Market recovery in Canada will be moderate and somewhat unpredictable
By Murtaza Haider and Stephen Moranis
On the surface, CREA’s forecasts might suggest a struggling market. However, if one excludes the COVID-19-induced housing frenzy from the equation, the sales volume in 2024 and 2025 would align with the longer-term average sales volume.
In other words, the pandemic-driven sales surge distorted the market, mainly due to the phenomenon of forward buying — whereby consumers accelerate their purchases to take advantage of time-limited incentives, such as significant discounts or low interest rates. By 2019, an average of 500,000 dwellings were bought and sold annually through the MLS system. However, the drastic interest rate cuts in 2020 and 2021 led to a significant acceleration in sales, adding an estimated 238,000 transactions that most likely would not have otherwise occurred.
Dr. Dogan Tirtiroglu, a professor of real estate at the Ted Rogers School of Management at Toronto Metropolitan University, explains that housing is a durable good. The heightened homebuying in 2020 and 2021 partially exhausted the demand from a relatively finite pool of prospective buyers. Consequently, the anticipated rate cuts may not significantly boost sales, as many of those who would have purchased homes in 2023 or later had already done so in 2020 and 2021 to take advantage of the ultra-low mortgage rates.
Even with CREA’s scaled-back sales forecasts, by the end of 2025 there will still be an additional 188,865 transactions in the system, beyond the deviation caused by the pandemic. This suggests that the slowdown in sales over the past year has not been sufficient to offset the excess sales in 2020.
While sales activity shows volatility, housing prices tend to be more stable. CREA reported that average house prices in 2023 decreased by 3.6 per cent. Forecasts for 2024 show an annual increase of 2.5 per cent, followed by a further increase of five per cent in 2025.
The uncertainty surrounding the timing and magnitude of future interest rate changes, coupled with the finite capacity for homebuying within specific intervals, suggests that the housing market recovery in Canada will be moderate and somewhat unpredictable. Significant short-term fluctuations in either direction are unlikely.