Canadian Housing Update 8: December Blues as Rents Fall

No one should put too much emphasis on the December Real Estate market, there isn’t as much data and prices are more volatile. The smaller data set naturally creates greater volatility without larger purchases. The days on the market are usually the highest month for the year due to holidays and fewer people buying. It does not mean it is meaningless, but we should take it with a grain of salt.

Topics

Prices Continue to Fall

Rent Rates Fall

Mortgage Rates Decline Again ‍

With everything going on, the outlook for 2024 looks gloomy and most likely will NOT see price improvements next year. Before you say this is impossible, this has happened before in the 1990s.

Prices Continue to Fall

The prices fell once again in December and in some areas it was dramatic. The GTA was on average 2%, while some higher-priced suburban areas saw 5% drops (Oakville, Brampton, Ancaster, and Markham). In BC, it was the same with a 5% drop in prices in the Greater Vancouver Area. These drops may be exaggerated due to the December market but not a great sign overall.

The Sales Transactions are the worst since 2008, and lower than the COVID lockdowns. December is always the worst month of the year, but this has been the worst December in 15 years. 

January is traditionally another slow month; the real test will be the rebound in housing sales after that and heading into the spring season. Many listings were removed from the market in November and December, the spring will be a big test as those come back on.

Rent Rates Drop

The one interesting data point has been the drop in rental rates. This is not a one-month occurrence but a consistent drop, especially in the suburban areas. Depending on the area there has been a 5-10% drop in rental rates. This has been consistent since August/September (The College/University Renting Season), but only some cities have a college. 

GTA - $2,995 to $2,800

Brampton - $3,200 to $2,950

Oakville - $3,550 to $2,900

Burlington - $3,175 to $3,000

While these drops are seasonal and they generally fall toward the end of every year, this will be a key stat in 2024. If rental rates continue to fall, it will be difficult for investors to justify their higher-rate mortgages. While rates are coming down, even a modest drop in rates will not prevent investment properties from becoming unprofitable if rental rates continue to fall.

Mortgage Rates

The drop started in November as the Bank of Canada backed off interest rate increases and started discussing cuts. Over the past couple of months, the 5-year fixed has dropped about 0.60%.

The banks and lenders will act slower than the market and slowly drop rates. The consistent rate drops over the past couple of months should continue into the new year. There are options for a 5-year Fixed below 5% now, which has not been seen for a while. This may come down another 0.10% - 0.20% in January to bring it in line with current bond rates. If there is further weakness in the Canadian economy, we will likely see these rates drift lower, but mainly in the shorter maturities of 2-3 years. These remain elevated currently above 6.00%.

Look Forward in 2024

We can look forward to lower interest rates, but this doesn’t mean higher prices. Homes are still unaffordable unless rates come down significantly. Even if the Bank of Canada were to cut rates in half it would likely still not be enough and exceed our previous highs. The price peak of housing at the beginning of 2022 will likely not be seen again for years. In 2017, the Canadian Housing market fell 15% after an incredible run from 2015-2017. It took 3 years, up to 2020, to the 2017 high and that was with near-zero percent interest rates. Currently, we are off about 25% from the peak in 2022. There will likely be a 4 to 7-year period before we see those numbers again. Unaffordability remains elevated and 5-year 5% mortgages are not enough relief. If these Canadian Economic trends continue, we will see prices drop again in most markets for 2024 but could see broader price improvements in 2025.

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Justin, Konrad, and Merriel

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Content Sources: Bloomberg, Trading Economics, Yahoo Finance, BCA Research

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