Canada’s house price boom gathers pace

Lalaine C. Delmendo | October 03, 2022

After a two-year slowdown, Canada’s housing market has bounced back strongly in 2020-21, buoyed by strong demand coupled with limited supply.

House prices in Canada’s eleven major cities rose by a huge 15.16% y-o-y in November 2021 (10% when adjusted for inflation), an acceleration from the previous year’s 8.96% growth, according to figures from Teranet – National Bank of Canada. This is the ninth straight month of double-digit y-o-y house price growth, following y-o-y rises of 9.36% in 2020, 1.95% in 2019, 2.51% in 2018, 8.92% in 2017, and 12.25% in 2016.

Source: Teranet- National Bank of Canada


By property type (figures from the Canadian Real Estate Association):

  • One-storey single family home prices rose on average by 26.3% y-o-y in November 2021 (20.7% inflation-adjusted).
  • Two-storey single family home prices increased 28.3% y-o-y (22.6% inflation-adjusted).
  • Townhouse prices increased 25.2%, on average, over the same period (19.6% inflation-adjusted).
  • Apartments posted average gains of 17.9% (12.6% inflation-adjusted).

All of Canada’s eleven major cities saw rising house prices in November 2021 from a year earlier. Halifax recorded the biggest house price increase during the year to November 2021 at 29.78%, followed by Hamilton (24.92%), Victoria (18.77%), Ottawa (18.04%), Toronto (16.26%), Montreal (15.45%), Vancouver (13.9%). House prices also increased in Winnipeg (10.63%), Calgary (8.32%), Quebec (7.98%), and Edmonton (4.8%).

Demand is surging, despite the pandemic. In the first eleven months of 2021, sales soared to 630,634 residential properties – far surpassing the annual record of 552,423 sales for all of 2020, according to CREA.

There were just 1.8 months of inventory in November 2021 – tied with March 2021 for the lowest level ever recorded. The long-term average is more than 5 months.

To meet the strong demand, residential construction activity is increasing. Dwelling starts surged by 31.7% to 202,924 units from a year earlier during the year to November 2021, following an increase of 4.4% in 2020, according to the Canada Mortgage and Housing Corporation (CMHC). Likewise, dwelling completions rose by 12.9% y-o-y to 166,816 units in the first eleven months of 2021, following an annual growth of 6.1% in 2020.

To improve housing affordability, Canadian prime minister Justin Trudeau, who won his third term in September 2021, vowed to introduce new measures, including a temporary ban on foreign buyers, inclusionary zoning, increased densification, shortened construction approval timelines, and the rapid development of vacant or underused lands.  A 1% tax on foreign-owned vacant or underused real estate took effect on January 1, 2022.

The central bank’s market-cooling measures resulted in a sharp slowdown in house price rises in 2018 and 2019, but the housing market gained momentum again last year.

The national average home price stood at CA$720,850 (US$570,162) in November 2021, up by a whopping 19.6% 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$992,844 (US$785,298) and CA$922,580 (US$729,722), respectively.

The Canadian economy was estimated to have grown by about 5% in 2021, following a contraction of 5.3% in 2020, according to the Bank of Canada. The BOC expects the economy to grow by another 4.25% in 2022.

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

A long and steady boom

Canadian house prices have risen almost continuously for 18 years:

  • From Q1 2000 to Q1 2009, house prices rose by 79% (49% inflation-adjusted), due to low interest rates and economic growth.
  • From Q2 2009 to Q3 2012, house prices increased by another 24% (17% inflation-adjusted), despite government efforts to cool the housing market.
  • From Q4 2012 to Q4 2015, tighter mortgage rules implemented in July 2012 helped calm the market, but house prices still rose by around 15.7% (10.8% inflation-adjusted).
  • From 2016 to 2020, house prices surged by almost 40% (28.7% inflation-adjusted).
  • During 2021, house prices were estimated to have soared by almost 21% (16% inflation-adjusted).

