Quebec Residential Sales and Construction Are Expected to Gradually Improve, but Not Affordability

The housing market will remain tight in 2024, due in part to demand growing faster than supply. Several factors, including demographics and employment, have affected demand over the past year and will continue to put pressure on the housing market in the coming months. 

Even though population growth was slower in Quebec than elsewhere in Canada, it still reached a 50-year high (graph 1). Driven by an influx of new immigrants and non-permanent residents, this demographic boom is pushing up demand for housing. Most newcomers choose to rent after landing in Quebec. However, a Bank of Canada survey of consumer expectations found that a growing proportion of renters are considering buying a property in the next 12 months. The increase is especially pronounced among newcomers. As a result, demand is expected to keep rising in the existing home and rental markets as the population continues to expand.

Housing demand was also buoyed by Quebec's relatively resilient labour market. Employment remained robust in the face of last year's economic turbulence. While a decline in job vacancies offset most of the losses related to the downturn, the province's unemployment rate still edged up. According to our most recent forecasts, Quebec's unemployment rate could reach 5.9% in 2024, compared to 4.5% in January, and limit the extent of the housing market's rebound in the coming months.

In addition, it could be a while before mortgage rates come down significantly. Last year, high interest rates put a damper on the housing market, but prices still edged up, albeit modestly. The resulting deterioration in affordability deterred a lot of potential buyers, reducing demand for both new and existing homes. But with home ownership moving further out of reach, demand for rentals only grew stronger.

On the bright side, mortgage rates seem to have peaked after two years of steep increases. Interest rates are expected to come down this year, but it's important to remember that cuts will be incremental (graph 2). This means that many borrowers will continue to have trouble passing the mortgage stress test. As a result, we expect buyer demand to only grow gradually, edging up as rates come down. In recent years, soaring interest rates and home prices have eroded housing affordability. Rate cuts should provide some relief, but unless prices come down too, we don't expect affordability to return to pre-pandemic levels in the next few years.

Residential construction started to slow in 2022, and activity continued to wane in 2023. Housing starts were weak throughout the year, despite a sharp uptick in December. In Quebec, new housing construction fell to 2016 levels, with just 38,912 units built in 2023. Construction dwindled in all market segments, but the sharpest decline was in purpose-built rentals. Across the province, nearly 9,000 fewer rental units were built in 2023 compared to 2022 (graph 3). That said, the share of rental starts grew in proportion to all starts in Quebec and remains higher than elsewhere in Canada (graph 4).

Over the past three years, the average price of a new single-family home in Quebec jumped by about 68%, exceeding $870,000 in December 2023. Higher costs for materials, labour and land have sent prices soaring, discouraging many developers at the same time. Little by little, the pressure is expected to ease in 2024. Construction will likely pick up this year as market conditions improve on the back of interest rate cuts. This should bring down financing costs for developers and builders, encouraging them to start work on new projects. A survey conducted by the Commission de la construction du Québec found that the industry's recruitment challenges aren't as bad as they were last year. This should relieve some of the pressure on labour costs, another factor that pushed up prices in 2023. The New Housing Price Index seems to have stabilized in the province's key regions, including Greater Montreal, where the sharpest increase was recorded (graph 5). The various factors that have been holding back residential construction should gradually ease, allowing housing starts to pick up again over the next few years (graph 6).

In addition, all levels of government, including several cities and municipalities, are working on solutions to increase housing supply. Several cities have adopted a property tax credit to accelerate residential construction in their respective areas. Increasing new builds has become the top priority for many municipalities across Quebec. The provincial government recently tabled construction industry reforms with the goal of getting homes built faster. Specifically, the reforms aim to address productivity issues by allowing greater flexibility in trades and worker mobility. These changes would make it easier for employers to assign workers where they're needed, providing a solution to the labour shortage. Despite policymakers' efforts, it will take time before these measures have a tangible impact on the housing market. 

