Real Estate Outlook 2024

The Bank of Canada’s aggressive campaign to subdue inflation is taking a renewed toll on Canada’s housing market. The most recent rate hikes in June and July—and the willingness to do more if needed—have poured ice-cold water on the recovery that started this spring. They further raised the bar for buyers to get into the market. Layer in on top of this a loss of confidence arising from a softening economy and it’s no wonder demand is quieting down.
This is especially true in high-priced markets like the Fraser Valley where buyers are more sensitive to higher borrowing costs. Home resales in the area have so far reversed about half the spring rally. Odds are activity will continue to be muted in the period ahead. We expect the Bank of Canada to maintain its policy rate at a cycle high of five per cent until the middle of 2024, before switching to an easing mode once its inflation target is met. The full renormalization of the Bank’s monetary policy is likely to be a gradual process, extending well into 2025 or possibly longer. Bottom line: buyers are unlikely to see material interest rate relief for a while.

Perhaps the more striking trend in recent months has been the return of sellers to the market. After slumping earlier this year, new listings have since shot up significantly—soaring 35 per cent nationally and 56 per cent in the Fraser Valley since March—above levels that prevailed before the pandemic.

The upshot of this has been a sharp rebalancing of demand-supply conditions across most of Canada this summer. In the Fraser Valley, conditions are back roughly to where they were at the start of 2023 (balanced) after tightening considerably this spring. While still historically low, for-sale inventories are rising, providing more options for buyers. And there’s scope for inventories to rise further in the near term as soaring interest costs put many existing homeowners in a tough spot. We think a growing number of them could be compelled to make a move.

The sharp easing in demand-supply conditions has taken some heat out of prices. For now, the MLS® Home Price Index in the Fraser Valley is still going up on a month-to-month basis, but at less than a quarter of the rate that prevailed over the April-July period. However, in Canada, the Index fell outright (albeit slightly) in September for the first time since March.

More heat is likely to seep out while the market balance tilts in buyers’ favour. This could lead to a mild price erosion this fall which could potentially stretch into the early part of 2024. We would view such a market development as a temporary phase of stagnation rather than a deeper, longer-lived market tumble.

The reason is simple. The fundamental factors underlying the market remain exceptionally strong. Canada’s population is booming—growing at its fastest pace in half a century—and high immigration targets almost guarantee it will continue to grow rapidly in the coming years. But housing construction isn’t keeping up. This combination significantly lowers the risk of a supply glut, which has been key to past home price collapses.

And because frustrated would-be buyers are waiting on the market’s sidelines rather than giving their homeownership dreams altogether, it also means that demand-supply conditions are bound to tighten up significantly again when circumstances improve. We think that will be when the Bank of Canada has delivered a few rate cuts sometime in the latter part of next year. Some buyers may jump the gun before that, of course.

So expect the current period of stagnation to be followed by a flurry of activity and hotter prices later on. This unfortunately would leave little room for ownership affordability to get better in a meaningful way.

Navigating the pandemic economy and real estate market has been a lesson in volatility for REALTORS®. From the depths of the early pandemic plunge, a euphoric interest rate driven increase in sales and prices in 2021 and early 2022, has given way to a interest rate reversal which has sent the market reeling. There are no guarantees to how the housing market will evolve going forward with the pull down of high interest rates and related financial stress dragging on demand, while historically high population growth pushes underlying demand higher.

Fraser Valley area REALTORS® have been at the epicentre of the ebb and flow of the market as the pandemic allowed for many households to push eastward from Vancouver due to remote/hybrid work arrangements, and as a more affordable option for buyers. As prices climbed in a low interest rate environment and high demand for land, the saying “head east until qualified” was more appropriate than ever. At its peak of $1.26 million, the average priced home sold in the Fraser Valley Real Estate Board area was 68 per cent above pre-pandemic 2020. This dwarfed the 32 per cent increase in the neighbouring Greater Vancouver board area (which covers the rest of the Metro region), and Canada (up 50 per cent).

That was then – the market has since shifted dramatically. After signaling a prolonged period of low rates, high and persistent inflation forced the Bank of Canada’s hand. The Bank hiked its policy rate 10 times over the past year to a more than 20 year high to 5.0 per cent, while bond yields have soared reflecting U.S. rates and economic strength. Buyers have quickly seen buying power disappear and inability to qualify for mortgages at prevailing prices. Variable rates have moved up in lockstep with hikes, after falling into the 1.5 per cent range at their low, while fixed rates moved into the 5-6 per cent range.

Unaffordability has caused a rapid retreat. After doubling from pre-pandemic levels, sales fell to the lowest pace in more than two decades notwithstanding the 2008/09 financial crisis and early pandemic downturn. Some early year fixed-rate relief boosted sales in early 2023 but have turned lower again following summer rate hikes. Average prices have followed this pattern with a peak to trough decline of 28 per cent, before an early year recovery. The average price is 17 per cent below peak but still 40 per cent above February 2020, meaning interest rates are strained.

There are no guarantees in this type of environment, but headwinds are likely to continue and REALTORS® are best served to brace for another challenging year. Interest rates, while already restrictive, are expected to remain so. The inflation backdrop is showing signs of moderating but the U.S. Fed has signaled further rate hikes as its economy runs hot. This will continue to prop up bond yields and mortgage rates north of the border. Canada’s economy is entering an economic slowdown and possible recession, but rate cuts are likely off the table until the second quarter of 2024 when we anticipate a slow retreat in the policy rate to more normal levels.

Housing unaffordability can be adjusted by multiple levers, including lower interest rates, lower prices or rising wages. However, none of these are likely to fix the problem in the short term. While interest rates are high, we see downside in price levels being limited by supply. Undoubtedly, higher rates are putting additional pressure on highly leveraged owners and investors to list, but asking rents in the Lower Mainland remains robust with double-digit growth rates as massive immigration adds to demand. This adds to both the value of properties and supports owners adapting to higher rates. Low inventory levels continue to support high prices, and active listings are growing slower than new listings, suggesting some sellers are pulling their listings due to conditions. We see the short-term housing trends as being negative with low sales flow into Q1 2024 and further declines in home prices but modest.

However, REALTORS® should recognize that underlying demand remains strong. Historic levels of population growth are undoubtedly fueling demand but buying is constrained by financing ability. This demand is on the sidelines and driven by high population growth areas in the Fraser Valley markets like Surrey. Any improvement in affordability through lower interest rates or lower prices will fuel buyer entry as observed in early 2023 and sellers recognize this, keeping asking values high. Volume will improve as rates decline, but patience will be required.