Canada house price index

House prices to rise further in 2022, albeit at a slower pace

Canada’s house prices are expected to continue rising in the medium term, amidst robust demand, coupled with supply shortages. The national average price is forecast to increase by 7.6% y-o-y to CA$739,495 (US$579,653) during 2022, according CREA’s December 2021 Quarterly Forecasts.

Regionally:

  • Ontario is expected to post the biggest annual rise in house prices of 11.5% during 2022, to an average of CA$971,080 (US$761,181).
  • House prices are also projected to increase strongly in New Brunswick (11.4%), Nova Scotia (11.2%), and Quebec (11%), Prince Edward Island (8.1%), and British Columbia (7.1%).
  • More modest house price increases are projected in Manitoba (5.9%), Saskatchewan (5.4%), Alberta (4.7%), and Newfoundland (4.6%).

Home sales reached new record high

In the first eleven months of 2021, actual sales soared to 630,634 residential properties – far surpassing the annual record of 552,423 sales for all of 2020, according to CREA.

Based on the sales-to-new listings ratio, about two-thirds of local markets were seller’s markets while the other one-third were in balanced market territory, according to CREA.

Canada sales activity

In November 2021, the national sales-to-new listings ratio stood at 77%, slightly down from 79.1% in October but still far higher than long-term average of 54.9%.

There were just 1.8 months of inventory in November 2021 – a level which tied with March 2021 as the lowest level ever recorded. The long-term average is more than 5 months.

“The fact is that the supply issues we faced going into 2020, which became much worse heading into 2021, are even tighter as we move into 2022,” said Shaun Cathcart, CREA’s Senior Economist.

Residential construction rising

During the year to November 2021, dwelling starts surged by 31.7% to 202,924 units from a year earlier, following an increase of 4.4% in 2020, according to CMHC.

By property type:

  • Apartments: starts were up 23.3% y-o-y in Jan-Nov 2021 to 109,226 units, after rising by 4.5% in 2020
  • Single family homes: starts increased 52.6% y-o-y to 62,679 units in the first eleven months of 2021, following an annual increase of 7.3% in 2020
  • Semi-detached houses: starts were up 33.9% y-o-y to 10,147 units in Jan-Nov 2021, after rising by 13.8% during 2020
  • Row houses: starts rose 23.7% y-o-y to 20,872 units, in contrast to a 6.5% decline in 2020

Likewise, dwelling completions rose by 12.9% y-o-y to 166,816 units in the first eleven months of 2021, following an annual growth of 6.1% in 2020.

canada housing starts and completions

Ontario accounted for more than a third of all dwelling starts in Canada in Jan-Nov 2021, followed by Quebec and British Columbia, which represented about 25% and 18% shares, respectively.

Interest rates still low, mortgage market continues to grow

Mortgage interest rates remain low in Canada.

  • Interest rates on 1-year mortgages averaged 2.79% in December 2021, down from 3.09% in December 2020.
  • Interest rates on 3-year mortgages averaged 3.49% in December 2021, unchanged from a year earlier.
  • Interest rates on 5-year mortgages averaged 4.79% in December 2021, unchanged from the previous year.

Canada interest rates

In December 2021, the central bank kept its key rate unchanged at a record low of 0.25%, after a cumulative 150 basis points rate cut in March 2020 at the onset of the COVID-19 pandemic.

Buoyed by very low interest rates, the mortgage market continues to expand. In Q3 2021, the total amount of mortgage loans outstanding rose by 10.2% to CA$1.72 trillion (US$1.35 trillion) from a year earlier, according to Statistics Canada.

The size of the mortgage market expanded strongly in recent years, rising from 39.8% of GDP in 2000, to 54.2% of GDP in 2008, to 63.3% of GDP in 2014 and finally to more than 75% of GDP in 2020.

Canada outstanding mortgages

In 2019, the government launched its First-Time Home Buyer Incentive which aims at helping first-time homebuyers reduce their monthly mortgage payments without adding to their financial burdens. Under the CA$ 1.25 billion shared equity program, the government contributes a portion of the home purchase price in exchange for an equity share of the home’s value.

