CMHC’s Housing Market Outlook: a perspective on growth and challenges

(Music fades in.)

(Visual: Government of Canada logo, and CMHC logo fade in together. A series of images featuring housing construction across Canada.)

(Visual: Two people are shown in conversation. They sit across from one another at a boardroom table. The two individuals are Joelle Hamilton, Communications & Marketing, CMHC, and Bob Dugan, Chief Economist, CMHC.)

00:00:05

JOELLE: Hello, everyone, and welcome. Today we're going to dive into the latest Housing Market Outlook report which forecasts housing activity for Canada and its six major markets. Joelle Hamilton here, and I'm thrilled to welcome Bob Dugan, CMHC's chief economist. Welcome Bob. Thank you for joining us today.

00:00:25

BOB: Absolutely. Yeah.

00:00:26

JOELLE: Today we're going to be diving into an important topic. It's one of our biggest flagship reports and that is the 2024 Housing Market Outlook Report. And I thought it would make sense for us to start with talking about our future — like the future of our economy and also, mortgage rates, as I'm sure that's on everyone's minds. The outlook suggests that there's going to be weak economic growth into 2024 but that there will be a recovery or some improvement in 2025 and 2026. How do you see changing mortgage rates and economic conditions impacting buyer behaviour and a rebound or recovery of our housing market?

00:01:15

BOB: Well, you know, when you think about the economy, one of the key things that you have to understand is what's going to happen to inflation because that's really what drives interest rates and the behaviour by the Bank of Canada. We've seen great progress. You know, inflation in February was down to 2.8 percent year over year, well below what it has been, you know, since the pandemic. And so that's — you know, we're starting to see the light at the end of the tunnel now. So we've had a very — you know, stagnant economic conditions for some time now. We don't expect 2024 to see any kind of strong growth but because inflation is coming down, we do believe that the Bank of Canada's going to be in a position to cut rates in the second half of this year. And that's what sets the stage for stronger growth in the years ahead. So as interest rates come down, we'll see, you know, variable mortgage rates come down in step. Longer-term mortgage rates not as much though because you know, we have something — there's something called a yield curve and it's inverted right now which means that you know, rates on ten-year bonds are actually lower than rates on two-year bonds and that’s a very unusual situation that has to resolve itself. And so that rebalancing of the yield curve is going to keep longer-term interest rates higher. So five-year fixed rates won't come down by as much but we will see some interest rate relief and that sets the stage, of course, for housing recovery. So we do expect to see, you know, stronger existing home sales and stronger price growth, you know, this year and in the years ahead.

00:02:39

JOELLE: So the report also highlights a drop in housing starts this year with a slight recovery in the following two years. What's driving this trend and how will these factors impact overall supply and affordability?

00:02:53

BOB: You know, with the housing starts forecast key to the — to our view is what happens to multiple starts and so, you know, larger, you know, higher density kinds of starts like apartment buildings, those kinds of things. And what happens is the planning horizon for those things is much longer. And so last year one of the key errors in our forecast really was multiple starts or apartment starts stayed much stronger than expected because, for a lot of these larger projects, the planning is done well in advance.

So you know, financing, for example, would have been locked in at lower rates before they started to really increase and so there was, you know, scope for those multiple starts to stay very strong last year. But now when we do our market intelligence we made a lot of calls to developers and different folks to get an idea of the building plans and what it looks like is this year the conditions aren’t going to be quite as good for multi starts and the current economic conditions of high-interest rates is going to be reflected more in the level of activity.

So we expect multi starts to come down. Overall, though, single starts slowly improving and then by next year we'll start to see starts moving higher again. But that being said, well below levels that we saw a couple of years ago.

I think it was 2021 housing starts were around 270,000 units. In 2022 they were around 260,000 units.

Starts are moving lower. This year we're only expecting somewhere in the neighbourhood of 220,000 units. And so very low by recent year standards and not enough to close the supply gap. So, you know, we talk about this three-and-a-half million unit gap in the supply of housing by 2030. If we want to close that gap, we have to double the pace of housing starts from where it is now and if it — but we're not seeing that in our forecast. So in the long term, concerns about affordability if we can't build the supply to meet the demand and we could probably see, you know, house prices and rents increasing if we don't get the homes built.

