Housing affordability is a hot topic in 2024, and there’s a lot of talk about how interest rates affect it. Too many people are drinking the “lower interest rate Kool-Aid” as the route to housing affordability. While many people think lowering interest rates is the key, we at Buckley Mortgage Broker Team believe they won’t significantly decrease until late 2024 or early 2025.
Here’s why.
The Challenge with Housing Supply
In Canada, we’re facing a big challenge in building enough new homes. Unfortunately, the slowness of municipalities across Canada to approve new construction will continue in 2024. There is not enough innovative thinking in Canadian Municipalities to meet the demand for housing. The federal government through CMHC has publicly announced we need about 500,000 new homes each year, but we’re only managing to build 225,000 to 250,000. Buckley Mortgage Broker Team is seeing a substantial increase in mortgage inquiries related to Custom New Home Construction, however, this is isolated to the Georgian Bay and Lake Huron areas.
According to the Altus Group Economic Consulting, in the last eight years, the City of Toronto’s Committee of Adjustments noted that applications have doubled to around 4000 in recent years and average decision timelines are around 95 days, which is 65 days longer than the standard required by the provincial planning act. Long story short, it’s taking way too long.
What Really Affects Housing Affordability?
Contrary to popular belief, high interest rates aren’t the main reason for expensive homes. In fact, residential home affordability has nothing to do with rates. It has to do with housing Volume Building Tactics.
In regular terms, this boils down to the costs of land, high taxes and fees, and the complex and slow process of getting building approvals. Canada is one of the toughest countries for starting construction projects. This sluggishness in building new homes is the main reason why housing remains unaffordable.
According to Canadian Real Estate News and as reported by OECD (Organization for Economic Co-operation and Development), Canada is ranked 34 of 35 Countries for new approval performance. We are not alone, as the United States previously occupied home sales sank to a near 30-year low in 2023 while mortgage rates climbed to the highest level in more than 20 years and prices hit record highs, pushing home ownership out of reach of many Americans according to National Association of Realtors.
Do not hold your breath for relief. In Canada, there will remain price increase pressure in 2024 with housing prices rising 5.5% in the fourth quarter according to Royal LePage’s recent reports.
Mortgage Renewals and Housing Costs
It’s not all doom and gloom — if you are set to renew your mortgage in 2024, you will see some cost relief.
There are a substantial number of Canadians with mortgages renewing between 2024 and 2026, with 14% of Canadian Mortgage Holders set to renew their loans in 2024. Next year 24% of Home Loans are up for renewal and in 2026 about 35% of mortgages are up for renewal. These families will benefit from decreased interest rates in late 2024 and 2025.
Until then our recommendation to clients will be to renew for 1-to-3-year terms, but First Time Home Buyers may still opt for longer terms.
The Housing Market’s Current State
The Canadian housing market showed some unexpected strength at the end of 2023, especially in Toronto. Canadian home resale transactions bucked the softening trend with a solid 8.7% m/m increase in December 2023. The Greater Toronto Area has seen an 11.5% year-on-year surge in home sales for December 2023 and 21% over November 2023.
This might indicate a potential rebound in the market for 2024.
Impact of Immigration on Housing
There’s been a lot of blame thrown at immigration for driving up housing demand. We view these claims as baseless, being more politically fueled than anything else. Immigration is a response to Canada’s declining birth rate. In 2022, 351,679 babies were born in Canada. This will not sustain our population growth.
Declining birth rates, a slide that began decades ago, is a major contribution to our shortage of healthcare workers and tradespeople. The 437,000 new permanent residents (along with 604,000 temporary workers) that were admitted in 2023 do create demand on municipal infrastructure, but they also fill job vacancies in health care, the trades and the technology sector – and ultimately help our country re-balance an aging population.
It’s important to note that there are reported to be over 1 million international students in Canada and international students mostly prefer renting. This has led to a significant increase in rent prices.
The Future of Housing and Demographics
Demographics will continue to provide insight into Canada’s population growth — and the resulting demand for houses. In past blogs, we pointed out that Canadians are staying in their homes ten years longer than they were fifty years ago. In the blog of April 10th, 2023, we also pointed out that residential house prices will decrease as we approach the year 2050. This suggests that we might see a decrease in house prices around 2035 to 2040 due to demographic shifts, as the birth rate isn’t high enough to replace the aging population. However, at that same time, we will likely see increased pressure on the healthcare system.
Inflation and Interest Rates
With Inflation staying stubbornly high in late 2023 and early 2024, the Bank of Canada will be in no hurry to lower interest rates until the latter part of 2024. That being said, we do anticipate a decrease in the second half of 2024.
Canada’s latest inflation data shows an increase to 3.4% in Dec 2023. Shelter prices rose 6 % in December, which includes rents that we referred to earlier in this article which jumped 7.7%. Grocery prices rose 4.7%; however, the good news is that prices at the pump dropped 4.4%. Energy prices are often heavily influenced by geo-political issues in the Far East and Ukraine. Although not good for farmers, FCC (Farm Credit Canada) is reporting a decrease in grain prices since November. This has been confirmed by local farmers who have reported a loss in value of grain inventory since the fall harvest.
The average Canadian doesn’t believe excessive inflation is on the way out as they grapple with higher food prices, high energy costs and rent. As a result of higher prices and inflation average Canadians — including yours truly — are adjusting their spending habits by reducing dining out and other discretionary spending.
When will Interest Rates Decrease in Canada?
There is no clear timeline for interest rate cuts. The first six months of 2024 will be cast with some uncertainty. Fixed rates often lead variable rates down because of the trading of 5-year bonds. The 5-year bond rate is directly influenced by expected growth and expected inflation. We are genuinely concerned about geo-political stability.
We anticipate no rate change this Wednesday and all current signs are that the Bank of Canada is done hiking rates; although we believe inflation remains sticky.
The market, in our estimation, has been too enthusiastic about the timing of rate cuts and has gotten ahead of itself. We are of the view that we will experience rate decreases in the second half of 2024, which may end up being the fall of 2024 and early 2025 accounting for a 100-to-150-point decrease in Prime rate moving to just under 6% and the current Bank Rate getting under 4%. Forecasting beyond these levels is pre-mature as inflation remains beyond the 2% target of the Bank of Canada.
Political Factors
We are not prone to discussing politics here; however, 2024 is looking to be an extraordinary year politically. Countries representing more than half of the world’s population will be holding elections. The most important election for markets will, of course, be the US Presidential election, and primary season is already well underway. Historically markets have seen equity returns in line with long-term averages in presidential election years, but with a higher probability of a positive return.
We do not believe the US Election in 2024 will change the trajectory of US Inflation Data or US Monetary policy of the Federal Reserve; however, higher equity markets will have a positive influence on Consumer Confidence. Higher bond yields and a stronger US Dollar could follow a Trump win. The Federal Reserve will stay the course for 2024.
The Takeaway
In summary, understanding housing affordability isn’t just about looking at interest rates. It involves a broader view of housing supply challenges, the impact of immigration, demographic shifts, and the broader economic and political landscape.
