Houses for sale in Ottawa

Buyers eager to get in before competition pushes prices back out of reach

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Buyers in Canada are starting to venture back into the housing market, seeking to get ahead of any possible shopping frenzy spurred by expected rate cuts from the Bank of Canada.

An unusual home sales rally in December has stoked speculation that the Canadian housing market may start to heat up even more. With prices still soft as the central bank signals that it’s done raising its benchmark rate, buyers are trying to find the best time to purchase property before more competition floods in and pushes prices back out of reach.

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The psyche in the market has already started to shift. Canadians became more optimistic about home prices in November and that trend has steadily risen in the months since, according to a poll conducted for Bloomberg by Nanos Research.

I don’t think we’re the only ones who have saved for a down payment in the last three years

Maria Herrera from Vancouver

It’s lured in buyers such as Maria Herrera, a 31-year-old manager at a Vancouver animation company. With the goal of snagging a two-bedroom condo, she recently jumped back into the market with her husband and agreed to buy a place in the suburbs in January after spending the past few years weighing a home purchase.

“I don’t think we’re the only ones who have saved for a down payment in the last three years,” Herrera said. “It will go back to people getting excited with the rates getting lower, and people just going a little crazy and going into a buying frenzy.”

House hunters have had to grapple with a market that’s been increasingly tough to crack into as a major shortage of affordable properties collides with record immigration. Home construction has fallen short of the roughly 1.8 million immigrants Canada added the last year and a half.

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“We’re seeing multiple offers again and houses selling for over asking price, which is very, very different from a month ago,” said Teia Eagar, a real estate agent in Toronto who says she’s seeing a new sense of urgency among buyers. “They’re trying to time the market. They’re starting to feel like the bottom of the market was hit.”

Pent-up demand

Anticipation is mounting for the Bank of Canada’s next move. The central bank held its policy rate steady at its meeting in January and signalled that the main question facing it now is how long to keep borrowing costs where they are.

Economists expect the central bank to start cutting rates before the middle of the year, according to a Bloomberg survey. Traders are betting for cuts to start just after that, according to data on interest-rate derivatives.

Similar forecasts for rate cuts around this time last year spurred a price rally that continued through the traditional spring buying season, pushing values up nearly 6 per cent between February and August. The resurgence contributed to the Bank of Canada needing to raise rates again in June and July to tamp down inflation.

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“You have this wave of pent-up demand from all those people who weren’t able to make that decision last year. Suddenly they can afford to do it,” said Stephen Brown, an economist with Capital Economics. “In the next few months, there is a pretty good chance we’ll see a pretty decent pickup in prices as you see this wave of buyers come in that want to get in ahead of everyone else.”

Today, the expectations for rate cuts may be enough to help buyers into the market. Longer-term bond yields have dropped as markets adjust to the outlook for rate cuts. Because those yields form the basis for the interest rates on fixed mortgages, that’s pushed some costs lower, with clients now getting interest rates of around 5 per cent on five-year loans.

Even floating-rate mortgages are starting to garner interest from people including Herrera in Vancouver. Some buyers are willing to take on those loans in anticipation that they’ll save money overall once the central bank actually starts lowering its benchmark rate.

“All the speculation of rate cuts in 2024 has already created a bit of a buzz in the market,” said Reza Sabour, a mortgage broker in Vancouver. “That sentiment is going to drive madness into the market I think. I’m fully expecting a very busy spring market with multiple offers in Vancouver and Toronto.”

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Record influx

Strong wage growth coupled with Canada’s record immigration are likely to bolster the housing market even further. It’s already helped to heat up the rental market, with rent growth reaching a new high in 2023. That could eventually translate into an even more competitive for-sale market. Often, more people consider buying after a surge in rents narrows the gap between what they’d have to pay a landlord and what they’d be shelling out each month for mortgage payments.

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The federal government has announced efforts to boost housing supply and a cap on international student visas to restrict demand. But both changes could take years until they filter through to the market. Building new homes takes time, and people moving to Canada still need to find places to live in a market with a dearth of options. The Bank of Canada has itself cited the country’s failure to build housing fast enough to keep up with population growth as a driver of inflation — one largely out of its control.

“They’ve slowed down the housing market — it’s gone down — but I don’t think they can stop it from going back up,” said Shawn Stillman, a Toronto-based mortgage broker. “You have more people coming to Canada and they need a place to live. The Bank of Canada has only so much power to hold this wave behind the wall.”

Want to know more about the mortgage market? Read Robert McLister’s new weekly column in the Financial Post for the latest trends and details on financing opportunities you won’t want to miss

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