MNI INTERVIEW: Canada Housing Agency Sees Resale Price Boom

Canadian home prices are on the cusp of another boom as mortgage rates are likely to retreat only gradually and builders will struggle to keep up with demand, the chief economist for the country's housing agency told MNI.

Bob Dugan of Canada Mortgage and Housing Agency predicts home resale prices will return to record highs about a year from now and keep booming after that, reaching about CAD815,000 in 2026 from CAD711,400 this year. Those gains would amount to an almost 20% increase over five years from the CAD687,300 recorded in 2021; in dollar terms the difference is bigger than the typical family's annual income.

Affordability is also getting worse for rental apartment units and whatever new supply gets built may be snapped up by young families that have been squeezed out of the property market. The agency's most recent figures show Toronto's rent-controlled units are up at a 4.4% annual pace -- but when a unit turns over and resets at market rates the increase is 40%, Dugan said.

"There just isn't enough supply to meet the needs of a growing population," he said in a phone interview. "There are a lot of people on the sidelines now." The agency has estimated 3.5 million more units are needed in a nation of about 40 million people to restore affordability.

GRADUAL BOC CUTS

While housing starts took a hit after the Bank of Canada's 10 interest rate increases, supply constraints mean there will only be a limited comeback as the central bank starts lowering borrowing costs later this year, Dugan said. Homebuilders are already working at a strong clip, and many have reported labor shortages and restrictions on new construction that make mass production difficult.

"There are going to be gradual decreases in interest rates" from today's 5% to 2.5% in the second half of 2026, Dugan said. “If they move too quickly the danger is the credibility of a stable 2% inflation rate could come into question,” Dugan said, citing extra pressure from recent elevated wage demands. (See: MNI INTERVIEW: BOC Has Case For No Cut This Year: Dal's McNeil) The surge in housing costs alone has propped up headline inflation and made it harder for the Bank to cut rates.

Mortgage rates on popular five-year fixed loans will also fall by less than the policy rate, Dugan said. That's because the yield curve for benchmark federal bonds remains inverted and that boosts the funding costs of commercial banks, he said.

“This forecast sends a bit of an alarm bell that affordability is likely to deteriorate given this housing starts forecast because we’re not adding enough units,” Dugan said. “Nothing would make me happier if we spoke in a couple of years’ time and my house price forecast was too aggressive."