A Deep Dive into Housing: Understanding Near-Term Trends and Secular Drivers
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Robert Kavcic made an informative presentation offering an in-depth analysis of Canada’s housing market overall and assessing the drivers of housing demand and supply. He then addressed a broad array of questions in the Q&A following his prepared remarks.
The content emphasized generational tightening of monetary policy that is predicted to slow down the economy in the second half of 2023. A “best case scenario” is a mild recession in Canada as the excess demand for labour and strong household balance sheets temper higher interest rates.
Canada’s excess housing demand from mid-2020 through February 2022 led to sales activity 50 to 60 percent higher than the normal range. Ultra-low interest rates, especially with the number of homebuyers opting for variable-rate mortgages in 2021, and massive price gains attracted significant investor demand. Ontario’s exurbs and cottage country near the GTA core were by far the most significantly stretched housing markets by early 2022.
Kavcic stated that investor activity had slowed markedly as the jump in borrowing costs made the rate of return required on a rental property much higher to get back to yields that make sense. In turn, this requires 20-25 percent decline in the price of residential properties from February 2022 peak levels, and the market is approximately halfway through this adjustment.
Robert also stressed that Canada will not be able to hit the supply side target that the federal and various provincial governments are promoting because Canada cannot double the rate of construction over the next decade. The market has already responded as best it can to excess demand, with the highest new supply in decades, reaching levels comparable to the peak in the 1970s. Significant supply constraints arise from the record number of job vacancies and low unemployment in construction, zoning restrictions, and rising costs of materials. Rather than a push from policymakers, supply dynamics will continue to be dictated by market conditions, with supply reacting with approximately a 1-½ year lag to market conditions. Kavcic projected starts to fall, not rise, during 2023, and potentially the first half of 2024.
In terms of demographic support, immigration continues to boost demand in the core-buying cohort of people aged 25-to-40-year-olds. This is important given that the number of Canadian Millennials aged 41-42 with children is at its peak. Demand from the Millennial cohort is cresting now, will level off over the next few years, and then start to contract over the rest of this decade. Canada is backfilling this key demographic with international immigration.
Kavcic concluded that while mortgage rates are close to peaking, near-term BoC rate cuts are unlikely. This may result in a continued downward trend in prices throughout 2023, but with a pick-up in sales during the spring as sellers adjust their price expectations and buyers have more certainty about borrowing costs. Looking ahead, fundamental cash-flow-driven buyers will increasingly replace speculative buyers. Although demand from Canadian Millennials has likely peaked, high immigration levels will stave off a 1990s-like bust. While price increases may be more subdued and even stagnant in some markets beyond 2023, continued population growth and supply constraints will support prices in the mid-2020s and beyond.
Senior Economist and Director, BMO EconomicsThe content emphasized generational tightening of monetary policy that is predicted to slow down the economy in the second half of 2023. A “best case scenario” is a mild recession in Canada as the excess demand for labour and strong household balance sheets temper higher interest rates.