New market-cooling measures

Canadian prime minister Justin Trudeau, who won his third term in September 2021, vowed to introduce new measures to improve housing affordability “Your overarching goal is to help ensure Canadians can get a home of their own, through work to improve housing affordability and end chronic homelessness,” Trudeau wrote to housing minister Ahmed Hussen.

Agreed Hussen: “Any measure that increases the housing supply, that intensifies the use of land, that builds more housing and that frees up more housing on the same amount of land, is a good thing.”

Last year, the country also tightened mortgage lending requirements for investors.

“This will enable us to reduce the speculative demand in the marketplace. It’ll help cool excessive price growth,” Hussen noted.

In addition, Ontario’s provincial government is also planning to increase its speculation tax for foreign property buyers from 15% to 20%, while also applying the tax provincewide.

Foreign speculative buyers were partly blamed for surging house prices in Vancouver and Toronto in recent years, prompting British Columbia and Ontario to impose land transfer taxes on foreign buyers in some markets.

Aside from these, the Canadian government introduced several rounds of market cooling measures in recent years. In October 2017, the Office of the Superintendent of Financial Institutions (OSFI) required lenders to test borrowers’ ability to pay higher interest rate than the one they have actually been offered. The measures, which came into effect on January 1, 2018, apply to all federally regulated financial institutions.

  • OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages. The minimum qualifying rate is now the five-year benchmark rate published by the Bank of Canadaor the contractual mortgage rate +2%, whichever is higher.
  • OSFI is requiring lenders to enhance their loan-to-value (LTV) measurement and limits so they will be dynamic and responsive to risk.
  • OSFI is placing restrictions on certain lending arrangements that are designed to circumvent LTV limits.

The new stress test requirement disqualify about one in every five potential buyers, according to a survey conducted by the Mortgage Professionals Canada.

This followed measures were introduced in 2016 to discourage speculation:

  • From August 2, 2016, foreign nationals and foreign-controlled companies were required to pay 15% in additional property transfer tax on residential property transfers in Greater Vancouver. A 15% tax is equivalent to around CA$300,000 on the sale of a CA$2 million home.
  • From October 17, 2016 homebuyers who made greater than 20% down payments, faced the same insurance requirements as those with lower down payments.
  • The government has also launched consultations on limiting the government’s financial obligations in the event of widespread mortgage defaults.

Other market-tightening measures date back to July 2012, with a significant ratcheting-up of pressure in 2013 and 2014. Till this year none of these measures have had much effect.

Rent-to-own program to be introduced

Consultation work for the country’s rent-to-own program has recently begun, which aims to help renters buy their first home. A tax-free downpayment savings program for first-time buyers is also planned.

These two measures are estimated to cost about CA$4.2 billion (US$3.3 billion) over four years.

Rents rising modestly again; rental yields remain healthy

Canada average monthly rents

After falling last year, residential rents are rising modestly again, amidst the gradual easing of coronavirus-related restrictions.

“Toward the end of 2021, the average rents across Canada have nearly recovered to the same levels seen at the start of 2020, and we expect they will continue to rise above 2019-peak levels in 2022,” said Rentals.ca.

In November 2021, the average monthly rent for all Canadian properties listed on Rentals.ca rose by a modest 3.6% y-o-y to CA$1,817 (US$1,429), in contrast to about 7% fall a year earlier.

By property type:

  • Single-family homes: monthly rent rose strongly by 14.2% y-o-y to CA$2,594 (US$2,041) in November 2021.
  • Condominiums: rents increased 7.9% y-o-y to CA$2,198 (US$1,729) in November 2021.
  • Townhouses: rents rose by 16% y-o-y to CA$2,200 (US$1,731) in November 2021
  • Rental apartments: rents were up slightly by 1.6% y-o-y to CA$1,662 (US$1,308) over the same period.

Ontario and British Columbia had the highest rents in Canada in November 2021, with an average monthly rent of CA$2,182 (US$1,717) and CA$2,090 (US$1,644), respectively, according to Rentals.ca.

