State of Canada’s Housing Market, March Recap

Vancouver, BC

Written by Breck Hapner

Canada’s housing market experienced considerable flux during March due to a series of events, which involved inflation cooling and the Bank of Canada (BOC) refusing to address the possibility of hiking interest rates. Other impacts on real estate were changes made to the foreign home buyer ban, which pushed the former law into irrelevancy, and alterations to mortgage holder conditions by the Canadian federal government to prevent a predicted surge of defaults.

Experts view these various adjustments with some skepticism because real estate prices could be driven higher within the coming year. Market professionals believe that these recent modifications by the Canadian federal government could create an artificial floor for a decaying housing market that would inflate prices unjustifiably, creating a bubble leading to an eventual market collapse. In other words, “natural” market fluctuations are being removed in favor of simulated protections that may undermine the system in a negative fashion.

Of course, all this will entail additional government spending, which is bound to generate an inflationary effect in opposition to raising interest rates to create a natural market reset. Mortgage holder bailouts may prevent default, but also keeps viable property off a market desperately in need of supply. The reduction in homes, combined with the added demand brought by immigration, may inflate real estate prices in all Canadian markets.

Agent Erin Koschewski from CIR Realty, based in Alberta, agrees with this assessment, advising optimistic caution when making a buying decision because “there are so many moving parts to Canada’s housing market. Immigration and interprovincial migration, inventory (or lack thereof), interest rates, inflation, and more need to be considered and evaluated to conduct a successful purchase from the strongest position.”

Inflation Cools In February

According to a Bloomberg report from March 21, 2023, the annual pace of inflation cooled in February, posting its largest deceleration since April 2020. Experts agree that the inflation reduction is good news, because it means the previous multiple hikes in interest rates are having the intended effect on the economy. Still, the prices for energy, commodities, food, and other daily necessities haven’t dropped significantly in price, affecting the average Canadian’s purchasing power dramatically. 

That being said, the Bloomberg article further states, “The Bank of Canada, which is working to bring overall inflation back to its target of 2 percent, left its key interest rate target unchanged earlier this month at 4.5 percent.” As it currently stands, inflation is at 5.2 percent instead of the 8 percent experienced in 2022, but experts continue to debate on whether or not a 2 percent inflation figure and reduction of interest rates from the current 6.5 percent to 4.5 percent is achievable.

Toronto, ON

BOC Dismisses Interest Rate Discussion

The Fed in the U.S. did not only recently increase interest rates, but also suggested further hikes would be necessary and probably inevitable. The Bank of Canada didn’t even debate about raising interest rates in March, according to a Bloomberg report from March 22, 2023. 

Canadian experts caution that pausing interest rate increases may create a false sense of security for home buyers and market professionals, leading to distorted expectations and detrimental consequences such as an inflation resurgence and more expensive real estate prices.

“Increased interest rates tend to drive prices up, because it decreases borrowing power, and pushes more of the population into the same pool of affordability,” Koschewski said.

The Housing Supply Problem

Immigration is usually treated as a positive trend by Canadians, but the situation has become untenable due to issues with housing supply. According to a Bloomberg article from March 22, 2023, there aren’t enough rental homes to support indigenous Canadians and the influx of immigrants. Canada needs 300,000 new rentals by 2026 in order to make sure the gap between the number of people coming into Canada and the amount of available housing doesn’t quadruple.

Bloomberg cited data released in a Bank of Canada report that “estimated an existing deficit of 25,000 to 30,000 units of rental stock across Canada,” which could add up to a deficit of nearly 100,000 units by 2026. The impact on Canadian real estate could be considerable, as shortages in housing supply may result in higher rents, which will inevitably lead to increased prices and single-family home values.

“Nationally, there are currently only 426 units per 1,000 people,” Koschewski said. “There just isn’t enough inventory available for purchase. With a large pool of buyers, and not enough homes available for sale, naturally you’re going to see prices increase. All these buyers are bidding on the same few properties.”

Montreal, QC

The Immigration Explosion

To compound issues with housing stock, immigration is propelling record Canadian population growth, according to a Bloomberg December 21, 2022, article, stating, “Over the past 12 months, the number of international migrants to Canada totaled 822,866 — by far the largest influx in historical data to the mid-1970s.” The numbers in this article pale in comparison to recent figures from Statistics Canada, which suggest that Canada’s population grew by more than a million people in 2022, with more than 60 percent representing a net increase of over 607,000 non-permanent residents.

