Experts predict 'snapback' in Toronto housing market following severe slowdown in 2023

Real estate sales are expected to rebound this year after reaching a multidecade low in 2023 — but experts caution not to expect the pandemic feeding frenzy that churned out record sales and home prices. The total number of home sales reached 65,982 in 2023, according to data from the Toronto Regional Real Estate Board (TRREB), and a 12 per cent dip from to 2022.

Despite an uptick of new listings during the spring and summer, the number of new listings also declined by 6.6 per cent year over year in December. But experts expect sales to increase in 2024, as forecasted interest rate cuts release pent up buyer demand, which in turn will lead to a crop of new listings as sellers opt in to the more active market.

The increased volume of transactions could put upward pressure on prices, leading to further affordability challenges. "Last year was a terrible year," said mortgage broker Ron Butler. "There will be some pent up demand after experiencing multidecade lows especially with millions of people coming into Canada.

We will see some snapback in the market. When that snapback will come, and by how much, is hard to say." If the Bank of Canada signals rate cuts soon there is concern it will create another feeding frenzy in the market, he said, similar to what occurred in spring 2023 when there was renewed interest from buyers and sellers after the Bank of Canada paused rate hikes.

"If interest rates fall in 2024 we could see sales volumes and prices come back relatively quickly," said David Macdonald, senior economist at the Canadian Centre for Policy Alternatives. Cutting interest rates is a double edged sword, as it will decrease mortgage interest rates, rental costs and inflation (mortgage costs and rents are the biggest drivers of inflation currently), but it could also create a run up in prices, worsening housing affordability, he added.

Even though Toronto home prices have dropped more than 15 per cent since the February 2022 peak, prices are still close to 30 per cent higher than 2019 levels — hoping to attain the pandemic price peak, he said. "Home prices would have to fall drastically to get to those pre pandemic numbers," Macdonald said.

"And with rates cuts, prices are likely to go up." As soon as the Bank of Canada cuts rates by 25 basis points it will signal to the markets that the economy has turned a corner, said Tony Stillo, director of Canada Economics at Oxford Economics. "The markets will react quickly and factor in anticipated rate cuts," he said, "meaning there is the potential for real estate to spring back more strongly than the Bank of Canada would like.

That's why they'll be very measured in their signalling to avoid an upswing in housing." But there are economic factors that could hamper activity in the market for the next two quarters, experts say. The economy is currently in a moderate recession, said Stillo, which will continue for the first half of the year.

When more homeowners renew their mortgage at higher rates, household debt will increase limiting their purchasing abilities. Because of this, consumers will take a more cautious approach when it comes to large investments, such as property, he added. Layoffs in tech, finance and media have also been significant, Butler said, giving consumers a cautious approach to their finances.

"People have to feel good about their economic situation," he said. "Prices should revive but there are some (economic) differences now compared to a year ago. The sentiment of buyers and sellers is hard to pin down." Sal Guatieri, senior economist and director at BMO Capital Markets, doesn't see a large rebound in activity or prices this year, and even expects further price softness in the first half, given that affordability will remain a pressing issue due to current high values and likely still elevated borrowing costs.

"An increase in listings could offset firmer demand to limit price gains this year," he said. "It may take until 2025, when interest rates are reduced further, to spark a more material rebound in prices.".