Existing property sales rebounded in early 2023, when many households believed the Bank of Canada's cycle of interest rate hikes was over. However, additional rate hikes in June and July acted like a cold shower on the market and property sales fell again. But at the same time, high construction and financing costs saw many buyers choosing existing homes over new ones. With a limited inventory of existing homes for sale, pressure on average home prices didn't let up. In fact, Quebec's average home price reached a record high of $507,740 in January 2024.

Home sales perked up at the beginning of the year, but activity is expected to slow in the first few months of 2024 due to the sluggishness of the economy. With fewer homes being built and fewer properties for sale, many households have no choice but to stay put in their current housing. However, sales are expected to pick up again in spring 2024, driven by lower mortgage rates. All told, the 2024 sales tally should be similar to last year's. Activity is then expected to pick up steam in 2025. We anticipate moderate price declines in early 2024, but the average price should actually end the year slightly higher as demand continues to outstrip supply (graph 7).

Getting into the market is still challenging for first-time buyers who can't qualify for a mortgage because of high interest rates. Meanwhile current homeowners will see their payments go up when they're forced to renew their mortgages at higher rates. In Canada, mortgage interest costs rose by 28.5% in 2023. This is also discouraging homeowners from moving, which reduces supply and hinders market activity.

Looking at regional trends, existing home sales fell across the province. Transactions were down between 16% and 28% in 2023 compared to the year prior. The sharpest declines were recorded in the Gaspésie–Îles-de-la-Madeleine and Laurentides regions (graph 8). The slowed activity affected home prices quite differently from one region to another. The average sale price only cooled in Montreal, its surrounding regions and Outaouais (graph 9). Elsewhere in the province, prices continued to climb in 2023. Against this backdrop, interregional migration in Quebec has fallen from the peak recorded during the pandemic. In general, average prices rose the most in regions where sales fell the least, which is a sign that the market remains very tight in those areas. Prices are being pushed up because inventory is insufficient to meet demand. This imbalance is expected to continue throughout 2024, with improvements in sales depending on residential construction within each region.

There is a dire need to speed up construction of purpose-built rentals. Across the country, demand for rental housing has risen much faster than supply. For a lot of people, renting is more affordable than buying due to the spike in home prices and mortgage rates. Because of the imbalance between supply and demand, rents keep rising and vacancy rates keep falling. Over the past three years, the average rent in Quebec grew faster than the average wage (graph 10), and there's every reason to believe that this gap will persist in 2024.

With the decline in purpose-built rental construction and the surge in demand, vacancy rates are down in most cities across the province (graph 11). The provincial vacancy rate could shrink to nearly 1.0% in 2024, down from 1.3% in 2023. Vacancy rates also differ significantly by rent range, with affordable units being harder to find (table 1). As long as high interest rates weigh on developers and builders, construction will remain weak in this segment—unless concrete measures are introduced specifically to get more rental apartments built.

The rental market has always been bigger in urban areas like the Montreal, Laval, Capitale-Nationale and Outaouais regions. However, it has grown substantially in several other cities and municipalities, including the Saguenay census metropolitan area, where rental construction jumped by more than 600% in 2023. Rentals accounted for roughly 13% of new builds in 2022, compared with 65% in 2023. Construction delays in recent years and rising demand are behind the area's shrinking vacancy rate. 

Despite the ongoing uncertainty, the economic slowdown and the risks surrounding the current situation, Quebec households are benefiting from a strong labour market. Job creation has remained fairly stable in recent months, and the unemployment rate is still low compared to the historical average. We expect unemployment to go up, with the rate approaching 5.9% by fall 2024. Until mortgage interest rates gradually start coming down mid-year, borrowing costs will continue to hold back housing supply.

Overall, home sales and prices are expected to be relatively stable in 2024. Meanwhile, a number of municipalities and governments are now looking to address the shortage of rental housing by getting more rental units built.