It may be a new year, but it seems that Canadian real estate will face many of the same pressures it did in 2023. Interest rates and inflation will continue to be big-ticket issues in the year to come, as will the many facets of the housing crisis.

At the same time, experts seem to be in agreement that some semblance of relief is on the horizon. Forecasts released at the tail end of last year say that 2024 could bring long-awaited interest rate cuts, a degree of mortgage relief, and perhaps a more eventful spring housing market.

Interest Rate Relief Is On The Way

The Bank of Canada (BoC) made headlines in 2023 by raising the policy rate to a 22-year high of 5% in July. Even so, it was a quieter year for interest rates compared to 2022, with the BoC opting for just three rate hikes (and five rate holds) over the course of last year.

“The 2% inflation target is now in sight,” Bank of Canada (BoC) Governor Tiff Macklem said in his year-end remarks last month. “The economy is no longer overheated, and that is relieving inflationary pressures. Inflation has come down from just over 8% in the middle of last year to 3.1% in October. That’s significant progress.”

However, Macklem also cautioned that the bank needs to see “more downward momentum” in core inflation before it can consider lowering rates. Meanwhile, shelter inflation, which makes up over 40% of the core Consumer Price Index, remains stubbornly high against the backdrop of record population growth and a structural lack of housing supply, which have kept prices elevated even though buying activity has dropped.

Macklem told reporters in December that Governing Council has not yet taken further rate increases “off the table” or begun to discuss rate cuts. He also said it’s “too early” for the bank to consider cutting rates.

Still, with the latest inflation reading coming in at 3.1% (well below the 8.1% recorded in mid-2022), many economists are anticipating that the bank’s next big move will indeed be a rate cut. TD’s James Orlando and Desjardins’ Randall Bartlett forecast the first cut will come as soon as April, while RBC’s Clair Fan predicts a cut at some point in the second quarter of 2024.

Home Prices Will Slip, And Then Rally

Seasonality and higher interest rate realities culminated in a drop off in home-buying activity in the latter few months of 2023, and as such, Canadian home prices have been coming down since September. The latest figures from the Canadian Real Estate Association put the national average home price at $646,134 as of November.

In the early days of 2024, downward price pressure is expected to persist according to one expert. A recent forecast from TD warns that prices could slip as much as 10% from their third-quarter level in early 2024 due, in large part, to a “larger-than-anticipated” drop in sales coupled with a surge in inventory in both Ontario and BC’s real estate markets.

“However, some perspective is warranted. A 10% decline in average home prices would still leave them 15% higher than pre-pandemic levels,” TD’s forecast explains. “Our expectation that the Bank of Canada will be cutting rates towards the end of the second quarter of next year prevents a steeper decline.”

In light of supply shortfalls and Canada’s ever-growing population, the price correction isn’t expected to last long. Royal LePage forecasts that the national aggregate price of a home will edge up 5.5% on a year-over-year basis to $843,684 by the fourth quarter of 2024. The bulk of this price appreciation will be concentrated in the latter half of 2024, says the real estate company, and home prices are ultimately expected to come back in line with the pandemic peak observed in the first quarter of 2022.

Lower Mortgage Rates May Boost The Spring Market

The last few months of 2023 saw home-buying activity slow to crawl, and with both demand and prices down, many sellers were pushed to the sidelines. As such, the latest figures from CREA show that home sales dipped 0.9% both month over month and year over year in November.

CREA’s Shaun Cathcart said last month that many would-be sellers have been “resigned to hunker down” until 2024. He added that, depending on the timing of interest rate cuts, the Canadian housing market might be “somewhat more active” this spring than initially expected.

Current (and imminent) mortgage realities also bode well for the spring market. BMO Economist Robert Kavcic wrote in a recent note that borrowing costs may have already peaked now that the BoC’s tightening cycle seems to be in the rearview.

To his point, a number of lenders — including Equitable Bank, THINK Financial, and MCAP — dropped their five-year insured fixed interest rates below 5% in mid-December. Kavic notes that with five-year GoC yields having crumbled by around 115 basis points from the early October high, fixed mortgage rates will likely come down further as 2024 progresses. Variable-rate mortgages are poised to follow suit as the bank drops the policy rate.

Housing Starts Face Another Year Of Annual Decline

On the supply side, housing starts took a 22% tumble in November according to the latest figures from Canada Mortgage and Housing Corporation (CMHC). Though November’s reading was on the heels of a surprisingly strong run of starts observed in the months prior, CMHC's Kevin Hughes said that the drop-off in starts was an inevitable and anticipated product of “tighter economic conditions impacting construction timelines.” Hughes also foreshadowed slower start rates in the months ahead.

RBC’s Robert Hogue and Benjamin Richardson spoke to the expectation for starts in 2024 in a recent forecast, saying that challenges presented by labour shortages (particularly in the skilled trades), softer pre-construction sales in 2023, and record population growth will cause supply shortfalls to persist as the year unfolds.

According to RBC’s forecast, housing starts are expected to climb only slightly above 2023’s levels in 2024, and will be well outpaced by demographic demand.

BMO Economist Douglas Porter presents another take on the starts matter, saying in a recent note that BMO anticipates that overall starts in 2024 will sink lower than 2023’s levels, marking the third annual decline in a row and “running precisely counter to widespread calls for more-more-more supply.”

“When it comes to new home building, politicians propose, but markets dispose,” wrote Porter, adding that downcast starts activity would implicate housing affordability, causing it to deteriorate further from “already dreadful levels.”

Investors Will Have Reason To Reassess Buying Plans

Buyers of all types, investors included, backed away from real estate purchases as 2023 progressed, but one economist says that 2024 will bring reason to reassess purchasing plans across the board.

“The hurdle for investors to jump back into the market is probably higher than for end users. Expectations of price gains simply aren’t there the way they were earlier in the cycle (think pre-construction buyers), and the spread between cap rates and risk-free yields is still historically tight,” BMO’s Robert Kavcic wrote in a December 14 note.

“On the latter, we are seeing improvement now with prices down, rents rising and long-term bond yields falling in recent months, so we’re getting closer, but many investors probably still need to see some further adjustment.”

For those in the position to tap into real estate investing, separate reports from PwC Canada and Morguard have said that the multifamily asset class (which is inclusive of niche assets such as student and senior housing) and the industrial class will present the best opportunities for real estate investors in 2024 as these are the segments that will be both undersupplied and high in demand.

PwC additionally speaks to the strength of the county’s retail sector, noting that “sentiment around the retail asset class overall has improved significantly, especially when it comes to grocery-anchored developments that serve communities seeing strong population growth.” The report adds that neighbourhood and community shopping centres are ranking “particularly high for investment prospects” as we enter 2024.

Real Estate News