in 2020 and 2021 to take advantage of the ultra-low mortgage rates.
Despite CREA’s reduced sales forecasts, by the end of 2025, there will still be an additional 188,865 transactions in the system, driven by the ultra-low mortgage rates of 2020 and 2021. This indicates that the recent slowdown in sales has not been enough to counterbalance the surge in transactions from those years.
Since there is finite demand for homebuying and homeownership within a given period, excessive purchasing in an earlier period can depress sales in subsequent ones, even with a growing population of potential buyers. This phenomenon partially explains the current slowdown relative to the peak activity observed during the early pandemic years.
While sales activity shows volatility, housing prices tend to be more stable. CREA reported that average house prices in 2023 decreased by 3.6 per cent. Forecasts for 2024 show an annual increase of 2.5 per cent, followed by a further increase of five per cent in 2025.
Regional differences in price appreciation are linked to changes in demand driven by economic recovery levels. Housing prices in Alberta are expected to grow by nearly eight per cent annually this year and next. In contrast, relatively modest price gains are forecasted for Ontario, Canada’s largest provincial housing market.
The uncertainty surrounding the timing and magnitude of future interest rate changes, coupled with the finite capacity for homebuying within specific intervals, suggests that the housing market recovery in Canada will be moderate and somewhat unpredictable. Significant short-term fluctuations in either direction are unlikely.
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