Housing has become a hot issue among financial analysts and experts, and the answer isn’t as straightforward as you might expect. By looking at the various economic indicators and seeking out expert voices, we aim to provide an overview of the current scenario and the future outlook of the housing market.

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Key Takeaways

• Signs that the housing market may be recovering are seeing an increase in housing market activity, home sales, and housing starts.
• Increases can hinder housing market recovery in interest rates, high unemployment, and inflationary pressures on labour and materials.
• Experts predict that the housing market is currently showing signs of stabilizing and may begin to recover in Q2 of 2024, when interest rates are expected to decline.

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Definition of a Housing Market Recovery

A housing market recovery can be defined as the process of stabilization and gradual signs of improvement, with an eventual return to its pre-decline state. This improvement in housing market conditions follows a period of decline or, in some cases, a recession. 

Put simply, a housing market recovery involves a return to normal, with some indicators being an increase in housing market activity, home sales, and housing starts coupled with a decrease in unemployment rates.

Economic Growth & Unemployment Rates

Economic growth and unemployment rates are two interrelated indicators used for assessing the health of the country’s economy. Economic growth is measured through Gross Domestic Product (GDP), which signifies the rate at which the economy expands or contracts. A growing economy indicates that business is thriving, jobs are being created, and quality of life, measured by purchasing power parity (PPP), is improving. In contrast, a contracting economy suggests the opposite.  

Pre-Pandemic Level of Economic Growth

Before the pandemic hit, the global economy was experiencing steady growth, reflected in the robust health of the housing market. Housing markets were thriving as economic growth stimulated housing demand, resulting in increased home sales. 

The central bank policy rate was 1.75%, and interest rates on fixed mortgages were in the 3% to 4% range, making it much easier to qualify for a mortgage. 

The pre-pandemic level of inflation sat just below the Bank of Canada (BoC) target of 2%, signalling that the country was operating at close to full capacity.

Post-Pandemic Drop in Economic Growth & Increased Unemployment Rates

The onset of the pandemic brought a sudden halt to economic growth. Unemployment rates increased as businesses closed their doors amid the uncertainty of the pandemic. This shift significantly impacted the housing market, causing a decline in housing market activity and home sales due to pandemic restrictions and wavering consumer confidence as the main factors leading to this decline.  

Financial Conditions Impacting Housing Market Recovery

The housing market’s recovery is deeply intertwined with broader economic financial conditions. Economic factors such as interest rates, employment levels, and inflationary pressures significantly influence the housing market’s performance. 

The relationship between these financial conditions and the housing market is often complex and multifaceted, with changes in one area leading to ripple effects in the other.

Low Mortgage Rates & Rate Hikes

One of the key financial conditions affecting the housing market is mortgage rates. Low mortgage rates have significantly driven housing demand in recent years.

Lower rates increase housing affordability as they make qualifying for a mortgage easier by increasing purchasing power. 

However, when interest rate hikes are implemented by the BoC, this dampens activity and can potentially hinder housing market recovery. Higher interest rates are implemented in an attempt to control inflation, which in turn makes it harder to qualify for a mortgage while also making mortgages more expensive.

These higher rates act as a barrier to discourage borrowing and, in turn, slow the housing market. 

Inflationary Pressure on Prices

Inflationary pressure refers to the forces on the economy that lead to the rising costs of goods and services. This also plays a significant role in the housing market, as rising costs impact supply and demand. 

For example, the high costs of building materials were due to increased demand, which led to production shortages, and the impacts of climate change on materials like cement coupled with a shortage of skilled trades workers have significantly increased the cost of housing in Canada. 

Inflation pressures can be caused by shifts in demand, issues with global supply chains, production cuts, shipping bottlenecks, and climate change impacts. When demand remains strong, and supply chains are impaired, costs are higher, leading many businesses to pass on these higher costs to customers through increased prices. 

Consequently, higher mortgage interest-carrying costs paired with a marked increase in rents added to the Bank’s measurement of the Consumer Price Index (CPI), creating a double-edged sword on inflationary pressures. 

When to Expect a Housing Market Recovery: Chief Economist and Senior Economist Perspectives

Various economists and market experts have offered insights into when we might expect a housing market recovery. Their perspectives are based on analyzing the current economic indicators and trends. While opinions may vary, there is a consensus that the recovery of the housing market is dependent on a range of factors.

Robert Hogue, Assistant Chief Economist at RBC, expects that prices will be driven further down until rate cuts spur competition as buyers remain wary and take advantage of the bargaining power they have in this cooler market. 

Robert Kavcic, Senior Economist at BMO Capital Markets, predicts that the housing market will remain stable this year. It’s unlikely we will see a return to the price gains we’ve seen in recent years. 

Benjamin Tal, Deputy Chief Economist at CIBC Global Markets, suggests that the housing market will remain tight and that we will see prices stabilize around the second half of the year.

Frequently Asked Questions on Canada’s Housing Market Recovery

Welcome to our Frequently-Asked Questions (FAQ) section, where we answer the most popular questions designed and crafted by our in-house mortgage experts to help you make informed mortgage financing decisions.

Overall Outlook for a Housing Market Recovery

The overall outlook for housing market recovery remains cautiously optimistic. There are signs of stabilization in the market, though a full recovery may not be in the cards for some time. With ongoing affordability issues due to higher mortgage rates and the economic uncertainty on the horizon, homeowners and potential homebuyers may need to brace themselves for a much slower, steady recovery than anticipated. 

The timeline for recovery remains uncertain; however, the resilience of the housing market shouldn’t be underestimated. With a tight inventory supply and high demand, real estate professionals from Re/Max’s Fall Housing Market Outlook predict that while we need to address the housing supply shortage in the country, 2024 could start the year strong as buyers and sellers take advantage of easing prices. 

As a buyer or seller trying to navigate current housing market conditions, we recommend you seek guidance from a real estate professional who can provide expert advice on the evolving market. 

If you’re looking for advice or a mortgage solution tailored to your financial situation, reach out to nesto’s mortgage experts.

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