If we take a look at Canada’s population clock, it is showing the population is now 39,770,946 (at the time of writing this article), an increase of over 2,000 people per day. The population clock shows how fast people from prescribed categories are growing. If we inspect births, the number of individuals being born in Canada is at a rate of one birth every 1 minute, 24 seconds (hover cursor over the category to see the dropdown data).

The number of new non-permanent residents has grown to a rate of one every 50 seconds. So, in other words, there are more people coming into Canada than are being born in Canada at the moment. Statistics Canada points out that “a rise in the number of permanent and temporary immigrants could also represent additional challenges for some regions of the country related to housing, infrastructure and transportation, and service delivery to the population.”

“People will always need a place to live,” Koschewski said. “With the amount of immigration and lack of supply in both the rental and home buying sector, it is imperative to stay focused as an investor, understanding the changes that drive Canadian real estate.”

The Foreign Home Buyer Ban

An interesting development was the series of amendments made by the Canadian Mortgage and Housing Corporation to its foreign home buyer ban. Outlined in a Bloomberg March 29, 2023, article, “A total of four amendments to the Prohibition on the Purchase of Residential Property by Non-Canadians Act were announced by Ahmed Hussen, the minister of housing and diversity and inclusion.”

The foreign home buyer ban was introduced so that investors from other countries could not buy Canadian property and hold it as a safe investment. However, the largest number of foreign home buyers in Canada are individuals coming to Canada in order to work. So, it is now possible for foreigners who have more than six months remaining on a work permit to purchase a home.

So essentially, the large majority of foreigners who would have been affected by the ban and the large majority of sales that would have been eliminated are now allowable. Experts point out that it is important to understand how the foreign home buyer ban affected recent buying and selling processes within the Canadian real estate market. Since the ban was eliminated for the large majority of foreigners who are going to be purchasing, it essentially nullifies the checks and balances that were set in place, allowing not only home purchasing but property investment and development.

In addition, it is now possible for foreign buyers to purchase properties outside of major metropolitan areas, as well as properties that are over four units. Experts agree this will affect the Canadian rental market, because properties that have more than four units are considered rentals. The inherent increase in values to those rentals is going to have a decisive effect on rents and market values.

“Relative to last year, rental prices are up around 21.5 percent in Calgary, and that number is expected to grow exponentially over the coming months,” Koschewski said. “My prediction is that condo sales will continue to see a resurgence, because of the affordability factor.” 

Toronto, ON

Mortgage Default Reprieve?

According to a Bloomberg March 29, 2023, article, a new mortgage code of conduct promised in the federal budget will “ensure federally regulated financial institutions will provide fair and equitable access to mortgage relief measures for people struggling to stay in their homes because of elevated interest rates.” An addendum eliminates high penalties and fees for distressed homeowners who need to sell their properties.

Canadians can now renew their mortgages for longer terms at resigning. Some homeowners who have mortgages they cannot afford will be able to extend their amortizations and bring their payments down.

However, there are drawbacks. It is of particular importance for variable rate mortgage holders to understand how a longer-term loan can affect their finances. 

This being said, experts believe these mortgage amendments will create market vulnerabilities. In the past market, those who could not afford their mortgages would be forced to sell, creating more inventory, and ultimately leading to more reasonable housing prices. By avoiding this scenario, any number of pricing and liquidity issues could arise, which fundamentally disrupt market stability.

“It all comes down to affordability. The pool for the 700K and above gets smaller, while the 700K and below gets bigger and bigger,” Koschewski said. “We’re seeing more people buying condos and townhomes again because of the affordability. What we couldn’t pay someone to buy a year ago, is now selling over list price in multiples.”

What's Next?

Experts worry about a market environment in which Canadian housing and rental prices have been falsely propped up with a deceptive sense of security. The interest rate pause, combined with immigration issues, the lack of available housing, and the reintroduction of foreign buyers has created a sense of uncertainty in the current Canadian housing market. 

Despite some questions and worries about the current Canadian housing market, Koschewski believes any purchase can be possible and advises buyers to come prepared. “Buyers, get pre-approved, and make sure you know where you stand financially, as it’s getting harder to qualify because of rates. Just remember to get into it with a plan, and a professional by your side.”

In our April recap, Haven will take a further look at the numbers: how the current Canadian housing market is reacting to prevailing economic factors influencing real estate.