Canada Housing

First Interest Rate Cut Provides a Helping Hand
to Canada’s Housing Market

Housing market remains soft, but could be turning the corner. After four periods of decline, home sales increased by 3.7 per cent monthly in June, on the heels of the Bank of Canada’s first interest rate cut in over four years. At the same time, the number of newly listed properties edged up 1.5 per cent monthly, as more sellers looked to capitalize on the anticipated return of potential buyers amid falling borrowing costs. These factors combined supported a 110-basis-point uptick in the sales-to-new-listings ratio to 53.9 per cent, consistent with a balanced housing market. With home sales now gaining some momentum, the median price of a single-family home inched up 0.2 per cent month over month. While house prices were down 3.4 per cent year over year, additional rate cuts expected in the coming months are likely to cause home values to rise further, albeit at a modest pace given ongoing affordability hurdles.

Additional rate cuts poised to stimulate buyer demand. Canada’s housing market appears to be on better footing. Home sales are likely to continue gaining momentum throughout the remainder of the year as further rate cuts are expected to boost buyer demand. However, this uptick will be incremental as affordability challenges remain elevated. Interest rates must come down materially before making a meaningful dent in ownership costs, causing Canada’s housing market to experience a slow recovery. Nevertheless, this more modest recovery in the nation’s housing market mitigates potential upside risk to shelter inflation outlined by the Bank of Canada, reinforcing the belief that additional rate cuts could materialize at the next monetary policy meeting.   

Commercial Real Estate Outlook

Falling borrowing costs to relieve some housing pressures. The belief among many economists and investors is that the Central Bank will lower its overnight rate by an additional 50 to 75 basis points by year-end, with the rate sitting around 3.0 per cent by the end of 2025. This will coincide with falling residential mortgage rates, alleviating some barriers to homeownership. Potential buyers who currently reside in the rental market could seek ownership opportunities as housing costs ease. This is likely to mitigate some pressure on Canada’s apartment rental market. Combined with the expected slowdown in population growth and healthy levels of new supply, Canada’s multifamily vacancy rate is forecast to stabilize around 1.5 per cent. Nevertheless, with apartment rental vacancies remaining well below equilibrium levels, annual rent growth is forecast to hold above long-term standards at roughly 5.0 per cent, maintaining the property type as a preferred investment option

Supply dynamics will still contribute to affordability challenges. While falling interest rates will help alleviate some affordability hurdles, the undersupply of housing across the country will continue to pose challenges. This trend has been exacerbated in recent years, with Canada’s population growing by a near-record high of 3.2 per cent annually in 2023. At the same time, national housing starts on a moving 12-month average were down roughly 5.0 per cent in June compared to the 2021 peak and at nearly half of the 500,000 annual pace needed to restore affordability by 2030. Consequently, action is needed to help with the feasibility of housing development in order to boost supply and affordability across the country.  

* Trailing June
Sources: Marcus & Millichap Research Services; Altus Data Solutions; Bank of Canada; CMHC;
Capital Economics; CoStar Group, Inc.; Ratehub.ca; RBC Economics; Statistics Canada