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Conditions might not get any better for buyers than they are currently this spring, a new report is suggesting, pointing to growing demand for homes, stabilizing interest rates and continued economic strength that will likely drive home prices higher by year’s end.
Online mortgage brokerage Nesto recently published its 2023 Economic Forecast and Report update, authored by its consulting economist Francis Gosselin, who sees a few more positives for real estate than other market observers.
“If there is one key takeaway, it’s that we see inflation going back to two per cent by the end of this year,” he says.
That would result in a likely “soft landing” for the economy — a term often referred to by central bankers trying to bring high inflation back to the two per cent, desired rate of price increases, without triggering a recession.
“If that goal of two per cent inflation is reached by the end of the year, we should see the policy rate go down as well,” Gosselin says about the possibility of the Bank of Canada reducing its overnight rate.
In the report, a rate reduction remains a remote possibility. But the study is more confident the Bank of Canada rate — generally, a benchmark for mortgage interest rate pricing — would at least remain steady for the rest of 2023.
This should further stabilize prices by reassuring buyers and sellers that conditions are unlikely to get worse and more likely to improve. Still, Gosselin notes that major banks are predicting — based on predictions from earlier this year — that prices are likely to decline.
He adds housing price data can be limited in offering insight about real home values.
“Price data is really reflective of the homes that are selling, and due to higher rates, the homes that are selling tend to be at the cheaper end of the spectrum,” he says. “It’s a bit of a methodological flaw when we publish the average price of homes because it’s based on transactions, not an actual assessment of value of every home in Canada.”
That said, higher priced homes are taking longer to sell because fewer buyers, due to higher borrowing costs, can afford to purchase those homes.
Yet the report points to drivers that will positively influence the market, at least when it comes to higher sales and prices.
One factor is continued demand for jobs, even if the economic growth slows. The higher rate environment may slow spending, but at the same time, the shortage of labour is likely to lead to higher wages, increasing homebuyers’ purchasing power even amid higher borrowing costs.
At the same time, the report predicts inflation will still cool due to the large number of current homeowners with home equity lines of credit, which are directly affected by a higher Bank of Canada rate. These households are already paying thousands of dollars more in interest and on principal annually, which negatively affects discretionary spending, Gosselin says.
Moreover, the “productive tension” between high immigration and growing demand for housing and limited supply will keep pushing home prices higher.
“The main challenge for the market in Canada is supply, which is pretty fixed and has really gone down significantly because the policy rate.” Gosselin further explains that higher rates have depressed supply by discouraging would-be sellers from listing their homes, concerned about finding a home and elevated borrowing costs. At the same time, builders have reduced activity due to higher financing costs.
“These conditions serve to jack prices up because supply is not matching” demand in part driven even more by federal government plans to bring in 1.5 million newcomers by 2025,” he says. “Everybody wants to come to Canada right now.”
While high immigration will help drive economic growth and prices for homes and rental properties — relatively good news for owners — it will negatively affect newcomers, existing renters and first-time buyers, he adds.
Still, when comparing prices in Edmonton and Calgary relative to Toronto, where average prices are more than double what they are here, Alberta is well-positioned, Gosselin says.
What’s more, even Canada’s priciest markets are generally still more affordable than other markets like Paris, where the price of a 300-square-foot apartment costs on average $600,000. In contrast, a similar home in Vancouver would be about $300,000.
“We’re still relatively cheap compared to many major European cities, for example,” Gosselin says.
“But we need to find a solution to the supply challenge if we want to avoid a similar fate.”