Market in Depth

Canada: slowdown before a new boom?

Lalaine C. Delmendo | March 29, 2020

House prices in Canada's eleven major cities rose by just 1.95% during 2019 and actually fell by 0.32% when adjusted for inflation, based on figures from Teranet – National Bank of Canada.

This is a clear slowdown from y-o-y rises of 2.51% in 2018, 8.92% in 2017, and 12.25% in 2016, and the weakest performance since 2008 when house prices declined by 0.79%. In the last quarter of 2019, house prices increased by a minuscule 0.32% (0.14% inflation-adjusted).

However prices are expected to take off soon. Construction has fallen, inventory is low, yet demand is rapidly rising, partly in response to strong immigration.

So far this is not visible (figures from theCanadian Real Estate Association):
  • Apartments posted average gains of 3.35% during 2019 (1.05% inflation-adjusted).
  • One-storeysingle family home prices rose on average by 3.32% during 2019 (0.97% inflation-adjusted).
  • Two-storeysingle family home prices increased 3.09% y-o-y (0.79% inflation-adjusted).
  • Townhouse prices increased by 2.55%, on average, over the same period (0.27% inflation-adjusted).

Of Canada's eleven major cities, Ottawa's house prices rose most during 2019, with a 7.38% average price rise, followed by Halifax (7.35%), Montreal (6.37%), Hamilton (5.93%), and Toronto (4.48%). Minimal house price increases were seen in Quebec (1.49%), Victoria (1.13%), and Winnipeg (1.02%).

There were house price falls in Vancouver (-4.05%), Edmonton (-1.49%), and Calgary (-0.94%).

Why house prices are expected to rise soon
The central bank has taken repeated action to reduce speculative buying – raising mortgage downpayments and reducing amortization periods. This resulted in a sharp slowdown over the past two years.

However there is now rising demand, falling inventory, and declines in construction. During 2019, dwelling starts and completions fell by 2% and 6.5%, respectively, according to Canada Mortgage and Housing Corporation (CMHC). Listings available for purchase are now running at a 12-year low, based on figures from CREA.

In December 2019, sales activity soared 22.7% from a year earlier, a sharp turnaround from a y-o-y decline of 19% in December 2018, according to CREA's Statistical Report. Transactions surpassed the previous year's levels across most of Canada, including all of the largest urban markets. For the whole year of 2019, total sales were estimated at 486,800 units, up 6.2% from a year earlier.

The national average home price stood at CA$ 500,200 (US$376,215) in 2019, up by a modest 2.3% from a year earlier, according to CREA. British Columbia and Ontario had the most expensive housing markets in the country, with average prices of CA$ 699,300 (US$525,965) and CA$ 606,400 (US$ 456,092), respectively.

Canada house prices
The Canadian economy was estimated to have expanded by just around 1.7% in 2019, a deceleration from annual growth of 1.9% in 2018 and 3% in 2017, mainly due to a beleaguered oil and gas industry, coupled with the US-China trade tensions. Bank of Canada expects that the country's economic growth will remain weak this year, with a projected GDP growth of 1.6%, before partially rebounding to 2% in 2021.

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 »


Oilpatch woes adversely affecting the Canadian economy

The Canadian economy was estimated to have expanded by just around 1.7% in 2019, a deceleration from annual growth of 1.9% in 2018 and 3% in 2017, mainly due to a beleaguered oil and gas industry, coupled with the US-China trade tensions.

Canada’s oil and gas industry is expected to continue to suffer this year, amidst the widening price differentials between benchmark US oil prices and Western Canadian Select (WCS) heavy crude oil and the potential negative impact of the corona virus outbreak.

Canada gdp inflation
To stop the spread of the virus, people are now advised to limit or cancel their travels especially to China – which is expected to reduce fuel demand. “The estimates are very fluid,” said RS Energy Group VP Al Salazar. “The snowballing effect of all the airlines cancelling flights and the fear factor, which is almost impossible to quantify, of people just staying home, really can spike this up.”

Canada’s oil industry accounts for about 10% of the country’s GDP. Canada has the world’s third largest oil reserves and is the world’s fifth largest oil producer and fourth largest oil exporter.

