State of Canada’s Housing Market, May Recap

Real estate prices in Canada aren’t crashing… yet. As a matter of fact, they seem to be (temporarily) going up due to a lack of available housing combined with extensive population growth and rising default. Competition for available properties is fierce. According to a May 15th Bloomberg article, the benchmark price for a Canadian home rose to C$723,900 (about $536,000), up 1.6 percent with transactions surging 11.3 percent. 

Recent market uncertainty, combined with economic vacillation, is a trending experience among Canadian professionals. For instance, Sage Executive Group Real Estate residential real estate agent Greg Donskov shared that in Kelowna, his Central Okanagan backyard, “Average home prices here have been on the rise for three months straight and have increased over nine percent since the start of 2023. It’s like a real estate rollercoaster, just without the loops and screams (well, maybe some excited screams).” 

But inventory is at a 20-year low, according to data from the Canadian Real Estate Association (CREA) on May 15th. “The real estate market is influenced by numerous factors, but a handful of key drivers are significantly impacting Canadians,” Donskov said. “One of these drivers is the scarcity of inventory, leading to tighter market conditions throughout British Columbia and Canada at large.”

Doskov reflected on the local versus systemic disparities between rising prices and low inventory, sharing an observation by British Columbia Real Estate Association (BCREA) Chief Economist Brendon Ogmundson: “In most markets, average home prices have been rising on a monthly basis despite remaining lower compared to the previous year: BC home sales have now risen for three consecutive months, but that recovery in sales has not been matched by listings, which continue to fall well below normal levels. As a result, average prices across the province are once again rising, recovering much of the decline since prices peaked early last year.”

So, even though it seems like housing prices should be falling, they continue to rise. This is largely because Canada now possesses one of the tightest real estate markets in history, according to a May 15th Real Estate News article. Unlike the last several years, when there were an oversized number who wanted to sell and buy properties, Canada’s market has shifted to an undersized number of buyers and sellers. And according to an April 14th yahoo!finance article, even though the number of sales is down significantly, the balance between sellers and buyers still remains significantly in favor of sellers.

Those already in a mortgage are not selling because they will end up taking a loss, and a new mortgage will also have much higher rates. Those homebuyers with the means to buy are waiting for better loan terms and a more stable economy. So, with little choice in a disrupted home purchasing market, what seems to be happening? There is an influx of leases and renters who either simply don’t have the choice or the means to buy a home.

You would think this is great news for landlords, but in fact, the new build and lease/rental investment situation is becoming increasingly more complex and not necessarily more lucrative. The sellers market, combined with the Bank of Canada pausing rising interest rates, has lured more buyers into the market with declining fixed rate mortgage pricing. However, this isn’t the only thing that’s causing real estate prices to stay high.

As an example, according to a May 29th Canadian Press article, owners of rental properties are currently caught within an economic vice, which keeps them holding onto properties even though more than half of Greater Toronto Area (GTA) condo investors are now losing money, and new housing starts are at a standstill due to intervening governmental regulations. You may ask, what is going on here?

“According to the Canada Mortgage and Housing Corporation (CMHC) an additional 3.5 million affordable housing units are needed in Canada to restore housing affordability,” Donskov said. “To stimulate housing construction, Canada needs to tackle burdensome regulations and other economic factors that contribute to market inefficiencies.” 

In a “normal” market, it would be expected that new homes would be built, and investment properties would eventually come up for sale, however it seems that real estate investors are holding on tight, hoping that the interest rate, new build, and rent environments turn in their favor. While the cost to buy a house is down significantly from last year, the cost to rent housing is up significantly, almost 20 percent in some markets and 9.6 percent nationally.

“It is crucial to bridge the substantial disparity between average housing prices and the actual cost of constructing new homes, either by eliminating or significantly reducing it,” Donskov said. “Local, provincial, and federal authorities must collaboratively devise a concrete strategy to expedite the current cumbersome bureaucracy and red tape, while simultaneously upholding necessary diligence measures. It’s time to cut through the administrative hurdles and streamline processes effectively in order to meet the supply issue.”

On top of all this, according to a February 15th Bloomberg article, rents continue to soar as immigrants, non-permanent residents, and foreign students remain uncounted in the population growth, which means the supply of new build, existing, and rental housing is significantly underserved. This is causing vacancy rates in some cities to drop below two percent, which, of course, is a recipe for higher prices, greater costs, and increasing inflation.

