Mortgage temperature check: Canadians watching for a turning point in the housing market

Coupled with inflation, the rising cost of living has tightened the belt on home affordability, leaving fewer individuals able to afford their dream homes.

However, as spring blossoms, so does the real estate market. Historically, this season brings increased activity, warmer prospects, and a surge of buyer confidence. The question remains: With rate cuts on the horizon, will Canadians seize this opportunity?

We looked at RATEDOTCA mortgage quoter data to see how current and potential homeowners are responding to home buying intentions and navigating the mortgage renewal market.  Keep reading to see our findings.

Could the housing market experience a case of Déjà Vu?

In the last year, BoC announced a “conditional pause” in its rate hike cycle. Market watchers speculated that rate cuts were coming, resulting in lower yields and a gradual recovery in the cooling housing market. However, hopes were dashed when the BoC surprised with back-to-back rate hikes in June and July 2023. Bond yields surged, driven by a prevailing “higher for longer” mindset.

While expert and market forecasts help guide predictions, unforeseen global events or inflationary snags could always alter the central bank's timeline for rate cuts.

Will more houses be sold in 2024?

The Canadian Real Estate Association projects a 10.4% increase in home ownership change this year compared to 2023. The most significant sales gains are anticipated in provinces with robust housing demand, notably Alberta, as well as in provinces poised for a rebound from historically low sales volumes, including British Columbia, Ontario, and Nova Scotia.

Overall, sales activity in Canada’s major real estate markets has experienced a decline in the past eighteen months. Although transactions have decreased by as much as 20 to 30 per cent in certain regions, according to Royal LePage, home prices have only slightly declined during the same period, remaining higher than they were in 2022. Demand has also tapered off somewhat, as potential buyers await lower interest rates.

As the anticipation grows for the BoC to announce rate cuts in the second half of 2024, more people expect home sales to surge. The heightened demand, coupled with limited housing listings, is expected to increase competition among buyers. Consequently, the Toronto Regional Real Estate Board (TRREB) is projecting 77,000 homes in the GTA to be sold in 2024 compared to less than 66,000 transactions that were recorded in 2023.

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

Spring market: Buyer confidence is back, but they’re waiting for rate reductions

There are definitely buyers on the sidelines waiting for interest rates to come down. Last month (February 2024), 89% of total RATESDOTCA quotes for mortgages were for new home purchases.

In recent months, many home buyers who had stepped back due to rising interest rates are now returning to the market. However, available housing inventory remains tight across most of the country, creating a competitive environment.

“It’s starting to become clearer that, barring any unexpected shock to the economic system, rates may have peaked and could begin to decrease sometime later this year,” says Ryan Biln, economist at the Canadian Real Estate Association (CREA). “That may make potential buyers feel more comfortable moving forward with financing and putting in offers.”.

It’s estimated Canada’s population has increased by more than two million since 2020 and that’s also contributing to the shortage in available supply. Biln explains that while interest rates and financing are important considerations, other factors — like employment, family, lifestyle, supply/demand conditions — also affect people’s purchasing decisions. The most important metric to watch for this year will be how many people put their homes up for sale.

There's not much hope for home prices to drop 

Gone are the days of affordable homes. Only 13% of semi-detached homes in Ontario are priced at $500,000 or less. And home prices in all major markets across the country are only expected to rise in 2024.

For instance, the cost of a home in the Greater Toronto Area is expected to grow above the national average to $1,198,012, (6% higher than it is currently). Cities like Vancouver, Halifax, Regina, and Winnipeg are forecast to see the least year-over-year increase in prices.

Any predictions of a decline in home prices are often met with skepticism by experts, and for good reason. Let’s delve into some reasons behind this:

Supply and demand dynamics: The Canada Mortgage and Housing Corporation (CMHC) highlights a pressing need for approximately 3.5 million additional housing units by 2030 to address affordability concerns. The demand is particularly acute in Ontario and British Columbia. The pace of housing construction simply isn’t keeping up with the projected demand.

Composition effect: According to CMHC, average home prices have dropped by 15.6% since their peak in February 2022. But here’s the twist: this average might not tell the whole story. It could be due to changes in the types of properties being sold. For example, if more condos (which are generally more affordable) are being sold, it can pull down the average price—even if individual property values haven’t changed much.

What fixed and variable mortgage rate holders can expect

As expectations for the Bank of Canada’s (BoC) policy rate evolve, so do fixed-mortgage rates. Currently, the market is closely monitoring any signals that could push back forecasts for eventual rate cuts. Why? Because yields — and by extension, fixed mortgage rates — are tied to the central bank’s monetary policy decisions.