The oil price gap between Canadian crude and US benchmarks hit above US$20 per barrel for most of January 2020, after averaging just US$12.7 per barrel during 2019.

“The suppressed prices are coming on the back of strengthened supply, in particular of heavy crude amid upgrader maintenance,” said JBC Energy. “Furthermore, Albertan stock levels jumped to 74 million barrels in November, within grasp of the all-time highs seen in 2018 and earlier last year.”

Alberta, Canada’s largest oil producing province, has been gradually lifting the mandatory production cuts that were introduced last January 2019. But as the cuts are phased out and production increases, the industry finds itself facing the age-old problem of insufficient pipeline capacity.

Bank of Canada expects that the country’s economic growth will remain weak this year, with a projected GDP growth of 1.6%, before partially rebounding to 2% in 2021.

The government has increased spending on infrastructure, cut some taxes, and increased child benefits, among others.

The downside is that the budget deficit is now swelling.

Recently, the government unveiled that the budget deficit for the 2019-20 fiscal year was estimated around CA$ 26.6 billion (US$20.2 billion), larger than the previous forecast of CA$19.8 billion (US$15 billion) and sharply up from a deficit of just CA$1 billion (US$751 million) four years ago. The federal government has run deficits every year since 2015, despite continued economic growth.

Canada unemployment
The deficit is expected to peak at CA$ 28.1 billion (US$21.4 billion) in the 2020-21 fiscal year, before falling to CA$11.6 billion (US$8.6 billion) in 2024-25.

Canada’s debt-to-GDP ratio edged up to 31% in FY 2019-20, from 30.8% in the prior year. It is projected to remain at that level through the end of 2021.

The country’s annual inflation rate stood at 2.2% in December 2019, unchanged from the previous month but slightly up from 2% a year earlier, according to Statistics Canada. The Bank of Canada expects inflation to remain around the 2% target this year, with some fluctuations due to volatility in energy prices.

In January 2020, the nationwide unemployment was 5.5%, down from 5.6% in the previous month and 5.8% a year earlier, according to Statistics Canada. British Columbia had the lowest jobless rate of 4.5%, followed by Quebec (5.1%), Manitoba (5.1%), Ontario (5.2%), and Saskatchewan (6%). Newfoundland and Labrador had the highest jobless rates in January 2020, at 11.9%.

During the October 2019 elections, Justin Trudeau’s Liberal Party has retained power but fell short of an outright majority, amidst a series of scandals that have rocked his first term. The Liberals of Prime Minister Justin Trudeau came to power in October 2015, on the back of campaign promises to shift the tax burden from the middle-income earners to the richest Canadians, and to run a budget deficit to allow spending on infrastructure and boost economic growth.

In an effort to fill the gap left by retiring baby boomers, Canada liberalized its immigration regulations in 2015. As a result, Canada took in more than 323,000 immigrants in the 2015-16 fiscal year, the largest number since 1910, according to Statistics Canada. In 2019, the Canadian government welcomed 341,180 immigrants, after admitting 321,055 newcomers in 2018 and 286,510 immigrants in 2017.

The government expects another 341,000 immigrants this year.

In November 2017, Canada’s then Minister of Immigration, Refugees and Citizenship Ahmed Hussen unveiled the government’s plan to let a million new immigrants in over the succeeding three years, in an effort to meet the country’s economic needs. The plan, dubbed as “Growing Canada’s Economic Future”, aims to increase the number of new immigrants by more than 300,000 annually from 2018 to 2020.

“This historic multi-year immigration levels plan will benefit all Canadians because immigrants will contribute their talents to support our economic growth and innovation, helping to keep our country at the forefront of the global economy,” said Hussen.

In October 2018, the government unveiled an updated multi-year immigration plan that includes a target of about 350,000 new immigrants in 2021, which is nearly 1% of its population.

About five million Canadians are set to retire by 2035.

"Nothing is going to impact this country besides increased automation and technology more than immigration will and this impact will grow in response to declining birth rate, aging population and accelerated retirements,” said Chris Friesen of the Canadian Immigrant Settlement Sector Alliance.

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