Declines in home prices and sales are expected to bottom out in the first few months of 2023, Rishi Sondhi, a TD economist, said in a note to clients. Per TD, the timing of the trough is consistent with the Bank of Canada’s tightening cycle, which we expect to culminate with one additional modest hike (25 bps) in January.
In all, as depicted in the chart below, Canadian average home prices are expected to fall around 20% from their peak before stalling in the first few months of the year.
As noted in a recent Financial Post article on this topic, sales volumes are also likely to find a floor in the first part of the year. But that doesn’t mean they won’t continue to be weak. High interest rates have pushed the costs of owning a home higher.
According to TD, growth in Canadian home sales and average home prices should return to positive territory, on an annual average basis, in 2024. By then, inflation should be contained, and the Bank of Canada is expected to have moved rates away from restrictive territory. At the same time, the economy should begin to heal after a weak performance in 2023, with continued robust population growth adding a fillip to demand. These factors should manifest in stronger sales activity, though at a pace that will continue to lag pre-pandemic levels for much of the year. Improving housing demand is also likely to stoke some renewed growth in prices.
Similarly, RBC Economics shares the view that a cyclical bottom is approaching, likely in early-2023, as activity levels off.
As described in a recent opinion article by TVO, this dip isn’t expected to last as Ontario still isn’t taking aggressive action to get enough new homes built. Despite the sometimes head-spinning number of changes to policy last year, getting more homes actually built and occupied is going to be harder still; and the government’s projections in the last budget show housing starts falling in future years.
On this point, the Canadian Home Builders Association has a new report (conducted by Altus Group) out this looking at the relative burden of planning and design rules imposed by Canadian municipalities. And, despite four-going-on-five years of a Progressive Conservative majority, Ontario cities still rank near the top (or bottom, if you like) in the ranking of places where it’s expensive and time-consuming to get something built. In Toronto, as an example, it takes 32 months to get a new project approved, up from 21 months the last time Altus conducted this analysis in 2020. Of the 20 cities surveyed, Ontario municipalities make up six of the bottom 10, with Toronto dead last.
And on the demand side of the picture Royal Lepage’s CEO is quoted sharing that “once interest rates stabilize and consumers adapt to their new normal, many of today’s sidelined buyers will be back — sooner than many analysts are predicting.”
Near-term trends in housing prices and sales transaction volumes can be difficult to predict. With that said, there has certainly been a shift in the narrative amongst Canada’s top economists that is hard to ignore. And with an increasing likelihood of a bottoming only months away, the current market environment provides a compelling opportunity for disciplined, long-term investors.
Moreover, Konfidis continues to see a very compelling landscape for single-family rental yields as home price declines have occurred in tandem with increasing rental rates. And most importantly, the outlook for single-family rental property ownership in Ontario’s secondary markets continues to be bolstered by long-term supply and demand fundamentals that support strong home price appreciation and inflation protection.