Market in Depth

Canada's housing market bounces back

Lalaine C. Delmendo | March 01, 2021

After slowing in the past two years, Canada's housing market has bounced back strongly last year, despite the COVID-19 pandemic.

House prices in Canada's eleven major cities rose by 9.36% during 2020 (8.33% when adjusted for inflation), the highest growth since 2016, based on figures from Teranet – National Bank of Canada. This is the 12th straight year of house price growth, following y-o-y rises of 1.95% in 2019, 2.51% in 2018, 8.92% in 2017, and 12.25% in 2016.

In the last quarter of 2020, house prices increased 2.81% (2.21% inflation-adjusted).

By property type (figures from the Canadian Real Estate Association):
  • One-storeysingle family home prices rose on average by 15.9% during 2020 (14.8% inflation-adjusted).
  • Two-storeysingle family home prices increased 16.5% y-o-y (15.4% inflation-adjusted).
  • Townhouse prices increased 10.9%, on average, over the same period (9.9% inflation-adjusted).
  • Apartments posted average gains of 4.2% during 2020 (3.2% inflation-adjusted).

Ten of Canada's eleven major cities saw rising house prices in 2020 from a year earlier. Ottawa recorded the biggest house price increase during 2020 at 19.69%, followed by Halifax (16.32%), Montreal (15.24%), Hamilton (15.06%), Toronto (10.27%), Victoria (7.56%), and Vancouver (7.06%). More modest house price rises were seen in Winnipeg (5.73%), Quebec (4.51%), and Edmonton (1.26%).

Only Calgary registered a house price fall of 1.47% during 2020.

Demand continues to rise strongly. In December 2020, actual sales soared 47.2% from a year earlier – the largest year-on-year increase in 11 years, according to CREA's Statistical Report for 2020. For the whole year of 2020, total sales reached a new record high of 551,392 units – up 12.6% from a year earlier and about 2.3% higher as compared to the previous peak set in 2016.

Residential construction activity has also risen last year. Dwelling starts rose by 4.4% to 217,802 units in 2020 from a year earlier, following declines of 2% in 2019 and 3.1% in 2018, according to Canada Mortgage and Housing Corporation (CMHC). Likewise, dwelling completions increased 6.1% y-o-y to 198,636 units last year. However due to the stronger increase in sales as compared to new supply, the national sales-to-new listings ratio tightened to 77.4%, sharply up from the long-term average of 54.2% and among the highest on record.

“Recent national sales trends have improved more than anticipated over the second half of 2020. New listings in most of the country have also recovered,” said the Canadian Real Estate Association (CREA).

“However, while sales activity rebounded to record-high levels, new listings only recovered to about their five-year average in most markets. The relative strength of demand for homes compared with supply has meant sales activity has been eroding active inventory, which was already scarce in many markets pre-pandemic. That said, this has been a trend since 2015,” CREA noted.

As a result, the government is now contemplating on the introduction of a new tax on foreign homebuyers to prevent speculative purchases, as well as address the worsening housing affordability in the country. The central bank has taken several rounds of market-cooling measures in recent years, including raising mortgage downpayments and reducing amortization periods. This resulted in a sharp slowdown in house price rises in 2018 and 2019. The housing market gained its momentum again last year as the impact of these measures waned.

The national average home price stood at CA$ 568,758 (US$446,947) in 2020, up 13.1% from a year earlier, according to CREA. British Columbia and Ontario had the most expensive housing markets in the country, with average prices of CA$ 778,012 (US$ 611,385) and CA$ 708,377 (US$ 556,664), respectively.

Canada house prices
The Canadian economy was estimated to have contracted by 7.1% during 2020, in contrast to a 1.7% growth in 2019 and the first decline since 2009, according to the International Monetary Fund (IMF). The Bank of Canada (BoC) is more optimistic, projecting a contraction of 5.5% last year, before bouncing back in the next two years with an average annual growth of 4.5%.

There are virtually no restrictions on foreigners buying properties in Canada.

Analysis of Canada Residential Property Market »

Rental Yields

Rental returns in Toronto are moderate

Rental returns on apartments in Montreal tend to outpace those in Toronto.  We´ve found in recent years that even on a largish 120 sq. m. apartment in Montreal, you are likely to earn a gross rental return over of 4.5%. If you own a small apartment of 60 sq. m. in Montreal and rent it out, you are likely to make a return of around 6%. In this low-return era, in a low-risk country such as Canada, that is a really acceptable yield. However unfortunately this year we don´t have yields data for Montreal, so in saying this we are relying on an extrapolation of previous years´ figures.

