By Rob Pilon: 

 

Will home prices be going up in 2024?

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That partly depends on economic factors like the direction of unemployment, wage growth, GDP, inflation, Bank of Canada rate cuts & bond market yields, both of which directly affect mortgage rates, affordability – i.e. the ability to qualify for a mortgage, level of inventory of resale homes for sale, etc., AND buyer sentiment (emotional reactions to the above economic factors that affects buyer action or inaction).

On January 24th, 2024, the Bank of Canada (BOC) held its policy interest rate at 5%. It’s now been 5% for five straight policy rate announcements going back to July 12th, 2023 - that’s just over 6 months.

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At January 24th’s policy rate announcement, Tiff Macklem, governor of the BOC, was both dovish and hawkish. Dovish by promising no more rate increases going forward, while remaining hawkish by stating that rates will be lowered only when inflation is well on its way to 2% (currently at 3.4% as of December 2024). Macklem expects inflation to be resilient through the first half of 2024 with up and down fluctuations throughout the year. Many economists predict numerous BOC rate drops of 0.25% each in 2024, beginning as soon as March or April, while others think rates won’t reduce until the BOC is sufficiently convinced systemic and entrenched inflationary pressures are clearly and irreversibly defeated, which will take time, certainly past the spring of this year. Macklem is very concerned about reducing rates prematurely as was done in the 1970’s, causing inflation to spike for a second time back then.

 

It's clear high mortgage rates and highly elevated rents, both known as shelter costs, have contributed greatly to inflation, along with food costs. It’s been reported that inflation is actually at only 2.1% if shelter costs are removed from all other inflation components. However, Tiff Macklem claims there are many other goods and services that remain intractably inflationary, not just shelter costs. Tiff constantly reminds the media that the BOC’s mandate is to restore price stability to many more components besides shelter costs. The BOC is not tasked with reducing mortgage rates, stimulating the housing market, or making homes more affordable for Canadians. Its role is to reduce inflation across the board to around 2%. Period.

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David Rosenberg, who heads up Rosenberg Research and is respected by his peers for his contrarian insights regarding financial and investment markets, expressed in a recent Globe & Mail article and in a BNN interview, that the BOC should begin lowering rates as soon as possible because wage growth is slowing due to rising unemployment partly because businesses are easing up on hiring and scaling back on expansion. Corporate sales are reducing as consumers begin to cut back spending due to inflation, expensive mortgage renewals and looming mortgage renewals in 2025 and 2026, and higher debt servicing costs on personal credit instruments. David believes there’s a good chance the Canadian economy is already in a technical recession (the economy in the 3rd quarter of 2023 contracted 0.27%). 4th quarter 2023 GDP will be announced on February 29th, 2024. We’ll know then if we had two back-to-back contractions, which constitutes a recession, even if it’s mild.

 

Mr. Rosenberg, and other like-minded economists, contend that delaying rate cuts will deepen the recession if rates are left too high for too long. This will cause greater job losses and corporate retrenching by way of reduced outputs (less manufactured products, especially as consumer demand for their wares continues to diminish). Prolonged monetary austerity will also hurt Canadians who carry extremely high levels of debt vis-a- vis their counterparts in wealthy developed countries. If the BOC maintains high rates for too long, they may be forced to make more aggressive cuts in the future if the economy begins to stall.

 

But no one knows how 2024 will ultimately play out. The level of uncertainty is pervasive. There are many views on what the spring real estate market will be like. If rate cuts come early, there may be a temporary surge in price appreciation, or not. David Rosenberg feels that even if the BOC rate was 3.5% instead of 5%, it could lead to an irrational escalation in the housing market which would not be sustainable in the long run due to consumers’ high debt levels, existing high home prices, and affordability barriers even at a bank rate of only 3.5%. However, I would not be surprised if the spring or summer market generated a baby-bull run. Let’s call it a calf-run. There are tens of thousands of eager buyers who’ve been waiting on the sidelines over the last 2 years. But if rates are cut in the 2nd half of 2024, it’s possible the mini-run will occur in the summer or fall market this year with a non-descript spring market in its wake. Time will tell.

