Focus
January 10, 2025 | 13:59
Housing Outlook: A Long Way Home
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Housing Outlook: A Long Way HomeThe Canadian housing market should post modest sales and price gains this year, but don’t expect another exuberant takeoff. Changing secular forces also suggest it’s still a long way back to the 2022 highs. |
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The Canadian housing market should firm modestly this year, but it’s still a long way back to the 2022 highs. Activity and prices have recently improved alongside Bank of Canada rate cuts, and that moderate upward momentum should continue through 2025—but we don’t expect another exuberant takeoff. Nationally, we see sales volumes rising 12% for the calendar year versus depressed prior-year levels (Chart 1). The benchmark home price looks to rise a modest 4%, as still-challenging affordability and investment calculus will keep the rebound in check. Housing starts are poised to soften somewhat alongside weaker presale market conditions and a downturn in population growth, although the level remains robust. |
Regionally, we could see the significant outperformance of Alberta and Atlantic Canada step back, while more beaten-down markets in Southern Ontario and B.C. recover. That said, we expect meaningful performance discrepancy within the major cities, especially Toronto, depending on property type. Single-detached housing remains scarcely supplied and well bid by young families; yet the condo market is dealing with a flood of completions, much of which are investor-owned and will be flipped onto the resale market. Look for condo prices to struggle in 2025 even if the single-detached market improves further. Here are some key market themes and forecasts as we move into the 2025 selling season: Mortgage Rates: Is What You See What You’ll Get?There is scope for some further Bank of Canada easing in 2025, but most of the rate-cut cycle is complete. We officially see 75 bps of rate cuts this year spread out through September. Importantly, the market has long priced this easing cycle into 3- and 5-year fixed mortgage rates, which have been sitting in the low-to-mid-4% range. The market is currently pricing in roughly 50 bps of Bank of Canada easing in 2025, which suggests that these fixed rates could be bottoming out. There is room for variable rates—currently around 4.7%—to test the 4% level (Chart 2), which would be an important psychological and valuation barrier, but the Bank will have to continue easing. Suffice it to say that, barring a major disruption on the macroeconomic front (e.g., a real risk of significant tariffs), mortgage rates of around 4% should be the norm for some time. Meantime, new mortgage rules that took effect on December 15, 2024 should incrementally ease conditions into the spring season. Most notable are an increase in the price cap for insured mortgages, from $1 million to $1.5 million, which effectively reduces downpayment requirements in that price range; and an extension of 30-year amoritizations to all first-time buyers (as well as buyers of new homes). Given that most low-end single-family homes and larger (e.g., 2+ bedroom) condos in the bigger cities have pushed into this price range, we should see some impact. Valuations Still a ChallengeMore Bank of Canada easing and easier mortgage rules sound great. But, these changes are helping to push valuations back into manageable territory rather than making them outright attractive. Let’s look at it from the perspective of a new buyer and then an investor: For a new homebuyer, affordability is still restrictive, but mortgage rates below 4% should allow more households to stretch into the market (Chart 3). In fact, if we plug 3.9% mortgage rates and a 30-year amortization into our affordability calculator, we get back into the realm of what was sustained pre-pandemic, assuming prices remain at current levels. In other words, if the interest rate outlook is correct, and incomes continue to grow at a solid clip in excess of inflation, there’s still only room for prices to rise modestly without again running into affordability constraints. For investors, the arithmetic surrounding cap rates, borrowing costs and risk-free returns is still not compelling, although not the complete turnoff it has been over the past year. Expectations of outsized price growth have also vanished. |
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From a cash flow perspective, sub-4% borrowing costs could crack open the door. Using a Toronto investment condo as an example (results will vary by location and segment), new investors would have been deeply cash flow negative through late-2022 and 2023, even failing to pay down any principal for a short period (Chart 4). While valuations are hardly attractive yet—the spread between 4.5% cap rates and risk-free GoC yields is still tight—lower mortgage rates and the decline in home prices have set conditions back into the realm of what used to be reasonable. Even so, we suspect investors will remain shy given limited near-term capital gains potential, lack of liquidity, economic uncertainty, tougher tax treatment (versus dividends), difficult landlord-tenant conditions and a much weaker rent backdrop. Valuations would need to push to the attractive side of the spectrum to account for these factors and bring investors back into the market more significantly. |
Rent Relief ArrivesOttawa’s 2024 Immigration Levels Plan will curb net inflows in the coming years. Annual permanent resident targets will be cut to 395k in 2025, and slow further to 365k by 2027. That’s down from an expected 485k this year, and a meaningful shift down from previously-planned levels of 500k per year. |
Meantime, new temporary resident caps will seek to cut that group’s share of the population to 5% from 7.3%, resulting in net outflows of roughly 445k per year over the next two years. Hitting these targets might be a challenge, but it implies that overall Canadian population growth will run just below zero in 2025 and 2026. That would be a dramatic shift from above 3% in 2024. When considering the amount of supply on the market today, and the pipeline of new investor-owned and purpose-built completions still coming, it doesn’t take a wild imagination to see a world where vacancy rates rise and rents fall. Growth in average asking rent across Canada has already turned negative according to Rentals.ca, with a near double-digit decline in 1-bedroom Toronto apartments. |
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Because of lags in the way market rents filter into the CPI (rent control and slow basket turnover), this won’t be reflected immediately in the Canadian inflation numbers. But, conditions in the real world are softening fast, and will continue to do so through 2025. A Long Way HomeWhile resale prices have found a floor across most markets, it’s still a long way back to the 2022 highs—as we’ve often said, think years not months. Indeed, even our base-case view, which incorporates a stable economy, steady wage growth and neutral interest rates, home prices don’t push through 2022 levels until about 2029. These are national prices, and regional performance will vary. |
Seven years from peak back to peak is not all that uncommon (Chart 6). Such a duration would be in -line with some of the more drawn out price corrections seen in the past, but not as long as the deep and prolonged 1990s bear market.This prolonged period of consolidation, or stagnation, stems from the fact that we saw a number of bullish forces all peak around the same time coming out of the pandemic. The millennial cohort has been the biggest driver of housing demand, but the peak of that group is now about 34 years old, so housing demand driven by this demographic wave is cresting. Meantime, the explosion in international immigration came precisely alongside peak domestic demographic pressure, but that too is rolling over as we speak. Finally, both demographic forces just so happened to hit maximum strength as interest rates were cut to historic lows and real borrowing costs were deeply negative. Suffice it to say that this was an extraordinarily bullish trio that won’t be repeated. |
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Back to that 1990s benchmark for a moment. We don’t expect those conditions to fully repeat, which included a deep and prolonged recession, fiscal and currency crises, and a mid-decade spike in real interest rates. But, that piece of history certainly rhymes: Housing valuations entered the 1990s at similarly stretched valuations; investors and ‘lack of supply’ drove the narrative; the peak of the Baby Boom turned 34 years old in 1993, just like their kids today; and robust international immigration flows were cut in half from 1989 to the mid-1990s. That’s a rhyme, alright. |
Key Takeaways
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