Outlook 2024 – why this could be the year of the rebound

Last year might not exactly have been a walk in the proverbial park for the housing market, with interest rates, inflation, certain land use/government policy concerns, uncertainty about the economy and other issues giving pause to new-home building and buying.

But 2024 is shaping up to be something altogether different, with relief – and belief – in sight on most issues. “I’m optimistic about the outlook for the housing market in 2024,” Mike Parker, vice-president of sales and marketing at Georgian Communities, told HOMES Magazine. “Despite facing global economic challenges, our region has demonstrated remarkable resilience, and we expect a steady demand for new homes driven by Ontario’s continuously growing population and robust economic fundamentals.”

“I think the market in 2024 will turn a corner and begin to improve,” adds David Hill, president of Ballantry Homes. “Interest rates have been high to fight off inflation, but the general consensus is that rates will begin to drop this year. Perhaps not in the first quarter, but by the summer. The housing demand is there, and lower rates will let homebuyers into the market again.”

And more good news came on Feb. 14, when the Canadian Real Estate Association said there are signs the recovery may already be underway.

Home sales activity recorded over Canadian MLS Systems rose 3.7 per cent between December 2023 and January 2024, building on the 7.9-per-cent month-over-month increase recorded the month prior.

“Sales are up, market conditions have tightened quite a bit, and there has been anecdotal evidence of renewed competition among buyers," says Shaun Cathcart, CREA’s senior economist. "However, in areas where sales have shot up most over the last two months, prices are still trending lower. Taken together, these trends suggest a market that is starting to turn a corner, but is still working through the weakness of the last two years,”

Let’s take a look at why this might just be the year of the rebound.

INTEREST RATES AND INFLATION

We can’t pretend that interest rates and inflation are no longer concerns, but there are clear signs things are improving. Statistics Canada reports that the Consumer Price Index (CPI) rose 3.4 per cent on a year-over-year basis in December 2023, up slightly from 3.1 per cent last November, but the acceleration was largely the result of higher year-over-year gasoline prices in December. Excluding gas, the headline the CPI would have slowed to 3.5 per cent in December 2023, from 3.6 per cent in November.

Translation: Somewhat persistent inflation – with inflation being the main reason the Bank of Canada (BoC) has maintained higher rates than a few years ago – BoC may be challenged to lower rates just yet. In its most recent rate announcement on Jan. 24, the BoC held its target for the overnight rate at five per cent.

Most experts expect rates to begin declining in spring.

“This could be an interesting year when it comes to interest rates,” says Jesse Abrams, co-founder at Homewise, a mortgage advisory and brokerage firm. “Starting with fixed rates, we have already seen them drop 70 bps from their peak midway through 2023. This is due to economic factors, and can be tracked based on five-year Canadian bond yields, which have dropped steadily since November. Moving into 2024, our team expects to see fixed rate mortgages continue to drop. However, we are not expecting a major drop. Potentially another 50 or so bps before the end of the year.

“On the variable side, this is where it’s even harder to guess,” he adds. “Rates went up as quickly as they did because consumer spending and inflation were out of control. And honestly, we are not out of the woods yet. CPI inflation is not true inflation, and while our leaders use that to determine our inflation, there are many lagging indicators that could still lead true inflation to increase again.”

Over the last six months, Abrams says, more buyers have been opting for shorter-term fixed-rate mortgages, believing that interest rates have peaked and should come down over the next two years. “So, we are seeing more and more two- and three-year fixed-rate mortgages. However, five-year fixed rates are still the most popular, as buyers consider them to be more ‘stable’ – especially first-time buyers.

ECONOMIC MAINTENANCE

There may be continued economic slowdown in 2024, setting the stage for a subsequent rebound in 2025 and 2026, with long-term Canadian GDP growth stabilizing about 1.8 per cent annually, according to TD Economics. This will be driven by solid population and labour force growth.

Business investment is expected to grow above trend over the forecast horizon. The need to build more homes will boost residential investment, and the opportunity to fast track the clean energy transition will cause a lift to investment in structures, machinery and equipment.

Consumer spending, TD says, will undergo a period of below trend growth through 2026, as Canadian households save more in the face of high mortgage debt.

HOUSING POLICY

Canada’s housing sector is impacted by conflicting forces, as population pressures require significant increases in building activity, but high costs and elevated lending rates, among other factors, simultaneously make homebuilding more challenging.

