Real Estate Resilience: A Recap of 2023 and Anticipating Opportunities in 2024
Paul Stevenson
Mortgage Agent Level 2 | Podcast Host of The Ottawa Real Estate Podcast
As we approach the end of 2023, many individuals find themselves reflecting on the past year and contemplating what lies ahead in 2024. It's a time for personal growth and improvement, as we navigate the ever-evolving landscape of our economy and our lives. During this transformative period, people have been compelled to reassess their spending habits, choices, and even their beliefs in order to determine the most promising path forward for themselves and their loved ones. Given the current financial climate, it's difficult to envision a scenario more challenging than the one we currently face. Many Canadians are teetering on the edge, clinging to their homes, jobs, and even their sanity. What people truly need is a beacon of light, a source of inspiration that can guide them through their struggles and empower them to persevere and improve their circumstances.
I believe 2024 is that beacon of light. In the next 12 months we will see the tide turn. Slowly, but efficiently. For real estate specifically, rates will seemingly continue to drive downwards for both fixed and variable rate products. I think we have seen the peak for rates in the foreseeable future.
When looking at fixed rates, we have to consider the Canadian government bonds. Canadian government bonds and mortgage rates in Canada are closely linked. In simplest terms, a government bond is a loan to the government. You buy a bond, and the government pays you back with interest over a set period of time. These bonds impact mortgage rates because they're seen as one of the safest investments available, and their interest rate serves as a benchmark for other types of loans, including mortgages.
So when bond yields (the return on investment for bonds) go up, lenders increase mortgage rates to maintain a similar profit margin. Conversely, if bond yields decrease, the cost of borrowing money for mortgage lenders also decreases. This cost savings can be passed on to the consumer in the form of lower mortgage rates. Therefore, tracking the bond market can give an idea of potential changes in mortgage rate. You can follow the 5 year Government Bond HERE.
For variable rates, the Bank of Canada's overnight lending rate is the heartbeat that sets the rhythm for many other interest rates across the country, including those for variable rate mortgages. Think of it as the amount the Bank of Canada charges when lending money to commercial banks overnight. This rate influences the interest that banks charge their customers for loans, including mortgages. If the Bank of Canada increases this key rate, banks typically follow suit, passing the higher cost of borrowing onto their customers. In other words, if you have a variable rate mortgage and the overnight rate rises, you can expect to see your mortgage interest rate and payments increase too. On the other hand, if the overnight rate falls, your mortgage interest rate and payments could potentially decrease. So the ebb and flow of the overnight lending rate plays a crucial role in determining the cost of your variable rate mortgages. You can keep an eye on the Bank of Canada announcements HERE. I would suggest bookmarking both of these webpages if you’re interested in keeping an eye out for shifts in the market.
Recently Benjamin Tal, Deputy Chief Economist at CIBC, joined BNN Bloomberg and explained that the Bank of Canada had overshot the runway on the overnight rate and Canadians are feeling it. The expectation is from many economists and experts that we will see the first rate cut from the BoC in the 2nd quarter of 2024. This would be a welcomed relief for many Canadians who opted for variable rate products between 2020-2022. In some cases starting with rates as low as 1.25% and now those same clients have rates of 6%.
The implications for the real estate market are yet to be seen. If interest rates start to decline, we may witness a further increase in prices due to limited supply and a stable economic outlook. Conversely, if rates remain unchanged, more individuals may be compelled to sell their properties to maintain their household budgets and reduce monthly expenses. It's important to note that a significant portion of Canadian homeowners have yet to experience the impact of recent rate increases. With a substantial number of Canadians facing mortgage renewals in the next 24 months, there is optimism for further rate reductions.
“To date, less than a third of mortgage clients have seen their payments impacted by higher rates,” RBC’s Chief Risk Officer Graeme Hepworth said during the bank’s fourth-quarter earnings call. The bank will see 14% ($52.2 billion worth) of its mortgage portfolio come up for renewal in 2024, and another 25% ($89.5 billion) in 2025. Roughly 90% of those are fixed-rate mortgages that currently have an interest rate of between 3.10% and 3.60%, the bank disclosed.*
Anticipating an active and traditionally vibrant spring market, I foresee an influx of eager homebuyers seeking their first homes or investment properties. This shift in demand is likely to occur between May and July of this year. With a robust spring market, buyers will be motivated to re-enter the market, fearing missed opportunities, resulting in steady growth. While I don't anticipate a substantial surge in home prices in 2024, historical trends suggest a moderate 3-5% growth range. Many would agree that a few years of stability, and perhaps even predictability, in the market would benefit us all.
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As the holiday season approaches, I want to take a moment to express my heartfelt gratitude for your continued trust. Your support has been instrumental in making this year a success. During this festive time of year, I want to extend my warmest wishes to you and your loved ones. May the holiday season bring joy, peace, and moments of togetherness that create lasting memories.
Whatever your beliefs, traditions, or celebrations may be, I wish you a season filled with happiness and goodwill.
In the new year I will be offering an exclusive Education Series. On the third Wednesday of every month I will be hosting an online class focused on a different aspect of real estate, bringing in experts throughout the year to help serve you.
Here is a sneak peak of the topics:
If you are interested in any of these education days, please sign up HERE and I will ensure you are informed in advance of each class.
I look forward to continuing to serve my clients and partners for many years to come. Have an excellent holiday season!
Until 2024,
Paul Stevenson