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Here are a range of predictions for the 2024 GTA resale housing market from various stakeholders:

 

Re/Max: "The Greater Toronto Area (GTA) is anticipating a slight decline of 3% in average residential prices, while Durham Region is anticipating a decline of 5%. Prices are anticipated to remain unchanged in Mississauga and Brampton. Prices in Oakville should go up 7%. The GTA market is anticipated to gain balance in 2024 but is also expected to favour buyers at certain points of the year. Both cost of living and interest rates are the most prominent factors impacting Ontario markets. These factors are leading many Canadians to become resourceful and focus their home-buying search on properties that can accommodate additional tenants, as a means to offset mortgage costs and ongoing affordability challenges.”

 

Royal LePage: “In the Greater Toronto Area, the aggregate price of a home in the fourth quarter of 2024 is forecast to increase 6.0 per cent year over year to $1,198,012. During the same period, the median price of a single-family detached property is expected to rise 7.0 per cent to $1,481,950, while the median price of a condominium is forecast to increase 5.0 per cent to $754,845. ‘There is a lot of uncertainty surrounding Canada’s economy and the real estate market these days, and that is especially true in the major centres like Toronto. What is certain is that Canadians need housing, they value home ownership and most are willing to prioritize buying a home over just about anything else,’ said Karen Yolevski, chief operating officer, Royal LePage Real Estate Services Ltd. ‘We know there are still buyers on the sidelines waiting for interest rates to come down.’ ”

 

Media interviews: “There's general consensus among those experts that sales volumes will remain sluggish in the first part of 2024, until or unless mortgage rates come down significantly, or sellers start accepting lower bids.”

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Ron Butler of Butler Mortgage: "The general trend we're probably going to see is one of continued stagnation. I doubt that mortgage rates will drop quickly enough or low enough to jolt reluctant buyers off the sidelines in the early part of 2024. Buyer sentiment will have a significant impact on prices in 2024. If you feel that these prices are really too high and that they will come down, no matter how motivated you are to buy a home, you will have a tendency to wait and see. It'll turn around eventually, but right now I think that buyer sentiment [against current high prices] is entrenched. I expect to see many investors trying to sell off small condos in urban centres because their plans to turn them into short-term rentals [like Airbnb’s] fell through.”

 

John Pasalis, president of Realosophy Realty Inc: “Sellers have yet to bring down their asking prices deeply enough to offset the increased borrowing costs that buyers face. It's the combination of these high prices and high interest rates that is keeping a lot of buyers out of the market right now. Also, as condo mortgages come up for renewal, it's going to be harder to afford those units. Over the next 12 to 18 months, we'll probably see more condo investors unloading properties just because they can't afford to have so much debt at today's interest rates.” 

 

TD economist Rishi Sondhi: “Sales volumes are to remain relatively low in 2024, although better than what the numbers were in 2023. We think that the bottom [of the number of sales] has probably been reached. Sales levels were just so darn low in Ontario [in 2023]. It's hard to go lower from there. We're expecting housing starts to fall in 2024. The evidence is based on a drop in sales in the pre-construction market over the past two years after mortgage rates began to climb. We’re not forecasting a collapse in new home construction, partly because of expected growth in purpose-built rental housing, fueled by the provincial and federal governments exempting those projects from HST.”

 

Daniel Foch, director of economic research for RARE Real Estate Inc: “My expectation is that if interest rates come down in a meaningful way (1% to 2%) by the end of 2024, it’s because our economy is in a severe recession, which does seem like a relatively likely path for the Canadian economy. I think most economists are reluctant to paint this picture, however, Benjamin Tal of CIBC states that if the Bank of Canada has to choose between inflation and a recession, they’ll choose a recession every time. In the past 100 years – recession always gets inflation back down to the neutral range, and it takes about 16 months to do so on average. This is the scenario I expect – a recession through most of 2024, and rate cuts in response to it by the end of the year.”

