A ‘window of opportunity’ may be opening for 1st-time homebuyers

Canada's housing market could see affordability conditions improve alongside interest rate cuts in the second half of 2024, an RBC report projects.

The cloud of unaffordability hanging over Canada’s housing market could start to lift later this year and give prospective first-time homebuyers a path to ownership, according to a Royal Bank of Canada forecast.

The RBC report released Tuesday projects that the Canadian housing market will tell two different stories in either half of 2024.

Pressure from the Bank of Canada’s benchmark interest rate will keep activity muted in the first half of the year, argues author Robert Hogue, RBC assistant chief economist. Higher borrowing rates tied to the still-elevated policy rate will “restrain the recovery” in Canada’s cooling housing market, giving a more “gradual liftoff” in the first half of the year.

But a pivot to rate cuts mid-year — or perhaps even sooner — “will get the wheels turning faster” amid pent-up demand in the market.

Hogue points to “the severe loss of affordability” in the market, stemming from the run-up of home prices in the pandemic followed by the rapid tightening from the Bank of Canada, as spurring the nearly two-year housing correction.

RBC projects that while housing activity is set to rise 9.2 per cent annually over last year’s levels, it expects the Real Property Solutions (RPS) home price index would fall a further 1.0 per cent this year after a 2.6 per cent decline in 2023. Home prices would only start to meaningfully climb across the country in 2025, with a forecast increase of 3.1 per cent in the RPS index alongside a projected 16 per cent gain in sale volumes.

Home prices may not surge rapidly after rate cuts if supply continues to improve in the housing market, Hogue writes. Mortgage renewal shocks, which RBC does not expect to spur a wave of forced selling across Canada, could nonetheless see more sellers come to market, and an uptick in sales could lure some existing owners off the sidelines.

“An influx of sellers would keep supply-demand conditions in balance, and temper any upward pressure on demand,” the report notes.