The Real Estate Market Is Picking Up Steam Again

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Canadians are feeling increasingly optimistic as the outlook for the real estate market steadily improves, while the economy moves slowly forward with only a few signs of an unavoidable recession.

The Bloomberg Nanos Canadian Confidence Index (a sentiment gauge based on a weekly survey) has climbed to its highest level since June 2022. Last week, the index came in at 50.4, marking its fifth consecutive increase. It began rising sharply around the same time the Bank of Canada formally paused its rate-hiking cycle in early March.

A reading of 50 means positive and negative views are roughly split evenly. The lowest reading over the past year was 42, back in October.

The main driver behind this rise is the growing belief that home prices have bottomed out: 75% of respondents expect prices to rise or hold steady over the next six months. That's the highest share since last June, and the sharpest ten-week jump in more than two years.

The survey reflects real shifts in the market. In March, the national average home price rose 0.2% to $709,000, the first monthly increase in a year. What's more, the Bank of Canada has conditionally committed to holding its key rate at 4.5%, as long as the economy and inflation continue to unfold in line with its forecasts. Concerns over the "health" of certain regional US banks have also shifted the outlook for interest rates. And a shortage of housing supply has analysts thinking the market will pick up in the second half of this year, a view the central bank itself echoed in a recent report.

Canadians are also feeling more optimistic about their job security and personal finances than they were four weeks ago. Growth forecasts for 2023 were revised upward by both the Bank of Canada and most economists, after first-quarter results came in stronger than expected.

According to the Toronto Regional Real Estate Board (TRREB), competition among buyers began resurfacing last month, with the average sale price of homes sold exceeding the average asking price for the first time since May 2022.

The TRREB report, alongside the Bloomberg Nanos survey, may point to prospective buyers regaining confidence and being willing to enter the market, even as borrowing costs have climbed sharply following eight rate hikes from the Bank of Canada in under a year.

CMHC Chief Economist Bob Dugan said average home prices, which had already fallen nearly 14% between March 2022 and March of this year, are now stabilizing. "Low supply (listings) means prices should start climbing as sales increase," Dugan noted, pointing out that this kind of activity is already visible in Toronto and Vancouver. "CMHC forecasts the average price will rise roughly 7.9% next year, and 7.5% in 2025."

That said, this window of opportunity for prospective buyers may not stay open for long. Despite the decline in home prices over the past year, new research shows housing has actually become less affordable amid higher interest rates. According to the report, affordability worsened in nine of Canada's ten largest cities, with prospective buyers now needing an additional $5,650 to $21,360 in income to afford a home.

The report notes that conditions affecting affordability are likely to keep worsening given current market trends. "With supply (new listings) extremely limited and some buyers returning to the market, affordability isn't expected to improve in the coming months," the release states.

The report's findings are based on calculating the minimum annual income needed to buy a home in Canada's largest markets, using data from March 2022 through March 2023. The figures highlight the combined impact of interest rates, home prices, and the stress test on affordability.

According to the Canadian Real Estate Association (CREA), the average home price in March came to $686,371, down 13.7% from a year earlier. "While home prices declined in nine of the ten cities studied, affordability actually got worse, since rates rose so sharply that Canadians now qualify for smaller amounts than they did just a year ago," the report states.

Vancouver saw the largest year-over-year jump in income needed to buy a home: $21,360.

Toronto's real estate market ranked eighth for declining affordability. Despite an average year-over-year price decline of $216,500, buyers need an additional $6,250 in income to buy a home compared to March of last year.

The analysis was based on a mortgage with a 20% down payment and 25-year amortization, annual property taxes of $4,000, and a monthly heating bill of $150.

Mortgage rates were based on the average five-year fixed rates from Canada's five largest banks in March 2023 and March 2022.

Average home prices were drawn from CREA's Home Price Index data.

Change in income needed to buy a home:
Vancouver: up $21,360
Calgary: up $18,820
Victoria: up $16,530
Halifax: up $13,140
Montreal: up $12,240
Edmonton: up $8,050
Winnipeg: up $6,920
Toronto: up $6,250
Ottawa: up $5,650
Hamilton: down $4,460

The drop in fixed mortgage rates we've seen in recent months should help with affordability. For example, as recently as mid-March, the best available five-year mortgage rate was 4.79%, and today it's already down to 4.39%! And for anyone who expects rates to keep falling and not stay at this level for a full five years, we're happy to offer shorter-term contracts of 1 to 3 years, currently starting at 4.84%.