Is Home Buying In Canada Becoming Affordable After Covid? A 2024-2025 Outlook

Is Home Buying in Canada Becoming Affordable in 2024, yet again post-COVID and the immigration boom in the last few years?

Housing prices are soaring high in Canada.

But now with a few new economic developments like – Bank of Canada rate cuts, new mortgage policy, and inflation control, we are wondering if this is the right time to buy a house in Canada, especially for first-time home buyers.

We will try to answer whether it is the right time to buy a house in Canada in 2024 and 2025. We will try to answer:

Is Home Buying in Canada Becoming Affordable in 2024-2025?

We will base our analysis on the below benchmarks:

Will more rate cuts be happening by the BoC? Because the current rate cuts are not enough to make housing affordable again.
To what extent the rate cuts can go? Like what is the tentative end rates we would reach with the BoC rate cuts? With that level will housing become affordable again?
Will the housing prices go down in 2024 and 2025?

Will more rate cuts be happening by the BoC? Because the current rate cuts are not enough to make housing affordable again.

The benchmark rate of BoC is 4.25% after a series of 3 rate cuts beginning June 2024.

Before we can address the question, ‘Will BoC rate cuts help reduce mortgage rates further?’, and ‘will these mortgage rate cuts, will the affordability increase?’, we need to assess the likelihood of future rate cuts and to what extent these cuts might occur.

Likelihood of future rate cuts

Let’s talk about

Factors that might push more rate cuts

a) US Federal Reserve big splash by reducing the Fed Rate by 50 basis points. BoC might look forward to keeping itself in sync with its US counterpart.

The BoC is not concerned if the Canadian dollar will lose its value as compared to the USD, with the September rate cuts by the Federal Reserve.

Note: Higher interest rates tend to attract foreign investment, increasing the demand for and value of the home country’s currency. Conversely, lower interest rates tend to be unattractive for foreign investment and decrease the currency’s relative value.

Past data of Fed Rate cuts vs Canadian benchmark rate cuts

b) The labor market is still weak

The number of jobs produced by the labor market is not keeping pace with the rising population.

Unemployment has risen from 4.8% in July 2022 to the current level of 6.6% in August 2024.

Unemployment Data for the past 1 year

Source: Trading Economics

Employment Change data in the past 1 year

Source: Trading Economics

c) The inflation rate in Canada is consistently decelerating from a 8.1% in June 2022 (when BoC started the rate hikes) to a target of 2% in August 2024

Source: Trading Economics

Hence, now the risk has shifted from high inflation (as we witnessed post-Covid) to a weakened labor market (currently).

All these factors:

a) US oversized Fed Rate cut of 50 basis points

b)Weakened labor market

c) Decelerating inflation

call for further rate cuts by the BoC to stimulate the economy.

Hence, we are almost certain that there will be a few rate cuts by the BoC, as predicted by industry experts.

To what extent the rate cuts can go? Like what is the tentative end rates we would reach with the BoC rate cuts? With that level will housing become affordable again?

The next dates for BoC monetary policy announcements are October 23rd and December 11th, 2024.

Let’s say the BoC cuts rates by 25 basis points in both cycles. This would mean that by the end of 2024, we can expect a policy rate of 3.75%.

Tony Stillo, Director of Canada Economics at Oxford Economics, predicts that the endpoint for this cycle of cuts will be 2.25%.

Based on our analysis, we anticipate the policy rate to be 3.75% by the end of 2024 and potentially 2.25% by the end of 2025. Please note these are assumptions based on the analysis presented in this video.

But the real question is: will these policy rate cuts also lead to lower mortgage rates?

And if so, will these reductions in mortgage rates finally improve housing affordability?

To answer the first question: yes, generally, cuts in the BoC policy rate tend to reduce mortgage rates. This is because banks and lending institutions pay lower interest rates to borrow money from one another, allowing them to offer mortgages at comparatively lower rates.

However, will these reductions in mortgage rates significantly improve housing affordability in Canada?

From my understanding, and as I gather more data to support it, I believe that affordability will not improve significantly. The real issue in Canada is not solely high interest rates but also a lack of housing inventory.

There simply aren’t enough houses to accommodate the growing population, especially following recent immigration trends.

Therefore, alongside rate cuts, a substantial increase in housing inventory is necessary to address the issue of housing affordability in Canada.

Housing Prices Scenario

Another scenario to consider in 2024 and 2025, if you are planning a house purchase, is the price of the house.

Will they further go up, or go down?

Let us try to forecast this.

We will check the data shared by CREA.

The Canadian Real Estate Association (CREA) presents data on the forecasted sales and the housing prices for a quarter.

As per the data released in July 2024, the national average home price is forecast to rise by 5% from 2024 to $729,319 in 2025.

Source: Canadian Real Estate Association (CREA)

Also, check the forecasted average prices for different Canadian provinces below.

Source:CREA

Average Home Prices in different provinces are forecasted for 2024 (blue line) and 2025 (orange line).

As you can see, BC and Ontario will have the highest prices.

Saskatchewan, Manitoba, and Alberta have comparatively lower prices.

However, when we observe the data for percentage change of average prices in different provinces, we see that provinces like Alberta, and Saskatchewan have the highest price changes forecasted with 7.9% and 5.4% respectively.

Canada overall is forecasted to witness a price change of 5% in 2025.

Hence the prime inferences, we can take out from the given data are:

In 2025, the average price of houses in Canada will increase by 5% compared to 2024.
Provinces like Alberta and Saskatchewan will witness the highest change in prices with 7% and 5% respectively.
However, the average price of houses will be highest in provinces BC and Ontario.

Ontario-0.9 million CAD and BC-1 million CAD (approx.)

Let us also check the data for the sales activities happening in 2023, 2024 (forecasted) and 2025 (forecasted).

Forecasted sales in 2025

Highest number of sales activity is seen in Ontario (180000) followed by Quebec (92,000), Alberta, and BC.

Conclusion

As we look ahead to 2024 and 2025, the Canadian housing market presents a little complex landscape for potential homebuyers.

While anticipated rate cuts by the Bank of Canada may lower mortgage rates, significant improvements in housing affordability remain uncertain. This is because an often overlooked challenge is of housing inventory or the number of houses for sale.

The underlying challenges of insufficient housing inventory and rising home prices, particularly in provinces like British Columbia and Ontario, are critical factors that cannot be overlooked.

If the housing inventory remains scarce, coupled with factors such as comparatively lower average wages for Canadians and only modest cuts in mortgage rates, the chances of significant improvements in housing affordability in Canada seem bleak.

Ultimately, first-time homebuyers and those looking to invest in real estate must consider not only the economic indicators but also their financial situations. It’s essential to stay informed about market trends, explore different regions, and remain patient as the market evolves.

While there may be opportunities on the horizon, careful planning and a thorough understanding of the landscape will be key to making a sound decision in this fluctuating environment.