The good news is that all three levels of government are fully aware of these facts, and there have been policy changes to effect change – even if they are slow coming and not well coordinated.

Case in point, in a recent statement saying Ontario has “no coherent plan to increase housing supply,” the Building Industry and Land Development Association (BILD) slammed the province’s approval of City of Toronto Official Plan Amendment (OPA) 591. BILD calls it yet another example of how the province has abandoned its position of leadership and its electoral mandate to build housing in the GTA, in favour of political expediency.

“In order to distance itself from its own past actions, the provincial government has overcorrected on the housing file to secure its political future at the expense of all future homebuyers in the province,” says BILD President and CEO Dave Wilkes. “Since early fall there has been a series of government decisions that are effectively undermining the ability of the industry to add housing supply for future growth. The province is committing us all to unaffordable housing for generations to come.”

Toronto’s OPA 591 proposes new and updated policies related to employment, and employment conversions, including mixed use and land designated for homes. The city’s plans included 24 employment conversions that could accommodate 8,000 new housing units. There were 45 requests to the province through consultation to adjust the city’s OPA scope for potentially tens of thousands of new housing units (based on a BILD member assessment) with some employment space retention if those sites were made mixed use. As the province ignored those requests, these units will now not be built. In addition, based on BILD mapping, none of the city’s employment conversions are near transit, meaning the resulting housing will not be transit-supportive. Had the province moved forward with the expansion requests there would have been more housing and mixed-use opportunities built, much of it transit-supportive.

This is simply the latest in a growing list of decisions made by the province that are undermining the provision of housing and employment space supply in Ontario, BILD says. The decision in October 2023 to reverse expansions to urban boundaries in the Greater Golden Horseshoe (GGH) limits lands for future housing, meaning there will be a shortfall of 242,000 new housing units by 2051.

These decisions, BILD says, create unmanageable uncertainty for the housing industry – on top of existing challenges related to building costs and other issues.

“In the space of a few short weeks, in the middle of the most significant housing crisis this region has faced, this government has made decisions that effectively cancelled nearly 300,000 housing units in the Greater Toronto and Hamilton Area and the GGH,” Wilkes says. “Even more critical, these decisions are undermining the very investors that are needed to finance new housing developments and call into question the viability of projects that that would have added much needed housing supply. Cities and developers around the world compete for this investment, and the actions of this government are threatening this lifeblood of new housing.”

BILD is calling on the province to urgently meet with all stakeholders and define an achievable and sustainable plan to build the housing that the region and province desperately needs to secure the future growth of our economy and communities.

ONTARIO GOVERNMENT, LISTEN UP

If we could stage a roundtable of housing industry experts (which has already done, via the Housing Affordability Task Force), and the province would implement their recommendations (which it has not), what would we hear?

“Where do I start?” asks Hill of Ballanty Homes. “Development charges and fees are crushing first-time homebuyers. Municipalities are using those fees to keep from raising property taxes and that puts an unfair burden on the new homeowner. We need a fair system that gives municipalities the revenue they legitimately need to deliver services to new neighbourhoods, but doesn’t push prices through the roof. Federal and provincial governments talk about affordability, but municipalities continue to raise the development charges and fees they charge.

“Then there’s the issue of red tape and approval times. Every month a project is delayed adds huge costs that end up in the price of a home. The province tries to set limits, and municipalities figure out ways around those limits and approval times become even longer.”

Without getting into the Greenbelt issue, specifically, land availability is a limiting factor. “We need communities across southern Ontario to make more land available in areas that are easily serviced and are naturally a part of existing neighbourhoods,” Hill adds. “That will protect our farmland and help smaller communities to become incrementally larger and more prosperous.

“We will need significantly improved infrastructure if we’re going to meet the needs of a million or more new residents. That means faster and better service on our GO Train system. And new lines that will open up areas that can become homes for commuters.”

Hill would drive home his advice to the province with some suggestions on housing programs. “In the past, governments both federal and provincial have instituted programs to help get young families into homeownership. Canada Mortgage and Housing Corp. was originally created to get the post-war Baby Boomers into homes, not just insuring banks against mortgage losses. The current Federal National Housing Strategy plans to create 160,000 new homes over the next decade. That’s an impossibly low number, and by helping homebuyers directly, they can do better.”

