Will Falling Interest Rates Spur a Canadian Housing Market Comeback?

Will Falling Interest Rates Spur a Canadian Housing Market Comeback?
May 17, 2024

Canadians hoping to buy a home are facing a tough decision: wait for interest rates to drop or jump in now before prices climb further.

A recent poll by BMO found that a whopping 72% of Canadians are waiting for interest rates to decrease before pulling the trigger on a home purchase. This hesitation stems from two main factors: affordability and market uncertainty.

High interest rates combined with the mortgage stress test, which requires borrowers to qualify for rates higher than the offered rate, are making it difficult for many to qualify for a mortgage. Lower rates would ease this burden, increasing buying power and making homeownership more attainable.

Secondly, some potential buyers are wary of entering the market due to fears of a recession and rising mortgage defaults. Additionally, some investors are waiting for potential price drops due to inflation, reduced immigration, or increased rental supply.

While these concerns are valid, it's important to note that economic indicators are currently trending upwards.  Furthermore, government efforts to increase housing supply are unlikely to have a significant impact in the short term.

On the positive side, wages are continuing to rise, which can help offset the impact of higher interest rates. Additionally, job losses, if they occur due to an economic slowdown, are likely to disproportionately affect renters compared to homeowners.

Despite the wait-and-see approach of many buyers, some are taking advantage of the current market conditions. While national housing inventory has increased, average home prices have also risen for five consecutive months.

A Bullish Outlook for Canadian Housing?

Predicting future housing prices is notoriously difficult. However, some trends suggest a potential upswing in the market:

  • Strong Immigration: Canada's consistent immigration levels will continue to drive housing demand.
  • Falling Interest Rates: With core inflation expected to ease, mortgage rates could decrease by the end of the year.
  • Limited Housing Supply: High interest rates, low new construction, and restrictive regulations are likely to keep housing supply lagging behind demand.
  • Rising Wages: Continued wage growth could outpace inflation, improving affordability for potential buyers.
  • Stock Market Strength: A strong stock market and healthy corporate profits could bolster the wealth of potential buyers.

However, there are also countervailing factors to consider:

  • Rising Mortgage Defaults: Mortgage defaults, though still below historical averages, are expected to continue increasing.
  • Potential Unemployment: While unemployment may rise, it's likely to impact renters more than homeowners.
  • Impact of Lower Rates on Sellers: Lower interest rates could incentivize more homeowners to sell, potentially increasing supply.
  • Risk of Re-Inflation: A resurgence of inflation could put upward pressure on mortgage rates.

Despite these potential headwinds, the long-term outlook for Canadian housing appears bullish. Chronic supply shortages, falling interest rates, and the ingrained belief in the stability of Canadian real estate could all contribute to a market that avoids significant price dips.

For potential homebuyers, carefully weighing these factors and consulting with a real estate professional is crucial for making informed decisions in this dynamic market.

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