In Toronto, gross rental yields are lower, at between 3.9% to 5.5%, sometimes even lower. Taking account of the fact that we give gross figures - a guess might be that net yields would be 2% lower.

We continue to find it hard to collect yields figures for Vancouver.

Transactions costs in Canada are usually reasonable. The Canadian property market is cooling.

Read Rental Yields »

Taxes and Costs

Taxes are generally high

Rental Income: Gross rental income is subject to a fixed 25% tax, withheld by the tenant.

However, nonresidents can elect to pay under the section 216 of the Income Tax Act, wherein they will be liable to pay tax on their net income at progressive federal rates. Nonresidents electing under section 216 are also liable to pay 48% surtax.

Capital Gains: Only 50% of the capital gains are liable to tax. Capital gains are computed by deducting the costs incurred in selling and purchasing the property, capital expenditures, and such costs as additions and improvements in the property.

Inheritance: There is no inheritance or estate tax in Canada.

Residents: Canadian residents are subject to Canadian income tax on their worldwide income. Income is taxed at the federal level and at the provincial level.

Read Taxes and Costs »

Buying Guide

Transaction costs are usually low

Total costs and taxes for buying properties amount to around 4.7% to 11% of the value of the property. Transfer Tax differs in each province, ranging from 0.5% to 2%. Typically, real estate agent's commission is 7% on the first CAD100,000(US$88,495) of the sale price and 3% on the remainder, plus 6% Goods and Services Tax (GST). Total roundtrip costs are higher for new and renovated houses because of the additional 6% GST.

Read Buying Guide »

Landlord and Tenant

Tenant protection laws are strong

Canadian tenancy institutions are pro-tenant.

Rent: The initial rent can be freely negotiated in all provinces, except in some provinces like Quebec, where initially negotiated rents can be appealed if they are higher than a rent charged by the same landlord for the same apartment within the previous 12 months.

Tenant Security: The contract cannot be terminated by the landlord within the duration of the fixed-term lease (usually one year), except for cause (e.g., tenant's non-payment of rent, tenant conducting illegal activity, and so on).

Subleasing needs a written permission from the landlord but this permission may not be unreasonably withheld. However, the landlord can insist on screening the prospective new tenants and may reject them on the basis of financial risk.

Read Landlord and Tenant »


Pandemic hits economy; record relief package introduced

The Canadian economy was estimated to have contracted by 7.1% during 2020, in contrast to a 1.7% growth in 2019 and the first decline since 2009, according to the International Monetary Fund (IMF). The Bank of Canada (BoC) is more optimistic, projecting a contraction of 5.5% last year.

The BOC expects the economy to bounce back quickly, with projected growth of 4% this year and 5% in 2022.

Canada gdp inflation
However, with the emergence of a more contagious and possibly deadlier variants of COVID-19 worldwide, these growth projections might be overly optimistic. In fact, Prime Minister Justin Trudeau recently warned that tougher travel restrictions are now being discussed. Along with other travel measures, the government is considering a requirement that people returning to Canada should quarantine in a hotel for 14 days at their own expense.

To boost the struggling economy, the government unveiled in December an economic stimulus package worth CA$ 100 billion (US$ 77 billion) which will be rolled out over a three-year period once the virus is already under control. It is “the largest economic relief package for our country since the Second World War”, said Finance Minister Chrystia Freeland.

The plan includes aid to pandemic-hit business sectors, investments in long-term care homes, as well as the distribution of COVID-19 vaccine. The spending is equivalent to about 3% to 4% of Canada’s GDP.

The downside is that the budget deficit is now swelling. This massive spending is expected to bring the deficit to a historic high of CA$ 381.6 billion (US$ 300.5 billion) during the FY2o2o-21 (year ending March 2021). This is compared to a deficit of just less than CA$26 billion (US$ 20.5 billion) the previous year.

Canada unemployment
As a result, Canada’s debt-to-GDP ratio will surge to about 50.7% in FY2020-21, sharply up from 31% in the prior year.

The Canadian dollar (CAD) appreciated against the US dollar by about 2.8% in the previous year, to reach an average monthly exchange rate of CAD 1.28 = USD 1 in December 2020.

The country’s annual inflation rate slowed to 0.7% in December 2020, sharply down from 2.2% in December 2019 and below the central bank’s target range of 1% to 3%, according to Statistics Canada.

In December 2020, the nationwide unemployment was 8.6%, already down from a historic high of 13.7% recorded in May 2020 but still up from 5.6% a year earlier, according to Statistics Canada.

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