The bond market has already priced in significant BoC rate cuts over the next two years. Declining bond yields, tied to expectations for rate cuts from the bank in 2024, have pushed down fixed mortgage rates by a full percentage point - creating an attractive opportunity for Canadians who are entering the spring housing market or have a mortgage up for renewal. As of February, the rate stands in the high 4 per cent bracket.

Over our sample period on the RATESDOTCA mortgage quoter, 87% of total mortgage quotes were for fixed rates, while variable rates make up the remaining 13%. The proportion of variable rate quotes has declined since 2022, when they constituted as much as 45% of the total quotes.

Michelle Farrugia, mortgage broker and director of sales at Mortgage Outlet Inc. shares two popular options that make the most sense in today’s mortgage market - a 3-year fixed or a variable rate, depending on your risk tolerance.

“The one and two-year terms are priced at or higher than the variable rate on most products, and choosing these options would mean you believe the rate market will come down in that time,” she explains.

She suggests those who share that belief might benefit from the similarly priced variable rate and ride the cresting wave of future rate drops. However, more conservative buyers might opt for the 3-year fixed rate, which is sitting lower than the variable rate and may provide interest savings in the interim as the rest of the country waits for rates to come down.

While a variable rate now can be advantageous, there’s also a caveat. If you can afford to take risk of a slightly higher and unpredictable rate, it might be a great choice. However, many homeowners can't afford such uncertainty, and the difference in interest payments could be substantial over the term of the mortgage.

Five-year vs three-year mortgage terms

Despite indications that interest rates could crawl back down later this year or early next, RATESDOTCA data suggests that more people are looking for longer-term security: Last month, 54.7% of Canadians shared interest in a 5-year term compared to a 3-year term (45.3%).

Traditionally, Canadians have favored five-year fixed rates. However, as three-year fixed terms gain popularity, current and potential homeowners are now anticipating that rates will be lower in three years.

“While long term fixed rates will provide for lower payments, variable mortgages will result in higher payments,” notes Dean Artenosi, owner of Ontario-based Coldwell Banker, The Real Estate Centre. “But when rates come down, homeowners will have the flexibility to lock into fixed rates.”

Read more: $23,579: This is how much more a variable-rate could have cost homeowners over fixed-rate

The mortgage renewal market

According to analysts, $251 billion worth of mortgages will come up for renewal in 2024, followed by another $352 billion in 2025. The pressure is mounting, and homeowners must prepare for potential payment shocks. The BoC predicts that 80% of mortgage holders will face a “relatively large” payment increase by the end of 2025.

While the central bank monitors the mortgage market, a significant portion of homeowners (40%) have already experienced the sting of higher renewal rates. Last month, in February, 42% of total RATESDOTCA quotes were for mortgage renewals.

Fixed-rate mortgage holders— those with expiring or recently expired terms —have and will continue to join the fray. Consumers who locked in historically low interest rates in 2020, particularly those with substantial loan amounts, are in for much higher rates upon renewal.

Related: 35% of homeowners are concerned about paying their mortgage, 31% concerned about their economic future: survey

Mortgage debt takes up 140% of Canadians’ disposable income - Will it increase, stabilize or decrease?

Canadian households are currently grappling with mortgage debt, which stands at nearly 140% of disposable income.  And it’s likely that this debt will continue to rise in 2024. Factors such as ongoing housing demand, interest rates, and economic recovery will contribute to this trend.

As mortgage debt climbs, there’s a risk of households becoming overextended - when households take on too much debt relative to their income.

If interest rates hike significantly again or if economic conditions change (for example, job loss or economic downturn), borrowers may really struggle to manage their debt payments and meet mortgage obligations.

Read more: Should you refinance your mortgage?

Down payment amounts may vary but loan-to-value ratio remains unchanged

TRREB’s latest buying and selling intentions survey shows us that the anticipated down payment for a home in Canada is 32% in 2024.

According to RATESDOTCA data, the average down payment potential homeowners intended to make in February 2024 was $159,015. The same time a year ago it was $198, 881. However, the loan-to-value (LTV) ratio remains similar which means that the borrower would still finance roughly the same percentage of the home’s worth, even though the actual dollar amount of the down payment has decreased.

“Home prices are beginning to trend upwards again as sidelined buyers are beginning to jump back into the market after seeing a handful of BoC rate holds,” says Mortgage Outlet’s Michelle Farrugia. “Pair this with the still-high interest rates, and it takes a lot more dollars for a buyer to secure a property as their mortgage affordability just isn't high enough to get them there.”

Related: What type of mortgage and term should you get?

Locking in rates for the next 120 days is like a free insurance policy

For prospective homeowners considering a new mortgage (78% of all mortgage quotes in February), there’s a silver lining. With the market currently appearing to ease up, there is the option to lock in current rates for up to 120 days in advance, otherwise known as a rate hold. If bond yields continue their downward trajectory, you’ll benefit from the new rates. Conversely, if rates rise unexpectedly, your rate hold shields you from potential increases.

Rate holds were designed as an opportunity to lock in a competitive rate to hold while you shop, now they’re a safety measure to protect you from future market increases.

But before taking the option of a rate hold, it’s worth considering the potential drawbacks.

"Many lenders are only offering holds on their inflated posted rates, whereas the same deal presented for a legitimate mortgage (not a pre-approval) would be priced up to one per cent lower,” explains Farrugia.

Lenders do this to signal their disinterest in spending time on pre-approvals and instead want to use their resources assessing live deals where there is real opportunity for profit on the table.

Farrugia gives us an example: Rate holds in late August last year on a 3-year fixed mortgage sat around 5.8% while a ‘live’ deal was being priced around 4.99% for the same product. While the rate hold was unappealing at the time, it came in handy for buyers who secured homes in late November when rates soared closer to the 6.5% range.

Related: Looking for a new home? Why you need to pre-qualify first

Alberta is calling, and Canadians are picking up

Alberta saw 56,245 more people moving to the province than leaving it.

The bulk of Alberta's growth between 2022 and 2023 was the result of two things: international migration and interprovincial exchanges. During this period, the province experienced the fastest year-over-year demographic growth among all provinces and territories, exceeding four per cent.

Alberta’s housing market is expected to outperform the national average. Strong migration and better affordability play a significant role. However, Albertans are not immune to the impact of higher interest rates. They rank third in the country for indebtedness, with a debt-to-income ratio of 180%.

Despite this, a higher proportion of non-mortgage debt and smaller mortgages make them less sensitive to interest rate fluctuations.

Read more: 48% of Ontarians changing moving plans due to high interest rates

Housing inventories remain low, especially in Calgary, which is reflected in increasing prices. Rental prices have also surged in the province over the past year, with Stampede City leading the way. The province’s residential sales numbers exceeded the January average, recording the second-best January on record.

Over the past year, the average home price jumped by 12.3% to $479,325, setting a provincial record. Average prices in Edmonton and Calgary have also increased by over 10%. For the province, the sales-to-new listings ratio remains high at 79% indicating a sellers' market.

However, Alberta has one major benefit for many out-of-province buyers.

“Alberta also offers a cool advantage of having no land transfer tax, so the closing costs on real estate there are relatively nothing compared to any other province where people are paying tens of thousands of dollars on transfer taxes,” says Farrugia.

She has seen an increase in more conversations than ever with clients about out-of-province buying (particularly in Alberta, Nova Scotia, and New Brunswick), where prices are lower, but rent is still relatively strong.

While housing investment in Alberta has improved recently, challenges such as labor shortages, elevated construction costs, and higher interest rates continue to impact residential construction. However, recent data suggests that developers are responding to low inventories and rising prices in the housing sector and that residential investment will improve in 2024.

Read next: Investing in homes, investing in tomorrow: survey

Canada’s efforts to help with housing affordability falling short

Experts are relatively unfazed with governmental structures and policies that are supposed to help with housing affordability, such as the recent shut down of the unpopular First Time Home Buyer Incentive, which was roundly criticized for its restrictive eligibility criteria and would have homebuyers sharing equity in their home with the government.

Other policy changes like the cap on international students might make a tiny dent but is not significant enough in the grand scheme of things.

According to Ryan Biln from the CREA, while the cap made headlines, it’s only in place to “stabilize growth”. While it may reduce student intake in Ontario and, to a lesser extent, British Columbia, New Brunswick, and Nova Scotia, other provinces and territories may still see more international students in 2024 compared to 2023 due to the cap being set on a provincial/territorial basis.

“We have seen many policy changes across all levels of government over the last decade that are put in place to help with housing affordability and supply but, in many cases, these policies haven’t been able to keep up with high demand for homeownership in the country,” says Biln.

One example of these efforts is the Ontario government’s initiative to remove the full 8% provincial portion of the Harmonized Sales Tax (HST) on qualifying new purpose-built rental housing in order to get more rental homes built across the province.

For now, potential homebuyers await favorable interest rates before entering the market, while current homeowners face renewals. Despite limited inventory ahead of the spring market, home prices remain resilient. All of this sets up the real estate stage for an intriguing season.