December 14, 2023 | 10:19
Canadian Housing: Looking to 2024 after a Soggy Fall
Existing home sales dipped 0.9% in November (seasonally adjusted) and were also down a very modest 0.9% from year-ago levels. That leaves sales volumes still roughly in-line with the low end of the pre-COVID range. So demand has indeed collapsed from the low-rate frenzy of 2021 and early 2022, but demographic demand is keeping activity from falling much further.
Meantime, new listings were down 1.8% in November, another modest move down after rising sharply for six months through the summer and early fall. New listings are still outpacing sales over the past year, up 10.5%, but the flow has steadied for now.
That allowed the sales-to-new listings ratio to firm slightly to 49.8% in November, although that is still well down from 68% in April (amid the mini market bounce). For comparison, the 10-year average is 61%, and these latest results are still near the lowest (i.e., softest) readings since the 2009 recession. Meantime, the months’ supply of homes available at the current sales pace stepped up again to 4.2 (a few ticks below the past-decade average)
These dynamics are pulling prices down further, with the national benchmark falling 1.9% in November, or the steepest decline since July 2022. From a year ago, the benchmark is still up 0.6%, while the average transactions price is up 2.0%. We’re still seeing quite a bit of price weakness in the GTA and (moreso) Southern Ontario; much less so in B.C. and Quebec; while Calgary prices are moving steadily higher.
Some Thoughts for 2024
Here are some key questions for Canadian housing heading into 2024:
Will affordability finally improve? Canadian housing affordability is currently the worst it has been since the 1980s, as exuberant price gains were subsequently met by a surge in mortgage rates. Since the peak, lower prices have been offset by higher borrowing costs from an affordability perspective, yielding no relief. But, as the cycle turns and rate cuts eventually meet these lower prices, affordability should benefit. Somewhat. The level is still a long way from where it was before the pandemic…
Have mortgage rates peaked? Borrowing costs could have already peaked. The Bank of Canada looks very much done their tightening cycle, and we expect that we could see 100 bps of rates cuts in 2024, largely in the back half of the year. In the fixed-rate space, 5-year GoC yields have now crumbled by about 115 bps from the early-October high, which should continue to pressure fixed mortgage rates down into 2024.
Should we lock in? First, we're not in the financial advice business. From a macro perspective, the 5-year fixed is currently the lowest available for most borrowers, but one should be mindful of the cost/benefit at what could soon be a turning point in the rate cycle.
Will prices bottom for real this time? We see some further downward pressure on prices in some markets through the spring of 2024 (namely Ontario), but the combination of pent-up demand and easing borrowing costs could finally put a floor under the market. At the same time, market psychology will surely improve given that we have a clearer view of what the worst-case borrowing-cost conditions look like. This, of course, all assumes that the economy holds up relatively well (i.e., stagnant growth, but no deep recession or widespread job loss). That said, the path back to the 2022 price peak will be a long one in Ontario (think years, not months).
Will investors return? 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. 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.