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Spotlight on Housing

The Residential Sector Is Now Expected to Heat Up

October 10, 2024
Maëlle Boulais-Préseault, Economist • Benoit P. Durocher, Director and Principal Economist

Highlights

  • Residential construction and existing home sales have both picked up since early 2024.
  • There are more listings on the secondary market than there were last year, which should keep selling prices relatively stable in the months ahead—though higher on average than the year before.
  • The stage has been set for even stronger gains: while prices should rise 6.4% over 2024, we expect them to jump close to 8% in 2025.
  • Rental construction has surged and is responsible for most of the growth in new construction. Some solutions intended to add units have been yielding results since the start of the year.
  • Several cities and municipalities have introduced different measures to kickstart new construction. These include easing construction rules, reducing approval times for new projects and offering some financial incentives.
  • The maximum amortization period for borrowers with loan insurance has been extended from 25 to 30 years, which could give an additional boost to new construction and the resale market.

Housing Starts

Quebec’s Recovery Has Been Swift

The Quebec housing market is now on a clear upswing. Existing property sales have risen, which is keeping prices high. After falling close to 45% over the two previous years, housing starts have been climbing since early 2024, and new builds are now up nearly 30% from the same period in 2023 (January to August) (table 1).


Rental Apartments Are Driving the Recovery

Purpose-built rental housing starts in Quebec began recovering well before June, when the Bank of Canada began cutting the policy rate. The gains are especially pronounced in cities and municipalities that relaxed regulations or offered financial incentives to encourage new projects. In an Economic Viewpoint External link. published last year, we identified a number of solutions that could boost residential construction in Quebec. Since the start of the year, several of those measures and initiatives have been adopted, which seems to have given rental construction new momentum. For example, Trois‑Rivières and Drummondville have introduced property tax credits, and Quebec City has eased some regulations, like lowering the minimum number of required parking spots.

 

Housing starts continued to recover across Quebec in the second quarter, with rental units still accounting for 75% of that growth (graph 1). Construction should stabilize in the next few months, but we expect it to remain strong now that borrowing costs have decreased. We expect residential housing starts in Quebec to grow by close to 30% this year and another 9% next year. Construction of single-family homes and condominiums should rise by around 10% in 2024 and 4% in 2025. Rental apartment starts are on track to climb 30% this year and approximately 10% the following year.


However, residential construction hasn’t recovered evenly in every area of the province. While housing starts have surged dramatically in Abitibi‑Témiscamingue and in Chaudière‑Appalaches this year, they dropped in Gaspésie–Îles‑de‑la‑Madeleine and Bas‑Saint‑Laurent (graph 2). What’s more, growth was lacklustre for several of Quebec’s major metropolitan areas (graph 3). It’s worth pointing out, though, that housing starts for the Trois‑Rivières and Saguenay census metropolitan areas (CMA) were very good in 2023, with increases of 14.5% and 48.5% respectively.



Obstacles Remain, but a Number of Solutions Have Recently Been Put in Place

Over the last two years, higher building costs have plagued the residential construction industry. Materials and labour costs both rose considerably—and in conjunction with the higher cost of borrowing, contributed greatly to the decrease in residential construction. The number of insolvencies in the construction sector rose at a faster pace than in many other industries. However, new home costs seem to have stabilized (graph 4), allowing builders to better plan ahead and make progress when their financial situation allows. We should continue to see improvement, now that interest rates are lower.


Cities and municipalities have rolled out a number of initiatives intended to kickstart new projects from real estate developers and builders. These have undoubtedly helped housing starts get back on track over the last few months, but some obstacles persist. Building permit delays, for example, are longer here than in other countries, according to a recent study External link.. Further measures to encourage construction are therefore essential, especially since there are still not enough homes to meet population needs. Governments should also focus their efforts on prefabricated or modular construction.

 

A few recent examples show that the manufacturing industry can be leveraged to speed up construction. In Fermont, in the Côte‑Nord region, prefabricated houses were built on a much faster timeline than traditionally built homes, with the parts being shipped in from a factory in Gaspésie. This type of housing takes 20% to 50% less time to build, which helps mitigate worker shortages and challenges related to the province’s climate, particularly winter weather. This initiative could be replicated elsewhere in Quebec, wherever housing needs are flagrant.

 

Rimouski, which has been particularly hard hit by the housing crisis, is also laying the groundwork for increased rental construction. The city has donated land to the Société de développement Angus. Through this partnership, more than 300 units will be created.