Richard Lyall, president of the Residential Construction Council of Ontario (RESCON), has similar advice for the province.
“We are in the middle of a perfect storm just now, as taxes, fees, levies and development charges on new housing are exorbitant,” he told HOMES Magazine. “We are taxing housing like alcohol, which doesn’t make sense. The cost of building materials remains high, and we’ve been slow to modernize and improve the development approvals process.

“Scrap the sales tax for first-time buyers who are purchasing principal residences, and for those who are selling their existing homes and buying something new and smaller,” he says. The province should also allow RRSP funds to be used by first-time buyers who are purchasing principal residences and those who are downsizing. This would free up more housing for those looking to get into the market.

“We also need a modern, digitized development approvals process that would move construction of housing along more quickly,” he says. “The current process in Ontario has been marred by well-documented inefficiencies for decades and is slowing down the pace of new-home building.”

We must also look to offsite construction as a means of boosting housing supply. “The government should look at providing financial assistance and tax breaks to incentivize companies to build more modular housing manufacturing plants, and provide research and development funding so the industry can keep pace with new technology and building techniques.”

Suggestions for the provincial government

• Freeze or even reduce fees to support the construction of new homes and reduce the costs of housing.
• Taking the GST off purpose-built rental was a good start; expand to the first-time buyer market.
• Improve approval times, as extensive delays lead to higher prices. Streamline processes at local planners with innovative technology that US planning departments use, such as Open Dove and Central Square, increase communication, speed up subdivision plan approvals, permitting processes and save homebuyers money.
• Reduce development fees at all levels of government to maintain a strong first-time homebuyer market.
• Take the politics out of planning. Local decision-making shouldn’t undermine the drive to keep prices in check and build necessary housing.

– Deena Pantalone, Managing Partner and Chief Innovation Officer, National Homes

CANADIANS BELIEVE IN HOMEOWNERSHIP

At the end of the day, all those fundamental challenges aside, Canadians remain confident in homeownership, and many are intent on buying in 2024.

Indeed, nearly one in five Canadians aged 18 and up say they probably will or may buy a home this year, and Canadians under 35 have the strongest intentions, according to a new Wahi survey of Angus Reid Forum members.

The ReMax 2024 Housing Market Outlook Report corroborates this sentiment, highlighting that Canadians’ outlook on homeownership remains positive, despite challenging market conditions in 2023.

The majority of Canadians (73 per cent) are confident that homeownership is the best investment, with an increase in buying activity forecast for this year.

“It’s been a challenging (2023) for Canadian homebuyers and sellers, who have been feeling the effects of a severe housing shortage and the high cost of living, but much like Canada’s housing market, Canadians have stayed resilient,” says Christopher Alexander, president, ReMax Canada. “Historically, real estate has given owners excellent returns and strong financial security – and that hasn’t changed. The slower market we’ve been experiencing across the country this fall could be an early indicator of an active 2024, as reflected in the modest price increase and sales outlook for next year, and the balancing of conditions in several regions across the country.”

And with all the talk of uncertainty last year, ReMax is forecasting healthy value appreciation in Ontario.

WHY YOU CAN FEEL POSITIVE ABOUT 2024

“The good news is that political leaders at all three levels of government have turned their attention to the housing crisis,” says Lyall. “However, they must continue to work with the residential construction industry on solutions.”

One benefit of expanding housing policy will be more diverse housing options that address the affordability challenge.

“This expansion in variety aims to accommodate a broader spectrum of preferences and budgets, offering more buyers the opportunity to find homes that align with their needs,” says Parker of Georgian Communities.

And given new-home builders’ challenges in 2023, prospective buyers might also encounter more favourable purchasing conditions. “This could include lower or extended deposit requirements, flexible closing dates and other incentives designed to make homebuying more accessible,” says Parker. “While the real estate market is inherently subject to fluctuations, there is a prevailing sentiment of expected stability in both prices and interest rates.”

Says Hill, “When (rates) do come down, more buyers will be able to afford the type of home they’re looking for. Every level of government is now very aware of the need to create the right kind of housing policy to get people into homes.”

Deena Pantalone, managing partner and chief innovation officer of National Homes, is also upbeat. "I see 2024 bringing a stronger real estate market. The fundamentals are all there. The job market, population growth and income are all healthy and, with the lower sales of last year, there is so much pent-up demand.

"Remember the old adage, 'When is the best time to buy real estate? Yesterday'. All we need is downward movement on interest rates – even a slight lowering – and sales will start to rise again."