00:04:48

JOELLE: That's actually a really great segue into my next question. We all know that homeownership is still out of reach for a lot of first-time homebuyers. Canada's population has grown due to immigration and many are choosing rental — to rent. What — like can you explain kind of what's behind like this trend?

00:05:09

BOB: Well, you know, so with immigration it's a long-standing sort of fact that you know, when they first arrive in Canada they tend to rent first and eventually they move into homeownership. So when you have high levels of immigration, you know, last year, the year before, these are folks that are still in the rental market by and large. Not all of them but most of them. And so that adds a lot of demand for rental housing. And then with higher interest rates even though we've seen, you know, house prices move lower in recent years, with higher interest rates the financing costs or the carrying costs of a mortgage are higher than they were a few years ago when, you know, prices were higher but interest rates were much lower. So, you know, access to homeownership is difficult. We also have to — people have to qualify at higher interest rates now that interest rates are higher. So these factors are meaning that a lot of potential homebuyers aren't able to make the move from the rental market into home ownership and because of this they're staying in a rental. That's demand for rental.

With strong growth in immigration that's demand for rental and without supply keeping pace that means that vacancy rates are moving lower and we're seeing rents increase. And we really see this when we look — you know, in the last couple of years, we've introduced a new measure of rent increases where we distinguish between rents in — for units where tenants stay in the apartment because largely those are controlled by rent control in some provinces or you know, by longer-term leases where the rents are predetermined. But when you look at turnover rent, so when a person moves out of a unit and someone else moves in, those new rents really are a reflection of the market, the tension in the market or the lack of supply. And for Canada last year in non-turnover units, rent growth was closer to five percent but when you look at turnover units it was closer to 24 percent. And there are CMAs like Vancouver where in turnover units the growth was actually closer to 33 percent and in Toronto closer to 40 percent. So that just gives you an idea of how the market being in short supply is really driving a deterioration in affordability for people in the rental market.

00:07:11

JOELLE: So I read in the latest outlook that housing prices are set to rise and may even surpass record levels that we saw, I think it was back in 2021 during the pandemic. What's behind that trend?

00:07:27

BOB: I mean it's a repeat of the story I just talked about. It's a supply shortage, right? And so we don't have enough supply of housing in Canada. So as interest rates begin to move down and you know, there's a lot of pent-up demand for homeownership, people that didn't buy in recent years because of high-interest rates that are waiting to sort of jump in, some of these folks will be entering the homeownership market, and when that starts to happen with limited supply that's going to put upward pressure on prices. So it's the deterioration and affordability isn't just a rental story. It's also a homeownership story. So we need more supply of both kinds of housing. And so with strong demand or stronger demand, we're going to see increases in house prices on average in Canada this year just under five percent, but by next year closer to nine, ten percent growth in house prices. And so that's just a reflection of the shortage of supply, the increasing demand and so again a deterioration in affordability likely for people in the homeownership market as well in the years ahead.

00:08:25

JOELLE: I'm hoping you can expand on the two scenarios that are presented in the Housing Market Outlook report. There's the pessimistic scenario and higher growth scenario. Can you explain both of them and their potential impact on Canada's housing landscape?

00:08:42

BOB: Sure. Well, I think it's first important to recognize that forecasting is not an exact science. And so most forecasts, you know, when you look at them in hindsight a year later are wrong. Not that they're completely off but they're usually wrong. So if we say GDP's going to grow by, you know, .3 percent this year, if it's .4 percent, you know, it'll — there'll be some variation around that. And so you have to sort of look at alternate scenarios where you try to anticipate well, what could go better or what could go worse and how does that look for the economy and then how does that look for the housing market just to give people a range of outcomes so they can understand, you know, what our point forecast is but also what kind of range around that there might be to sort of see, you know, what could the housing market look like in a higher growth scenario or a lower growth scenario.

In our low growth scenario, we try to recognize the fact that, you know, inflation has been more persistent than most people had expected. And you know, when you think about interest rates and you look at people's expectations for interest rates, the cut in interest rates keeps being pushed down the road by higher inflation. And so right now our point forecast as rates start to come down in the second half of this year but if inflation is persistent, the Bank of Canada will have to keep the fight up against inflation because they have a target of two percent. They want to get inflation back down there and you know, their credibility rests around their ability to achieve that objective. So they want to make sure inflation moves back down towards two percent. If progress is slower that means interest rates stay higher. That slows the economy but also puts pressure on Canadian homeowners because we have a high level of household debt in Canada and we have a lot of mortgages that have yet to renew at higher rates.