“As per a recent report by Statistics Canada, Canada witnessed an unprecedented growth of one million individuals in its population in 2022, primarily driven by international migration,” Donskov said. “Considering the federal government’s ambition to accommodate an additional 1.5 million immigrants by 2025, there arises a legitimate concern regarding out-of-control pricing and the potential impact on the already strained housing market in the country.”

But that’s not all. A May 9th Bloomberg article showcased experts who predicted that by 2030, the average rent for a one-bedroom condo will be $3,000. This certainly seems plausible in places such as Toronto and Vancouver, where vacancies are at historical lows. In fact, as of right now, the average rent for a one bedroom property in Vancouver is $2,700. Now, compare that to a place like Regina, which is about $1,000, and you can see there’s quite the discrepancy across the country.

Even at $2,700 rents, it’s proving difficult for landlords to be able to carry the cost of their properties, which eventually should lead to many of these properties coming to market. This would potentially cause housing prices to slightly decrease. However, at the same time, it would reduce the amount of rental stock that is available and subsequently cause rents to go up as well.

An April 10th Bloomberg article pointed out that Canadian banks are allowing consumers to extend their amortizations up to 30, 40, and, in many cases, significantly more years. This is a looming problem that is enabling landlords to hold onto their properties for significantly longer than they should, creating an imbalance in the real estate market that causes housing prices to remain high. 

Now the question is, will that end, and if it does, what will happen? From the evidence provided, it seems the Canadian government and banks in general currently prefer that investors hold onto properties instead of finding themselves in foreclosure situations and having to liquidate those assets at fire sale prices. That is exactly why the mortgage stress test was used for loan qualification purposes.

Canadian banks do not want to take over properties in default. This is because financial institutions that repossess assets have no guarantee that they can be sold to recuperate costs. Therefore, at present, banks would much rather have the borrower continue to make the payments, or at least try to make the payments and wait for the market to return to normalcy.

“The mortgage stress test has proven effective in ensuring Canadians can fulfill their obligations to lenders, especially in times of rising interest rates, as experienced in the past year,” Donskov said. “Introduced in 2018, when borrowing costs were low and rate hikes were anticipated, it would be unwise and needlessly harsh for Canada’s Office of the Superintendent of Financial Institutions (OSFI) to impose new obstacles for young Canadians seeking homeownership in the current environment of high rates that are likely to decline.”

Rising housing prices, swelling rents, and increasing interest rates are causing overall housing costs to balloon, which is escalating inflation. At present, there is much uncertainty in the marketplace. Should investors retain assets or sell? Is it a good idea for a potential homeowner to buy, or is renting a better solution? Currently, real estate experts advise only to invest in property or buy a home with the intention of purchasing for the long-term real estate wealth. In other words, the climate for short-term investment is problematic.

The following is a good argument for long-term investment: According to historical data provided in an October 5, 2022 TD Economics report, those who buy real estate can expect a much greater dividend and net worth 20, 30, and 40 years later. “The average net worth of homeowners born between 1955 and 1964 is now more than $1.4 million. This is 6.3 times that of non-homeowners born during the same time.”

As established Canadian investors are already experiencing financial difficulties with their properties, the ugly reality for many landlords is that they are probably going to have to hold onto properties for five, 10, or 15 years in order to recuperate the market losses they have experienced in the last year.

Unless there is a significant uptick in default or unemployment, the chance of mass real estate liquidations in the near future are low. Because of current economic uncertainties, trying to predict the stability of interest rates, or whether housing prices are going to rise or fall is not recommended. Those choosing not to buy in favor of waiting for a potential market crash risk either getting priced out of the real estate market completely or finding themselves in a scenario where their lifetime housing costs are significantly more.

Landlords will be forced to either increase rents or sell the assets, potentially leaving existing tenants without a place to live. So, there’s a case to be made for controlling one’s destiny and future by purchasing an affordable property that can be held for at least seven to ten years.

What else is important? When deciding to purchase a property, experts advise acquiring a mortgage that has built-in flexibility if interest rates do go down. In other words, avoid a big bank, five-year fixed mortgage with a massive penalty or a discount mortgage with the inability to refinance to a lower rate.

“If you are currently renting and don’t expect to be able to jump into an average home of C$735,000 right out of the gate, strive to realign your expectations,” Donskov said. “Buy a smaller home, own it for a year or two, build some equity, and then purchase your next forever home.” 

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