Stability is expected to return to the country's housing market this year with lower interest rates, but homeowners should not expect a return to the "rising" price gains achieved in previous years.

Robert Kavcic, Chief Economist at BMO, wrote in a recent research report that the Canadian housing market should enter a period of broad stability this year, with lower resale prices, easing mortgage rates, and pent-up demand, which is likely to help set a floor for the market.

He added that a return to previous peak price levels in some locations is "unlikely at this stage."

Despite an improvement in consumer sentiment after the Bank of Canada's recent pause on interest rates and market signals indicating that a rate hike is likely, and increasing market expectations that interest rate cuts will be imminent later this year.

As is the case with most major banks, BMO expects the Bank of Canada to cut the overnight target rate by a full percentage point from its current 5.00% level.

Downward pressure on prices will continue during the spring

Home prices have trended downward over the past 24 months since the beginning of the Bank of Canada's interest rate hike cycle.

As of December, the national average sale price was $657,145, down about 20% from the peak exceeding $816,000 reached in February 2022.

Kavcic says some downward pressure is expected to continue through the spring, especially in Ontario, which saw some of the largest price gains during the pandemic.

This aligns with the latest forecast from the Canadian Real Estate Association (CREA), which expects the national average price to increase by only 2.3% in 2024 to $694,173.

Higher-than-average gains are expected in Alberta, Quebec, and most Atlantic provinces, while CREA expects prices to remain stable in British Columbia and Ontario.

Kavcic explained: "In terms of real value, Canadian home prices have now largely adjusted to align with the long-term growth trend, indicating that much of the froth has been cleaned out from many markets."

Ongoing affordability challenges

Observers explained that despite falling home prices, high interest rates have essentially negated any benefit in affordability for buyers.

Economists at RBC noted that any price recovery will be "constrained due to ongoing affordability issues."

The National Bank's housing affordability monitor also recorded a "significant deterioration" in affordability as of the third quarter, which roughly coincided with peak bond yields and thereby fixed interest rates.

They wrote, "Although income growth provided some partial offset in Q3, it didn't do much to ease the situation." "Looking ahead, we see muted prospects regarding affordability. At best, there is more deterioration on the horizon during the last quarter of the year."

Since then, fixed mortgage rates have somewhat declined, but more reductions, including the expected interest rate cuts from the Bank of Canada later this year, will be required to achieve any meaningful improvement for homebuyers.

Kavcic said, "Affordability remains tight, which will limit the scope of any housing price recovery. We estimate that current expectations for lower interest rates will cut about half the way to restoring affordability to pre-pandemic levels, while the rest will require either further price declines or (more likely) price stagnation and catching up with income," adding that the good news is that the market still shows little sign of forced sales.