 

Other incentives—including financial ones—are helping invigorate construction in some cities and municipalities. That being said, construction brings its own lot of infrastructure challenges, such as aqueducts, new roads and public transit options for these new residents. Some cities and municipalities still finance this infrastructure through royalties and taxes, which tend to deter builders. Because cities and municipalities have limited financial capacity, improved coordination between the different levels of government is still crucial.

Rents

Rents have skyrocketed in Quebec, in part due to strong demand resulting from significant demographic gains, as well as a lack of available housing: the number of purpose-built rental housing starts dropped 12.7% in 2022 and 28.1% in 2023. While rental construction has picked up in 2024, rents continue to climb.

 

The Tribunal administrative du logement (TAL), Quebec’s rental board and authority on housing law, recommended a 1.8% rent increase for 2023, then doubled that figure to 4.0% for unheated units in 2024. That’s the biggest rent increase in 30‑years for buildings more than five years old. The TAL’s recommendations for 2025 haven’t been released yet, but part of the calculation is based on the rent component of the consumer price index (CPI), which in August 2024 was up 10% year over year (graph 5).


A number of government measures have been announced to reduce the number of non-permanent residents, which could slow population growth in the next few years and temper demand for rental housing. What’s more, efforts to stimulate rental apartment construction are beginning to bear fruit in several areas of Quebec, which should grow the supply of available housing. The overheated rental market should therefore gradually cool, translating to smaller rent increases as early as next year. Rents will go up nearly 9% in 2024 but should then slow down a bit with close to a 5% increase in 2025. In Quebec, 40% of households rent, and many of them are still facing outsize rent increases.

Resale Market

Existing property sales through real estate brokers are slowly improving in Quebec. After reaching their cyclical low in spring 2023 (excluding the temporary nosedive at the start of the pandemic), sales have turned around. Recently, they have even returned to their 10‑year average (graph 6). The total number of new existing property listings (houses, condos and plexes) is also close to its 10‑year average. This spring, the average time to sell was nearly five months, as it has been since fall 2022. At the peak of the pandemic real estate frenzy, average selling times were around two months, but the 10‑year average is actually eight months. So it seems that the resale market is slowly returning to a more normal pace.


With housing supply gradually catching up to buyer demand, we should eventually see more stable prices in the coming months (graph 7). All the same, the average price will be higher than it was over the same period last year—as of now, the cumulative increase since the start of 2024 is 6.5%. It should moderate by December, closing 2024 with year-over-year change of around 6.4%. We expect average prices to go up 8% in 2025, amid pent-up demand and relatively weak supply.


Regional Trends

Transactions were up nearly everywhere in the first half of 2024, compared to the same period in 2023 (graph 8). Bas-Saint-Laurent was the only exception. The Island of Montreal is still a seller’s market, but changes in the sales-to-new-listings ratio suggest that market conditions are coming into balance, which should help prices stabilize. Prices were up across the board, as shown in the results for the first half of 2024 (graph 9).



Homeownership May Be Slightly More Accessible

Would-be homeowners may hope to see prices fall, but it isn’t going to happen. Homes will become somewhat more affordable as mortgage rates fall, though, and the maximum amortization period for insured loans is being extended from 25 to 30 years (summary). This should make it slightly easier to buy a first home. But the longer amortization period will also drive up demand, which is expected to outpace the number of listings. This will drive prices up, limiting gains in affordability.


Interest Rates

While the residential sector has already regained some momentum, we can expect even more sustained progress in the months ahead, thanks in no small part to lower mortgage rates. The Bank of Canada has already announced three 25‑basis-point cuts to its policy rate since June. Our forecasts call for further 25 basis-point reductions over the coming quarters. The policy rate is currently at 4.25%. We expect it to be 3.50% by the end of 2024 and 2.25% by the end of 2025.

 

Variable mortgage rates will follow the Bank’s movements and should land at around 4% by the end of next year, compared to 6% right now (graph 10). But fixed mortgage rates, which move in tandem with federal bond rates, may be nearing the end of their downward trend. According to our most recent forecasts External link., the financial markets had already priced in the 2% inflation target, so most of the bond rate cuts—and resulting fixed mortgage rate cuts—are probably behind us.


Forecast Table


NOTE TO READERS: The letters k, M and B are used in texts, graphs and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. Data on prices and margins is provided for information purposes and may be modified at any time based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. Unless otherwise indicated, the opinions and forecasts contained herein are those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group.