Our updated forecast has been influenced by significant positive surprises in Canadian home sales and average home prices during the second quarter. Our previous projections indicated that sales had fallen short of levels aligned with underlying fundamentals, such as income and population growth. However, the recent surge in sales has closed this gap. The sharp increase in prices has also had a more negative impact on affordability than we had initially expected, which could affect future market activity.

Based on resilient housing and consumer spending data, the Bank of Canada decided to raise its policy rate in June, following a four-month pause. By the end of July, policymakers will have implemented an additional 50 basis points of tightening compared to our previous expectations. Apart from the direct effect of a higher policy rate on affordability, a more hawkish stance from the central bank may dampen the enthusiasm of buyers who had rushed into the market when the Bank paused earlier this year. It appears that the signaling from the Bank of Canada is playing a significant role in shaping the dynamics of the housing market. Additionally, our forecast for bond yields has been significantly upgraded.

We anticipate a decline in Canadian home sales in the second half of this year, reversing part of the recent strength. Moreover, we expect the pace of growth in purchases to slow down in 2024 compared to our previous projections. Limited supply in tight markets is expected to keep Canadian average price growth positive in the third quarter, but we anticipate a slight drop in prices in the fourth quarter. Similar to sales, we have adjusted our quarterly growth expectations for next year, lowering them from our March forecast.

Given the aforementioned challenges, one might question why we still forecast growth in sales and prices next year. Our expectation is that the Bank of Canada will begin reducing rates in the second quarter of 2024, and bond yields should also decrease. Additionally, population growth is projected to remain strong, and job markets should continue to generate positive income gains, despite some deterioration in the unemployment rate.

Chart 2 illustrates the quarter-on-quarter percentage change in Canadian home sales and average home prices from the first quarter of 2023 to the fourth quarter of 2024. Canadian home sales growth is expected to decrease from an estimated 17.6% in the second quarter of 2023 to -0.5% in the third quarter and -4.5% in the fourth quarter of 2023. Thereafter, it is anticipated to average 3.3% per quarter in 2024. Meanwhile, Canadian average home price growth is expected to decrease from an estimated 10.1% in the second quarter of 2023 to 1.2% in the third quarter and -1.0% in the fourth quarter of 2023. Thereafter, it is expected to average 0.6% per quarter in 2024.

The supply in the resale market remains low, with new listings in May being approximately 16% below the post-GFC (Global Financial Crisis) average. Several factors contribute to this subdued supply backdrop. Healthy job markets and the ability to extend amortizations have prevented forced selling. Moreover, poor affordability may discourage move-up buying, which could impede growth in listings. We may observe a temporary increase in listings as homeowners respond to the recent strengthening in price conditions. Next year, we anticipate a more sustained rise in resale supply, even though the resilience in employment levels limits the risk of a flood of forced selling.

In terms of annual average growth, sales are expected to outperform in Ontario and British Columbia (B.C.) in 2023 and 2024. However, this largely reflects a return to more “normal” sales levels after a sharp decline last year. On a quarter-on-quarter basis, we anticipate relatively cooler price growth in Ontario and B.C. for the remainder of this year and next, as these regions are more sensitive to the higher rate environment. Nevertheless, compositional forces, such as stronger growth in detached prices, could provide some near-term upside to average prices.

In contrast, we expect quarterly price growth to improve in the Prairies going forward, indicating a reversal from earlier underperformance this year. This is supported by favorable affordability conditions and relatively robust economic growth. Sales growth in Alberta may lag somewhat due to a higher starting point. In the Atlantic region, solid population gains and tight markets are expected to maintain elevated prices in the second half of this year and drive further increases in 2024. However, severe affordability challenges may restrain the pace of price growth. In Quebec, relatively modest population expansion is likely to weigh on demand more compared to other regions. Meanwhile, markets that are relatively looser than the rest of Canada (yet still tight by Quebec’s historical standards) are likely to experience comparatively slower price growth going forward.

The possibility of stricter mortgage lending rules has been raised by regulators and remains a significant downside risk to the outlook. However, we do not have sufficient clarity to incorporate this into our forecast. Sales could also be weaker than anticipated in the near term if the central bank’s hawkish signaling significantly disrupts buyer psychology. Weaker-than-expected economic growth could also impact prices through softer demand and an increased likelihood of strained homeowners resorting to forced selling.

On the other hand, compositional forces that drive up average prices in Ontario and B.C. may persist longer than initially anticipated. Housing shortages resulting from robust population growth could also exert upward pressure on prices beyond our expectations.