If the past few years have shown us anything, it’s that housing in Canada is in high demand.
Between recent interest rate hikes and a shortage of housing supply, many Canadians have experienced more expensive housing costs – regardless of whether they rent or own.
So, what is the current state of the rental and homebuying market and what can we possibly expect to see in 2024? To learn more, we spoke to TD Economist Rishi Sondhi about some of the things to know if you're looking to buy or rent this year.
An overview of the 2023 rental market
To understand today’s rental market, we need to look back. In 2023, the rental market was strong across Canada. Not only did the country experience one of the lowest vacancy rates at 1.5% – according to data from Canada Mortgage and Housing Corporation (CMHC) – but it became more expensive to rent, too.
CMHC found that rents increased 8% in the purpose-built rental market last year – the fastest increase on record since 1992 – showing that rental demand was strong.
When it comes to condos, TD Economics reported that the weighted average rent growth for units in Calgary, Edmonton, Montreal, Toronto, and Vancouver increased 6% in 2023 from the year prior.
Sondhi told TD Stories that one of the key factors that fueled rental price increases last year was population growth in an economy that held strong coming out of the pandemic. That means that those who entered the rental market in 2023 likely experienced more expensive rents and less availability in many parts of the country.
What’s to come in the rental market?
So, what can we expect in the rental market for 2024? So far, rent growth continues to run at a rapid pace. According to the Canadian Consumer Price Index (which tracks rents alongside prices for many other items in the economy), rents jumped by 8.6% in March 2024, compared to their level one year prior.
This rapid rent growth is consistent with what TD Economics expects will come in 2024. However, there are factors that could prevent an even steeper surge in rents this year that could set the stage for cooler growth in 2025.
For instance, one of the factors that could prevent an even steeper increase in rents this year is an expected interest rate cut.
TD Economics predicts that the Bank of Canada (BoC) will announce a rate cut in July, which could impact the rental market. When it becomes cheaper to borrow money, it can help alleviate financial pressure on landlords, therefore reducing the pressure to hike rents.
What’s more, when mortgage rates fall, current renters might consider entering the home ownership market if they can now afford to do so. This could mean slightly less demand for rentals.
Efforts to increase purpose-built rental construction is yet another reason that rent growth may not move much higher this year. More rentals could help better balance supply and demand and help slow rent growth.
“In the rental space, the federal government cut the federal portion of HST on purpose-built rentals. Several other provinces, including Ontario, followed suit in cutting the provincial portion of HST on purpose-built rentals,” Sondhi said.
“So that's a nice drop in costs that should help incentivize construction.”
Recently, the federal government announced its plan to reduce the temporary resident population (which is primarily made up of students and temporary foreign workers) in Canada from its current share of 6.5% to 5% by 2027. If realized, this policy would significantly slow population growth, taking some of the heat off rents. However, this is more of a story to watch next year.
An overview of the 2023 homebuying market
The interest rate hikes Canadians experienced in 2023 impacted the homebuying market.
To recap, for more than two years during the COVID-19 pandemic, the BoC left its overnight lending rate at 0.25%. But, in March 2022, amid rising inflation and the outbreak of war in Ukraine, the central bank raised its rate 25 basis points to 0.5%.
Since then, the BoC has raised its rate several times to help combat rising inflation, culminating in July 2023, when the overnight lending rate hit 5%. Since then, the rate has held at 5%.
According to data from the Canadian Real Estate Association (CREA), home sales totalled 445,514 units in 2023 across Canada, which was a 11.2% decline from 2022 and the lowest annual level for national sales since 2008.
A factor affecting the decline in home sales was a lack of affordability for many Canadians. Amid a backdrop of rising interest rates, data published by CREA found that the national average home price was $670,417 in December 2023, up 4.9% from the December prior.
“Resale home price levels were certainly still elevated in 2023,” Sondhi said. “We all know that prices went up a lot over the pandemic, and they’ve been corrected a little bit, but they haven’t yet gone back down to pre-pandemic levels."
For instance, in parts of the Atlantic Region, average home prices were between 60-70% above their pre-pandemic levels as of March 2024. In larger regions, such as Ontario, B.C. and Alberta, prices were about 30% above where they were before the pandemic struck.
What’s to come in the homebuying market?
So far, average home prices and home sales are tracking stronger than expected, according to TD Economics. The early 2024 market is supported by favourable weather, lower-than-anticipated borrowing costs, and pent-up demand.
For the first quarter of 2024, price growth was seen in the Prairies, Quebec, and most of the Atlantic, Sondhi said, whereas B.C. and Ontario saw price declines.
But this year’s resale market is likely just getting started. According to predictions published by CREA, nearly 493,000 residential properties are expected to be listed for resale on the Canadian Multiple Listing Service® (MLS®) System in 2024, which is a 10.5% increase from 2023.
TD Economics also predicts a pickup in home sales and an increase in average prices in the second half of this year, so long as the BoC cuts its overnight lending rate. “The number one thing that's going to stimulate the resale market this year is interest rates – assuming the economy continues growing,” Sondhi said.
“This should fuel above-average growth in Canadian home sales and average home prices, although affordability pressures will likely keep the gains from being even stronger,” Sondhi wrote in a recent TD Economics report.
Indeed, CREA forecasts that the average home price is expected to climb nearly 5% on an annual basis to reach $710,468 this year.
But, according to Sondhi, an increase in average home prices and home sales growth won’t likely be spread evenly across Canada.
Affordability concerns in provinces such as Ontario and B.C. could limit overall average home price gains, Sondhi said, even though there is pent-up demand in these markets.
Price growth in the Prairies, however, will likely outperform the rest of the market, bolstered by more affordable housing compared to other parts of Canada and a strong local economy. Likewise, Alberta’s resale market is also expected to be strong in 2024 as it experiences significant population growth.
So, what could this mean for you?
For people looking to rent, the picture remains challenging for this year, with TD Economics estimating that rent price growth in the purpose-build market could come in close to the robust 8% increase seen in 2023. In other words, rent prices likely won’t drop significantly.
In cities such as Toronto and Vancouver, rental growth might underperform other markets over the next few years due to the stretched high cost of living, Sondhi said. Since prices are already unaffordable for many tenants in these cities, the sentiment is there isn’t much room for significant price jumps in people’s budgets.
But Sondhi said in cities that are experiencing strong population growth, such as Edmonton and Calgary, the rental markets will likely still be competitive. This means that people looking to rent in these cities should expect higher rent prices compared to 2023. However, 2025 could bring better fortunes, with slower population growth, on-going construction, and lower interest rates feeding into weaker rent price growth.
For those looking to buy in 2024, expect the market to heat up by the second half of the year. TD Economics predicts that a cut in interest rates could help fuel solid growth in home sales and average home prices in the resale market.
But possibly good news for people looking to buy? Tough affordability conditions in several markets, such as Ontario and B.C., could limit overall average home price gains. In other words, home prices in these provinces will likely not trend upwards as significantly as they did during the height of the pandemic, but don’t expect a significant drop in price either.