Should you buy a house right now, or wait until interest rates come back down?

This article has been updated from a previous version.

Living in Canada has become increasingly expensive, whether you’re a renter or an owner. After the Bank of Canada’s (BoC) recent streak of five consecutive interest rate hikes over the past two years, it announced it will be maintaining its key interest rate again at 5 per cent today.

Mortgage holders and potential buyers are left contemplating their next move.

Ahead of spring — normally a hot real estate season — home prices are giving little to no wiggle room and the shadow of higher interest rates still looms large. So, what does this mean for potential homebuyers waiting to get into the market?

The dilemma: Buy now or wait?

Canadian homebuyers find themselves at a crossroads. Should they take advantage of the current market conditions and buy now, potentially avoiding even steeper home prices down the road? Or should they postpone their purchase to take advantage of lower borrowing costs?

Expectations for rate cuts driving up competition in the market

Some people may be eager to lock in a home now, especially since competition is lower than usual. Others, however, are holding off, waiting for interest rates to show signs of decreasing.

“In the beginning of the year there were a number of pre-approvals and interest in potentially buying a house ahead of rate cuts. But, with people now expecting rates to stay higher for longer, some won’t get into the housing market immediately,” says Victor Tran, RATESDOTCA mortgage and real estate expert.

“That coupled with tight supply in the GTA means not a lot of movement.” he adds.

According to TRREB’s market watch, the Greater Toronto Area (GTA) reported 6,560 sales in March 2024 – down by 4.5 per cent compared to March 2023. New listings were also down by three per cent compared to the month before. Overall, sales volume declined in March, even though home prices rose slightly.

Cities like Toronto are unlikely to experience a decline in home prices in the foreseeable future. The Canada Mortgage and Housing Corporation (CMHC) anticipates that the average listing price will rise due to several factors, including:

Lower mortgage rates: With economists calling for the first mortgage rate cuts to come later this year, the market will likely regain competition. This past January, RATESDOTCA’s mortgage quoter saw a 25.1% increase in interest month-over-month on new mortgage quotes in Canada – likely in anticipation of rate cuts in 2024.

Increased population growth: The influx of residents in the city contributes to housing demand.

The average MLS listing price for homes in Toronto is forecasted to be $1,135,000 on the lower end and $1,205,000 on the higher end.

As buyer confidence slowly makes its return, the real estate market is expected to see a surge in pent-up demand. This may lead to a rapid increase in activity. However, difficult affordability conditions could slow down the recovery.

For potential buyers, and especially those who have held out till now to enter the market, Tran says the best window of opportunity may be well after the first cut when interest rates have significantly decreased. This is anticipated to happen in the latter part of 2024 or early 2025.

Related: How much down payment do I need?

What's propping the home prices in Canada?

As of February, the Canadian Real Estate Association (CREA) reports that the national average home price in the country stands at $685,809, reflecting a 3.5% year-over-year increase. With prices rising again, home sales have experienced a 3.1% decline month-over-month in February.

But while there’s low buying activity, the number of newly listed homes has risen by 1.6% on a month-over-month basis during February. This pick-up in listings might signal more room for buyers in the spring market.

“There are those who are going to try to time the market and buy at the lowest point to make the most bang for their buck,” says Chelsey Chapman, sales representative at Keller Williams Edge Realty. “These people maybe don’t need to buy or sell, so they have the option of waiting it out.”

Population growth and demand for housing

Canada’s population growth directly correlates with real estate demand. Over the next five years, Canada is forecasted to lead all G7 countries in population growth. As more people seek shelter, the already tight real estate market will continue to face pressure to meet demand for housing.

Chapman also points to Canada’s high immigration targets over the next years as a key indicator of where the market is headed.

“That demand should really offset any sort of significant surplus in housing inventory,” says Chapman. “[Whereas] if we did experience a surplus in housing inventory, that would really shift us into more of that buyer’s market.”

Despite demand, construction is not keeping up. New housing supplies continue to struggle to match the pace of population growth and urbanization.

Read more: How to deal with the pressures of homebuying

Condo sales struggling – developers not getting their return on investment

In 2023, condo developers began their construction projects when interest rates were low. Larger developers involved in multiple projects and with higher upfront equity dominated the market. However, borrowing costs rose significantly that year, with stricter loan standards from lenders. This reduced the profitability of condominium construction.

