The impact of interest rates is being felt, but so too will the relief when they begin to ease
Canadian homeowners may see the value of their prized assets ease over the coming months as the impact of interest rates continues to be felt.
But this dip in values could be short-lived if growing expectations that the Bank of Canada will start to ease back on rates from spring 2024, giving the housing market a boost just as a key period of buying begins.
TD Economics economist Rishi Sondhi says that prices could fall 5% through the last quarter of 2023 and into the first three months of 2024. Sales could be down 10%.
However, rate cuts from the BoC would see sales and prices heading higher again from the second quarter onwards. This would require the unemployment rate to rise though, easing back wage growth to allow inflation to fall to closer to the bank’s 2% target.
While this should all mean that the housing market is moving nicely in the second quarter, Sondhi says that affordability is not likely to show any real improvement until 2025 in most provinces, which will restrain home sales below their pre-pandemic highs.
There are some risks to this outlook though.
“There's the potential for job markets to deteriorate by more than we expect. If this risk were to materialize, it would have the largest impact on our forecast through it's potential to push housing supply higher while simultaneously weaking demand,” said Sondhi, adding that a more aggressive stance by the BoC which takes rates higher than anticipated would also derail this outlook.
Investor activity
Sondhi’s view on investor activity in the Canadian housing market is that it’s curious given that these owners are generally more indebted than owner-occupiers and rates have exacerbated this.
It appears that investors are remaining in the market and will doubtless be considering their housing assets as long-term investments.
“Still, it's fair to wonder how much steam this demand has, especially as a typical new investor would likely be deeply cashflow negative in a jurisdiction like the GTA, even with the sharp rise in rents,” Sondhi questioned, suggesting that investor share of homebuying could fall back from its current multi-year high.
The full report is on the TD Economics website.
