Canada’s housing market is hunkering down for a cold winter.

The downturn had spread and most markets are now in “correction mode,” as higher interest rates, a lack of affordability and economic uncertainty keep buyers out of the market, said Royal Bank of Canada economists Robert Hogue and Rachel Battaglia.

Home sales are fallen 13 per cent since last spring, almost wiping out gains from the rebound after the Bank of Canada paused rates early this year.

The national MLS Home Price Index declined 1.1 per cent in November, its third monthly drop in a row and the largest in almost a year, said RBC.

Economists expect the chilly conditions to continue into 2024, but with interest rate cuts finally on the horizon, a turning point may not be that far off.

Robert Kavcic, senior economist at Bank of Montreal, identifies the key questions for the housing market heading into 2024.

Will prices bottom for real this time?

During this correction, Canadians have seen their housing market plunge, then revive and then slump again as Bank of Canada paused and restarted rate hikes. (See chart below).

Are we really approaching bottom this time?

BMO expects prices will remain under pressure in some markets until the spring of 2024, but once the Bank begins to cut rates, that, combined with pent-up demand, “could finally put a floor under the market.”

The easing of borrowing rates will also do wonders for market sentiment.

There is a caveat, however. This will hold true only if the economy unfolds as expected, he said. All bets are off if we sink into a deep recession with widespread job losses.

And some markets will recover more quickly than others. “The path back to the 2022 price peak will be a long one in Ontario (think years, not months),” said Kavcic.

Have mortgage rates peaked?

Borrowing costs may have already peaked, said Kavcic. After three holds in a row, the Bank of Canada appears at the end of their hiking cycle.

Governor Tiff Macklem said in an interview yesterday that he expects to start cutting interest rates in 2024 but needs to see several months of sustained downward momentum in core inflation first.

BMO predicts the central bank will cut rates by 1 percentage point mostly in the second half of next year, bringing the policy rate to 4 per cent.

Bond yields, which influence fixed mortgage rates, are also falling from their highs in early October.

Should borrowers lock in?

Kavcic, who stressed that the economists are not in the financial advice business, said: “From a macro perspective, the 5-year fixed is currently the lowest available for most borrowers, but one should be mindful of the cost/benefit at what could soon be a turning point in the rate cycle.”

Will investors return?

It will probably take more to entice investors back into the market than homebuyers, said Kavcic.

“Expectations of price gains simply aren’t there the way they were earlier in the cycle (think pre-construction buyers); and, the spread between cap rates and risk-free yields is still historically tight.”

The market has improved in recent months as prices fell, rents rose and long-term bond yields dropped, but Kavcic thinks investors will likely need to see more.

Will affordability improve?

Even as prices slip lower, housing affordability in Canada is the worst since the 1980s because of the rise in borrowing costs. Kavcic said that should improve “somewhat” when those costs start to come down, but affordability is still a long way from where it was before the pandemic.

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Canada’s housing market went through three distinct phases this past year, driven by the effects of interest rates, say Desjardins economists.

Back in January, home sales started slow with most major markets reeling under 425 basis points of hiking by the Bank of Canada in less than a year. Then the Bank paused rates and buyers rushed back to the market.

“The fastest recoveries occurred in and around Toronto and Vancouver — which tend to be most sensitive to interest rates — but gains soon followed in other cities,” said Desjardins.

The rally in part prompted the central bank to resume hiking, and the interest rate rose another 50 basis points over June and July, leading to the third phase, the fallback.

“The weakness began in Toronto, then spread to Vancouver, then became even broader based, as Calgary and Edmonton — previously resilient to higher borrowing costs given skyrocketing population growth — gave back gains,” said the economists.

• Statistics Canada releases its latest reading on inflation today in the consumer price index for November. Economists were expecting the annual rate to slow to 2.8 per cent, which would be only the second time since March 2021 that it has fallen within the Bank of Canada’s target range.
• Today’s Data: Canada industrial product and raw materials price indices for November, U.S. housing starts and building permits for November
• Earnings: FedEx Corp

Get all of today’s top breaking stories as they happen with the Financial Post’s live news blog, highlighting the business headlines you need to know at a glance.

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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