By the fourth quarter of 2023, housing market index, which reflects homebuilder sentiment, hit a record low. Builders faced hurdles such as rising material costs, labor shortages, regulatory delays, and interest rates.

According to CMHC’s market outlook for 2024 just released this week, supply challenges (the lagged effects of higher interest rates) suggest that new construction in 2025 – 2026 won’t reach 2021 – 2023 levels.

Related: Investing in homes, investing in tomorrow: survey

Where is the real estate market healthiest in Canada?

In Canada, not every region faces the same housing supply and demand challenges.

Specifically, in Regina, new home listings have been higher than pre-pandemic levels since the fall of 2023. As a result, home prices are expected to gradually decline soon.

Similarly, in the early months of 2024, Montreal’s housing market saw an increase in new home listings, which surpassed pre-pandemic levels. This surge provides slight chances for homebuyers, especially those whose ability to purchase is limited by high interest rates.

While the whole country is reeling from high interest rates, the problem is more acutely felt in the cities of Toronto and Vancouver, where residents have higher loads of debt due to more expensive housing. According to a recent mortgage payment report by Equifax, monthly mortgage payments across Canada increased by $457 in the fourth quarter of 2023 but both Toronto and Vancouver saw increases of over $680.

The market has shown some signs of improvement recently in these cities; however, a full recovery will likely be gradual and uncertain.

Other cities like Ottawa, Winnipeg, and St. John’s are all dealing with their own variations of a market strapped by high interest rates, weak affordability, inclining ownership costs, and low inventories for homes.

Read more: How much mortgage can the median household income afford in these cities?

Riding the market see-saw: From a seller’s market to a buyer's market

The real estate market in the past few years has experienced a low supply of available homes, which has created more competition. A seller’s market greatly reduces negotiating power for homebuyers.

With fewer homes to choose from, many would-be homebuyers are holding out and hoping more homes will eventually hit the market. If more homes become available and mortgage rates fall, this would be an ideal time to re-enter the market. However, if this is the case, competition for listings will be high.

At the same time, the BoC predicts that 80% of fixed mortgage holders will face a “relatively large” payment increase by the end of 2025. The possibility of mortgage renewal payment shocks could push property owners to put their homes up for sale. As homeowners struggle to refinance their current mortgages and qualify for new mortgages, and the forced sales continue to pile up, supply and demand will remain balanced.

According to CREA, there were 3.8 months of inventory nationally at the end of February 2024, slightly up from 3.7 months in January.

“Typically, [a buyer’s market] would be defined as having more than seven months’ worth of inventory out there in the market,” says Chapman.

For those who can afford to sell and buy in the current market, slightly lower home prices can soften the blow of high interest rates with slightly lower home prices.

“If you can get a house that maybe you were willing to pay $1.7 million six months ago for $1.2 million now, that’s really the benefit of buying in a down market,” says Chapman. “Building wealth is easiest when you trade up in a down market.”

Ultimately, the decision to buy now or hold off comes down to your own personal needs and budget. When deciding whether to purchase a home in a high-interest-rate environment, it’s important to remember that finding an affordable mortgage is still possible.

“If you need a place to live, have the means to finance it, and come across a property of interest, I’d say go for it,” says Victor Tran. “You need to start somewhere.”

Related: What’s the ‘buyer beware’ principle when it comes to buying a home?

Can’t afford to wait? Go for a shorter-term mortgage

Some people have time to wait for rates to fall before they make their move. But others might not have the luxury.

“There’s an additional subset of people who are in a lifestyle circumstance,” says Chapman. “Maybe they’re going through a divorce, downsizing, or have a job relocation and don’t have the choice to wait for the market to come back around.”

Read more: What type of mortgage and term should you get?

Buyers in this boat may need to put more effort toward prioritizing a realistic payment structure with their mortgage lender.

“Trying to time the market with a variable rate is a big gamble right now. Variable rates are higher than fixed rates, and it’s unlikely that rates will drop sooner rather than later,” says Tran.  “While it will depend on individual profiles, for many it will be better to opt for a short-term fixed and focus on lower monthly payments rather than potential future gain.”

Read next:

September: After two rate hikes, Bank of Canada pauses policy rates – for now.

July: Bank of Canada delivers 25-bps hike, raising rate to 5%

June: Bank of Canada raises overnight rate by 25-bps hike, policy rate now at 4.75%

April: After eight successive rate hikes, Bank of Canada maintains policy rate at 4.5%