Gross rental yields in Montreal remain healthy, ranging from 4% to 6%, according to Global Property Guide research. A small apartment of 60 sq. m. in Montreal offers a return of around 6%. In this low-return era, in a low-risk country such as Canada, that is a really acceptable, not to say enticing, yield. Even on a largish 120 sq. m. apartment in Montreal, one can likely earn a gross rental return of 4.5%.

In Toronto, gross rental yields are lower, at between 3.9% and 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.

Toronto’s vacancy rate is now “balanced”

In Q3 2021, Toronto’s vacancy rate for purpose-built rental apartments dropped to 3%, down from 5.1% in the previous quarter and less than half from a year earlier, according to consulting firm Urbanation.

“The rental market recovery heated up considerably during the third quarter as economic restrictions continued to be lifted and the population began returning back to the core,” said Shaun Hildebrand, President of Urbanation. “The stage has now been set for the GTA rental market to return to pre-COVID levels in short order.”

Canada rental vacancy rate

Toronto’s vacancy rate reached a record 6.4% in Q1 2021 – the highest level for the city since CMHC started collecting data in 1971.

The number of leases signed for condominium rentals in the Greater Toronto Area (GTA) totaled 13,969 units in Q3 2021 – up by 6% from a year earlier. Likewise, the ratio of leases-to-listings increased to 82% in Q3 2021 - the highest level since Q3 2019.

The average days on market fell to 16 in Q3 2021, which is also the lowest in two years, according to Urbanation.

Active listings of rental properties dropped 69% in Q3 2021 from a year ago and equivalent to 0.7 months of supply – the lowest since Q3 2018.

Immigrants to Canada reach new record high

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.

However due to the COVID-19 outbreak and the imposition of travel restrictions and lockdowns, the government’s plan of welcoming about 340,000 new immigrants in 2020 was not achieved.

Canada exchange rate

Despite the ongoing pandemic, Sean Fraser, the Minister of Immigration, Refugees and Citizenship, announced recently that Canada welcomed more than 401,000 new permanent residents in 2021 – the highest in Canadian history and surpassing the previous record from 1913.

“This historic achievement is particularly significant in the face of the pandemic’s many challenges. From closed borders to domestic lockdowns, global migration has been upended by COVID-19,” said the CCIRC.

“Canada needs immigration to drive our economy, enrich our society and support our aging population. One in 3 Canadian businesses is owned by an immigrant, and 1 in 4 health care workers is a newcomer. Business, labour market experts and economists all agree that immigration creates jobs, spurs innovation and helps address labour shortages. New Canadians contribute to communities across our country every day, and we will continue welcoming more of them as we build the Canada of tomorrow.”

About five million Canadians are set to retire by 2035.

Economy continues to recover; inflationary pressures increasing

The Canadian economy was estimated to have grown by about 5% in 2021, following a contraction of 5.3% in 2020, as the economy recovered from the adverse effects of the Covid-19 pandemic, according to the Bank of Canada. The BOC expects the economy to grow by another 4.25% in 2022.

As a result of massive government spending to fight the pandemic, the country’s budget deficit reached a historic high of CA$ 314 billion (US$ 248.4 billion) during the FY2o2o-21. It was equivalent to about 14.8% of GDP, sharply up from the prior year’s 1.8% shortfall. The shortfall is projected to drop to CA$ 58.4 billion (US$46.2 billion) in FY2022-23.

Canada gdp growth and inflation rate

The Canadian dollar (CAD) appreciated against the US dollar by about 3% in the past two years, to reach an average monthly exchange rate of CAD 1.28 = USD 1 in December 2021.

Canada unemployment

The country’s annual inflation rate stood at 4.7% in November 2021, far higher than the central bank’s target range of 1% to 3%, amidst supply chain issues, according to Statistics Canada. Together with October, it was the highest reading since February 2003.

In December 2021, unemployment was 5.9%, down from 8.8% a year earlier but still slightly above its pre-pandemic February 2020 level of 5.7%, according to figures from Statistics Canada.


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