The Residential Sector Is Now Expected to Heat Up

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.

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.

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.

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.