Inflation, high interest rates seen driving housing market in 2024

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Home sales expected to revive when Bank of Canada cuts interest rates but rally will be muted

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Inflation and interest rates will once again determine the fate of the housing market next year after a turbulent 2023 that was full of surprises, industry players say.

John Pasalis, the founder of Realosophy Realty in Toronto, said expectations for 2023 were for a sluggish market, but it didn’t start out that way.

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“The market started aggressively, (with) prices surging and then hitting the brakes and retreating,” he said during a recent interview with Financial Post’s Larysa Harapyn. “And now, we’re seeing the lowest volume of sales for detached homes on record in the Greater Toronto Area.”

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Steve Saretsky, owner of the real estate firm Saretsky Group in Vancouver, said the West Coast market also showed unexpected resilience to start the year, but was not immune to the slowdown.

“We came into 2023 thinking the prices were going to continue to drop off of the back half of 2022 and we saw kind of a rip during the spring market there,” Saretsky said.

Further interest rate hikes in June and July from the Bank of Canada put an end to that rally.

With central bankers now opening the door to potential rate cuts in 2024, Pasalis said he expects sales to recover from their recent lows, but his optimism remains guarded.

“It won’t be a booming market,” he said. “I think the market will be a little bit better… A lot of this depends on the outlook for inflation and interest rates. But if we go from five-year mortgages in the sixes to five, that’s going to obviously drive a little bit more demand.”

When it comes to the rental market, both Pasalis and Saretsky expect prices to moderate, providing a plateau if not some relief on the affordability front. They agree that soaring rent growth is becoming unsustainable and that markets are adjusting to local incomes.

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“How long can you sustain double-digit rent growth year over year?” Saretsky asked. “At some point, it does hit a ceiling of local incomes as that labour market starts to soften, which is clearly the Bank of Canada’s objective.”

Regarding home buying trends, Pasalis said he has noticed a lot of people leaving Ontario, and even the country, due to high housing prices. In Toronto, where home prices are approximately ten times household income, many are finding it increasingly difficult to justify the cost.

Saretsky said government policies geared toward expanding supply, such as the removal of zoning bylaws to encourage higher density housing around transit stations in B.C., will shape the market and neighbourhoods for years to come.

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Both experts said more government intervention was needed to address the housing supply shortage.

In particular, Saretsky said it will be interesting to watch how a plan to revive and update Canada Mortgage and Housing Corp.’s wartime housing program, in which a catalogue of pre-approved designs was created to expedite construction, will unfold.

“We have this ongoing fight about who’s responsible for what and it seems like we’re getting more action now — not only at the federal level, but at the provincial level as well,” he said.

• Email: shcampbell@postmedia.com

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