Spring resurgence possible – but unlikely, says RBC economist
Last spring, the national housing market unexpectedly gathered pace amid positive language on interest rates from the Bank of Canada – but while a repeat can’t be ruled out in 2024, it’s still likely that an uptick in market activity will only begin in the second half of the year.
That’s according to Royal Bank of Canada (RBC) assistant chief economist Robert Hogue (pictured), who told Canadian Mortgage Professional that prospective homebuyers are largely set to wait until the central bank’s first interest rate cut before stepping into the market.
“It’s always possible that the market may act the way it did a year ago, when just the expectation that the Bank of Canada was done and likely to cut rates in relatively short order got the market going in the spring of 2023,” he said.
“We wouldn’t necessarily rule that out, but I think the market has probably learned the lessons from a year ago and might prefer to wait until we actually see those cuts before a critical mass of buyers makes their way to market.”
RBC’s recently released housing market outlook for 2024 indicated that pent-up demand could “heat things up in a hurry” once the Bank of Canada lowers interest rates for the first time, although steep affordability challenges are likely to continue weighing down on would-be buyers.
An upswing in homebuying activity may become increasingly visible as the year progresses, Hogue told CMP. “We would not be surprised to see perhaps small waves of buyers making their way into the market in succession, and those waves would probably accelerate over the second half of this year and probably more so in 2025,” he said.
How would the Bank of Canada react to a strong spring market?
That central bank pause on rate hikes early last year was a key reason behind the strong spring housing market, with the Bank moving swiftly to pour cold water over the resurgence by increasing rates twice more during the summer.
It’s less apparent what the Bank’s reaction to a spring market uptick would be this time around, Hogue said, with its clear priority bringing down the core measures of inflation.
Despite the central bank's silence on the mortgage market outlook, CIBC Chief Economist Benjamin Tal notes the impact of upcoming mortgage renewals with higher interest rates in 2024. https://t.co/SORqGpRbUq#mortgageindustry #industrytrends #mortgagemarket #interestrates
— Canadian Mortgage Professional Magazine (@CMPmagazine) February 1, 2024
“Those have not progressed,” he said. “Lately, they’ve kind of stagnated a little bit. And I think it will continue to focus on those. It knows as well that it has some direct and indirect effect on inflation itself with the level of interest rates, because shelter costs are one of the major contributors to high inflation at this stage.
“So it knows that once it starts cutting, it will relieve some of that inflationary pressure just because of the math of how this CPI [consumer price index] is calculated. I’m not convinced that an uptick in the [housing] market would sway the Bank of Canada one way or another, but it certainly would be one of the factors they would look at.”
Sales activity to pick up, grounds for positivity on supply outlook
The resale market will be a “little busier” this year compared with 2023, according to RBC’s outlook, with activity expected to increase at a 9.2% clip and hit 484,400 units sold by the end of the year.
That would mark a welcome recovery for the market, even if it would only partially reverse the enormous declines witnessed in 2022 (25.1%) and last year (11.1%).
There’s some room for optimism on the supply front, too, with more owners likely to list their properties as a result of better sales prospects and potential mortgage renewal payment shocks.
“When prices stabilize and move up, it will probably attract more sellers, becoming a more auspicious place to sell a home,” Hogue said, “and mortgage holders whose terms are expiring… could lead some to sell their property.
“So the combination of both in our view is likely to bring more sellers to market, with more supply as demand picks up keeping the market in balance and therefore kind of mitigating the upward price pressure that may build during the recovery.”
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