So many homeowners that bought three, four, five years ago still have their low mortgage rates but when their terms are up for renewal they face a higher mortgage rate that'll squeeze their budgets because now all of a sudden their mortgage payments go up because of the higher rates. And so these kinds of things are what we see happening in our downside scenario. Higher rates, households facing a higher interest rate burden on the debt that they hold and that slows the economy. On the upside, one of the things that's helped, you know, the Canadian economy grow in recent years has been the strong level of immigration. And so stronger population growth due to immigration in the forecast period is part of what tells the story of why growth might be higher but also, we assume Canada has a problem with labour productivity and it's very low compared to other G7 countries. We also factor in a bit of an improvement in productivity as immigrants get integrated into the labour force and that improves productivity growth, income growth, and that leads to a higher growth scenario for the economy. In both these situations — in the high-growth scenario what it means is we're going to see stronger growth and demand for both rental and ownership housing. That means more upward pressure on, you know, rents and home prices and possibly a bigger deterioration in affordability offset somewhat by stronger income growth but generally a bigger deterioration in affordability because we don't see starts rebounding enough to make up for the extra demand in this scenario.

In the lower growth scenario, of course, we get a little bit of relief on homeownership demand but maybe more deterioration in the affordability of the rental market because if interest rates stay higher for longer and more people are burdened by their heavy debt levels it's harder for them to get — make that move from rental to homeownership. And so you know, it'll mean maybe more of a deterioration in the rental market affordability and higher interest rates making homeownership less accessible for many Canadians.

00:12:21

JOELLE: So you dove into a little bit of some regional trends but I'm hoping that you can expand on what's happening in Canada's six biggest cities.

00:12:32

BOB: The story is going to be very similar across most of the cities, you know, with some timing differences. And so basically one of the key drivers of what's going to happen in the housing market is the fact that the economy's going to strengthen and interest rates are going to come down. And so in certain parts of the country, they'll see the benefits a little bit sooner. Like we actually expect that housing starts in Montréal will stabilize this year, you know, and housing demand will increase and we'll see more MLS sales and house price increases.

In Vancouver, you know, they're one of the two cities — when I think about Toronto and Vancouver, these are the two cities where we had the biggest error in our multiples forecast last year when I was explaining earlier about how these are longer-term horizons projects. Well, this is where we see some of the weakness in multiple starts this year. So in both Vancouver and Toronto, we expect multiple starts to be lower which will hold back housing starts. But we do expect MLS sales in both of these places to increase and price growth to resume but a little bit not quite as much optimism on the housing starts forecast because of what's going to happen to multis this year being slower, so. But then eventually next year in Toronto, Vancouver, we should see starts begin to improve as well. And so it's just really a bit of a timing difference but you know, most places are going to start to see that recovery in housing markets. It just depends on with housing starts when that actually starts to take hold.

00:13:55

JOELLE: We're down to my last question. Do you have any advice or key takeaways for builders, for policy makers that may be using the information contained in our outlook to make future decisions?

00:14:12

BOB: Well, I'm hoping that this outlook — especially when you look at the housing starts, it really tells a story that housing supply is not going to bridge the gap. We need it to, according to our forecast right now, to restore affordability by 2030. As I said earlier, we would need starts to double the pace that we're forecasting each and every year. And so I think this forecast is a bit of a warning that we have to get serious about — and we are serious about it.

But we have to make sure we get those homes built if we want to see that improvement in affordability because with our baseline forecast and starts sort of in that 220 to 230,000 unit range over the next several years it's not enough to close that gap. And the real risk is we're going to see a further deterioration in affordability for both homeowners and for people in the rental market.

00:15:00

JOELLE: Bob, thank you so much for sitting down with me today and providing us with some really great insights into the 2024 Housing Market Outlook. It's been a pleasure having you in the podcast studio today and I look forward to you coming back soon.

00:15:14

BOB: My pleasure. So long.

00:15:15

JOELLE: And thank you to our viewers today. Stay tuned. In the coming weeks, we'll release our full Housing Market Outlook which will dive into additional markets. And we do want to hear from you. Feel free to leave a comment with your feedback on the report or this discussion. And be sure to subscribe to our YouTube channel for more conversations that matter here on our podcast. Until next time.