Housing affordability challenges persist despite lower rates
Canadian home prices will continue to rise in the coming years despite expectations of multiple interest rate cuts, according to a survey of analysts. Improving affordability conditions, while still stretched, are not expected to significantly boost demand.
Analysts polled by Reuters forecasted that home prices will rise by just 1% next year, following a slight 1% decline so far in 2023. Even though the central bank has implemented two rate cuts since June, bringing rates below 7%, these reductions have done little to reignite demand in the housing market.
"Interest rate cuts have so far failed to stimulate the housing market, although the sharper drop in borrowing costs... will lend more support," Olivia Cross, economist at Capital Economics, told Reuters. "Even after the latest drop in borrowing costs, affordability is far more stretched than prior to the pandemic. Accordingly, we expect price gains to be modest."
The Canadian housing market saw home prices surge nearly 55% during the pandemic, but prices have only fallen 14% since their peak in early 2022, despite significant interest rate hikes by the Bank of Canada. Even with the recent rate cuts and further reductions expected this year and into 2025, the housing market has been slow to recover.
Analysts predicted home prices will increase by 2.8% in 2025 and 3.0% in 2026, with the pace of growth staying relatively muted. These forecasts are largely unchanged from earlier predictions made in May and are expected to trail behind inflation, projected at 2.5% this year.
One key factor weighing on home prices is the balance between supply and demand. Housing starts jumped 16% in July, and new listings were up nearly 1%, but home sales dipped by 0.7%, according to data from the Canadian Real Estate Association (CREA).
Analysts suggested that increased supply could continue to put downward pressure on prices, especially as more homes come to market.
A significant portion of that increased supply may come from homeowners facing rising mortgage costs as they renew their loans. In Canada, mortgages are typically renewed every three to five years, unlike the US, where fixed-rate loans can last for 15 to 30 years.
With about $300 billion in mortgages coming up for renewal next year, many homeowners could feel the pressure to sell if borrowing costs rise further.
Read more: Why there's room for optimism for the mortgage market
"More interest rate cuts are likely to stimulate homebuyer demand across the country. But, we expect this will be gradual," RBC economist Rachel Battaglia said. "Significant reductions in rates will be needed to make a noticeable difference in ownership costs, especially in Canada's priciest markets."
Despite the challenges, some signs point to improving affordability for first-time homebuyers. Nearly all the analysts surveyed agreed that conditions are expected to improve, but the extent of that improvement remains unclear.
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
