Housing is a tale of two markets

The Bank of Canada is expected to start cutting interest rates soon, and the effects on the housing market will be closely watched. 

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Benjamin Tal, deputy chief economist with CIBC, said his rate outlook is for the central bank to begin cutting as early as June. 

“Inflation is behaving nicely,” Tal said, referencing slower growth data. “There is no reason not to cut at this point.”

Expectations of rate cuts are already reflected in the housing market, he said. 

“We are seeing the low-rise segment of the market — the detached segment of the market — starting to wake up,” Tal said, adding that supply remains constrained.

He especially anticipates an increase in demand for detached homes in the $3 million to $4 million price range, he said.

The condo market, however, is a different story, because pre-sale activity is weak, Tal said. “Whatever you see in terms of [condo] construction is actually completing previous engagements,” he said.

As a result, “the housing market will be a tale of two markets,” he said.

Tal noted, though, that in two to three years, if interest rates are lower along with condo supply, prices in that market will increase. Given that dynamic, now may be a good time to invest in a condo, he suggested.

In addition to market dynamics, Tal noted government interventions aimed at easing housing pressures.

“When it comes to the [federal] budget and its impact on the housing market, I think that many of the steps … were steps in the right direction,” he said, citing measures aimed at supply.

He also noted that the government’s move to reduce the number of non-permanent residents will put less pressure on the rental market.

“However, a lot more needs to be done,” Tal said.

“For the first time, governments at all levels are understanding that we have to treat this situation as an emergency because it is an emergency,” he said. Developers should be incentivized to build more rental units, he suggested.

Looking ahead, Tal said the primary risk to the housing market and broader economy remains persistent inflation. Should inflation remain high, the Bank of Canada and the Fed might find themselves forced to maintain or even increase interest rates, potentially leading to a recession and a “significant correction” in the housing market. 

“That’s not the main case scenario at this point,” Tal said, “but it’s definitely a risk.”

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