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Regarding the shortage of “properties for sale” (aka inventory), we’ll see an uptick in listed homes as mortgage rates reduce. High rates are preventing many homeowners from moving up because adding another $500,000 to their current low-rate mortgage (by porting, blending and extending) is too expensive at present. More inventory will also hit the market in 2025 and 2026 when 50% of lower-rate mortgage terms expire and mortgages will be up for renewal. As owners approach their renewal deadline, many will sell to downsize to a more modest home with a smaller, more affordable mortgage.  And ominously, if market prices take a serious turn for the worse and property values begin to plunge, homeowners will be tempted to list and sell before losing too much equity, especially if a severe recession takes hold and everyone is guarding their dwindling net worth. We saw something similar to this in 2017 (sans the recession) when the multi-year bull run came to an end in the spring of 2017. The number of listings exploded because homeowners saw the writing on the wall and wanted to cash out to preserve their equity before the market really soured. Ironically, the stampede of new listings coupled with waning buyer demand exacerbated the plunge in prices (high supply combined with low demand always brings downward pressure on prices, no matter what commodity).

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My last thought comes from a sobering lesson taught during the booming spring market of 2023. Home prices rose 15% from January to May 2023 which shattered most real estate predictions coming into 2023. Prices invariably fell in the summer and fall of 2023 due to rising mortgage rates. But my point is no one foresaw such aggressive buyer demand in spring 2023 given the collapse in sales, prices and buyer interest in the 2nd half of 2022 after the market peaked in February 2022.

 

So why did prices shoot up in the spring of 2023? Here’s why: 3-year fixed mortgage rates were 4.79% in January 2023 and fell to 4.70% in May 2023. Similarly, 5-year fixed mortgage rates were 4.39% in January 2023 and rose only slightly to 4.29% in May 2023. Also, 5-year variable rates remained steady at 5.55% from February 2023 to June 2023 because of the BOC's rate hold from January 26, 2023 to June 6, 2023. Think about it. Buyers were willing to drive prices up to an average of $1,195,521 by May 2023 with 3-year fixed rates of 4.70% to 4.79% and 5-year fixed rates of 4.29% to 4.39% and variable rates of 5.55%. That’s a fact, not an assumption or a baseless prediction. What was the average price of properties in December 2023? Only $1,084,692! And May 2023’s average price? $1,195,521! That’s a 10.21% spread in average prices. Therefore, here’s what we can reasonably extrapolate about future price movements going forward based on the above: In 2024, buyers will be willing to pay an additional 10.21% more for a property above today’s prices IF

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• 3 year fixed rates fall to 4.70%/4.79% from today’s 3 year fixed rate of about 5.84% (i.e. 3-yr fixed rates fall 1.14%), AND/OR

• 5 year fixed rates fall to 4.29%/4.39% from today’s 5 year fixed rate of about 5.20% (i.e. 5-yr fixed rates fall 0.90%), AND/OR

• variable 5 year rates fall to 5.55% from today’s variable rate of about 6.67% (i.e. variable rates fall 1.12%)

 

Simply put, buyers have demonstrated from last spring’s market that they’re willing to pay 10.21% more for what a house is worth today IF mortgage rates will fall approximately 1% from current mortgage rates. Granted, this projection doesn’t factor in a mild to severe recession or different inventory scenarios in 2024 compared to spring of 2023, nevertheless, it’s something to tuck away in the back of your head throughout the year.

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Anecdotally, very recent sales from January 1 to 15th in 2024 have increased 47% over the same period in January 2023. Furthermore, January 2024 property viewings are up from December 2023. Many “Open Houses” are well attended, and Offers are being made, but buyers refuse to drastically overbid in multiple Offer scenarios. Inventory remains tight. We’ll see how buyer and seller sentiment and economic development evolves over the next couple of months.

 

Below is a chart and tables for you to analyze: