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Royal LePage Reports a 4.3% YoY Increase in Last Quarter’s Home Prices, Foresees Market Changes in Light of Potential Rate Reductions

In the final quarter of 2023, Royal LePage’s House Price Survey reported a year-over-year increase of 4.3 percent in the aggregate Canadian home price, bringing it to $789,500. However, there was a quarter-over-quarter decrease of 1.7 percent in the national aggregate home price, indicating that market activity is still influenced by higher borrowing costs.

Phil Soper, the president and CEO of Royal LePage, notes, “I believe the narrative suggesting that the housing market will rebound only when the Bank of Canada lowers rates misses the mark. The recovery will begin when consumers have confidence the home they buy today will not be worth less tomorrow. We see that tipping point occurring in the first quarter, before the highly anticipated easing of the Bank of Canada’s key lending rate.”

When it comes to price changes by housing type, the national median price of a single-family detached home rose by 4.4 percent year-over-year to $816,100. Meanwhile, the median price of a condominium saw a year-over-year increase of 4.0 percent, reaching $583,900. On a quarter-over-quarter basis, the median price of a single-family detached home decreased by 2.1 percent, while the median price of a condominium saw a slight decline of 0.6 percent.

Soper adds, “Canadian consumers are moving through a period of transition and as a result, so are the dynamics of our national housing market. Buyer sentiment can have as great an impact on market trends as inventory or interest rates. Early market recovery will be sparked by signs of home price stability, and we are very close to that now.”

In terms of how the current aggregate price compares to previous quarters, the aggregate price of a home in Canada is 7.9 percent below its peak, which was reached in the first quarter of 2022. However, the national aggregate home price remains significantly above pre-pandemic levels. The aggregate price in the fourth quarter of 2023 was 18.7 percent higher than the same period in 2020 and 22.2 percent higher than the same period in 2019.

Soper explains, “People are working, with unemployment particularly low among the key 25 to 55-year-old demographic. Discretionary spending is down and savings levels are materially higher than normal. Nearly two years after the Bank of Canada began raising rates, mortgage delinquency remains at historic lows. We believe many who need housing have the capacity to enter the market, they simply lack the confidence to transact.” 

While the latter half of 2023 saw a slight decrease in prices across Canada, Calgary bucked the trend with rising prices. Calgary was the only major region to report a quarter-over-quarter aggregate price gain (of 1.5 percent), and the city also had the highest year-over-year price increase (of 10.7 percent).

The Canadian Real Estate Association (CREA) reports that inventory levels have risen from the extreme lows experienced during the pandemic, but they still remain below historical norms. In the fourth quarter of 2023, just over four months of inventory was available nationwide, a stark contrast to the less than two months of inventory at the end of 2021, and even more so when compared to the five to six months of supply in the first half of 2018 and 2019.

Phil Soper, CEO of Royal LePage, observes, “Over the past eighteen months, we’ve seen a decline in sales activity across most of Canada’s major real estate markets while inventory levels have slowly risen. However, the number of homes on the market is still well below current and future demand. This fundamental housing shortage will inevitably drive up home prices when buyers, who are currently on the sidelines, return to the market in the coming months.”

In December, the Bank of Canada maintained its key lending rate at 5.0 percent, suggesting an end to the trend of rising interest rates. The central bank even anticipates slightly reducing rates later this year, and some major financial institutions are currently offering discounts on fixed-rate mortgages.

Soper notes, “The Bank of Canada’s governing council will soon face the challenging task of trying to lower interest rates without simultaneously stimulating spending, which would lead to a rise in inflation.” The Consumer Price Index increased by 3.1 percent year-over-year in November, matching the increase from the previous month. Excluding the costs of mortgage interest from the index’s calculation, this puts inflation at 2.2 percent, close to the Bank of Canada’s target rate. 

Soper adds, “In Canada, we typically opt for short-term mortgages of five years or less, unlike in the U.S. where 30-year terms are more common. In a typical year, 25 percent of our mortgages are renewed. As a result, between 2023 and 2025, most Canadian homeowners will have transitioned to higher mid-single-digit borrowing rates. This will require us to adapt quickly, setting our industry on a faster path to recovery than in the U.S., where the prospect of losing a below-market rate can deter relocation.”

Nearly half of all outstanding Canadian mortgages, affecting about 2.2 million households, are due for renewal this year and next, as reported by the Canada Mortgage and Housing Corporation, and most will be at a significantly higher rate. Soper predicts, “Just as we saw last spring when the Bank of Canada paused rate increases for the first time in a year, leading to an immediate surge in sales activity and prices, the first hint of rate cuts, even if only by 25 basis points, could trigger a flurry of activity in the real estate market, releasing pent-up demand. Those who have been hesitant to list their homes will likely follow suit.”

Last month, Royal LePage’s 2024 Market Survey Forecast predicted a 5.5 percent increase in the aggregate Canadian home price in the final quarter of this year compared to the same period in 2023. The company anticipates a modest rise in home prices in the first half of the year, with more significant increases in the latter half due to increased activity following interest rate cuts. This forecast is based on the assumption that there will be no additional interest rate increases and that the key lending rate will stay at 5.0 percent throughout the early part of 2024.

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