Canada’s red-hot housing market

Lalaine C. Delmendo | January 28, 2021

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

Canada house prices

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-storey single family home prices rose on average by 15.9% during 2020 (14.8% inflation-adjusted).
  • Two-storey single 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.

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.

A long and steady boom

Canada escaped the major post-2008 collapse in house prices which took place in Europe and the U.S. 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% (28.4% inflation-adjusted).
Canada house price index

House prices to continue rising in 2021

Canada’s house prices are expected to continue rising strongly this year, amidst robust demand, coupled with supply shortages. The national average price is forecast to increase by 9.1% y-o-y to CA$620,400 (US$486,978), according to CREA’s Quarterly Forecasts for 2021.

“Average price trends across Canada in 2021 are generally expected to resemble those in 2020,” CREA noted. “Shortages of supply, particularly in Ontario and Quebec, are expected to result in strong price growth, while Alberta and Saskatchewan are anticipated to see average prices pick up following several years of depreciation.”

However, there are significant regional variations:

  • Ontario is expected to post the biggest annual rise in house prices of a huge 16.3% during 2021, to an average of CA$ 823,656 (US$646,522).
  • House prices are also expected to increase strongly in Quebec (13.6%), Nova Scotia (10.3%), Alberta (7.4%), and New Brunswick (5.7%).
  • Modest to minimal house price increases are projected in Saskatchewan (3.6%), Newfoundland and Labrador (2.9%), Prince Edward Island (1.6%), and Manitoba (1.3%).
  • British Columbia is expected to register a miniscule house price growth of 0.3% this year, to an average of CA$780,276 (US$612,471).

Home sales reached record high

Demand continues to surge despite the COVID-19 pandemic. 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.

“It was a new record for the month of December by a margin of more than 12,000 transactions. For the sixth straight month, sales activity was up in almost all Canadian housing markets compared to the same month in 2019,” said CREA.

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. Saskatchewan saw the biggest increase in sales in 2020 at 23.5%, followed by British Columbia (16.7%), Quebec (15.1%), Manitoba (12.9%), and New Brunswick (10%). Sales activity also increased in Ontario (9.2%), Prince Edward Island (9.1%), Nova Scotia (8.7%), and Newfoundland and Labrador (6.1%).

Only Alberta saw a slight decline in sales activity of 0.2% during 2020.

Nationwide sales activity is projected to rise strongly by another 7.2% y-o-y in 2021, to 583,635 units, based on CREA’s Quarterly Forecasts for 2021.

“It’s official, despite all the challenges, 2020 was a record year for Canadian resale housing activity,” said CREA Chair Costa Poulopoulos. “While momentum continues into 2021, surging COVID cases and a return to April-like lockdowns in some provinces means we’ll be revisiting some of those virtual technology solutions to process deals in the first few months of the year.”

Canada sales activity

The number of new listings rose by 3.4% in December 2020, led by the GTA and B.C. Lower Mainland. 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.

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.

Residential construction rising

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 CMHC.

By property type:

  • Apartments: starts were up 4.5% in 2020 from a year earlier to 122,945 units, after rising by 4.7% in 2019
  • Single family homes: starts increased 7.3% y-o-y to 59,954 units in 2020, in sharp contrast to an annual fall of 15.3% in the prior year
  • Semi-detached houses: starts were up by 13.8% y-o-y to 11,397 units last year, after falling by 8.9% in 2019
  • Row houses: starts fell by 6.5% y-o-y to 23,506 units in 2020, in contrast to a 7% rise in 2019.

Likewise, dwelling completions rose by 6.1% y-o-y to 198,636 units last year.

canada housing starts and completions

Ontario accounted for about a third of all dwelling starts in Canada, followed by Quebec and British Columbia, which represented for more than 20% share, respectively.

Interest rates falling, mortgage market continues to grow

Mortgage interest rates are falling again in Canada.

  • Interest rates on 1-year mortgages averaged 2.79% in January 2021, down from 3.64% in January 2020.
  • Interest rates on 3-year mortgages averaged 3.49% in January 2021, down from 3.94% in January 2020.
  • Interest rates on 5-year mortgages averaged 4.79% in January 2021, down from 5.19% in the previous year.
Canada interest rates

In January 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 August 2020, the amount of residential mortgage debt outstanding rose by 5.3% to CA$1.7 trillion (US$1.33 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 about 78% of GDP in 2020.

Canada outstanding mortgages

New foreign homebuyer tax looming

In December 2020, the government unveiled its plan to introduce a new tax on foreign homebuyers to prevent speculative purchases, as well as address the worsening housing affordability in the country. The details of the proposed measure are expected to be outlined in the spring budget in March or April 2021.

“Speculative demand from foreign, non-resident investors contributes to unaffordable housing prices for many Canadians,” according to the government’s Fall Economic Statement. “The government is committed to ensuring that foreign, non-resident owners, who simply use Canada as a place to passively store their wealth in housing, pay their fair share.”

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 this, 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 disqualified about one in every five potential buyers, according to a survey conducted by the Mortgage Professionals Canada.

This followed measures 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.
  • While any financial gain from selling a primary residence remains tax-free, the government now requires sellers to report the sale at tax time to the Canada Revenue Agency.
  • 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.

Rents falling; rental yields remain healthy

The pandemic has shaken up the rental market, said Statistics Canada. “Physical distancing measures and travel restrictions transformed the rental market. Before the pandemic, there was an influx of investors purchasing properties to rent them on the short-term rental market.”

“However, with travel restrictions in place, many short-term rental owners have had to find alternative and less lucrative rental options. There is already evidence of this happening in Toronto, where average rental prices have begun decreasing as new landlords try to attract clients from a diminished pool of potential renters,” added Statistics Canada.

In December 2020, the average monthly rent for all Canadian properties listed on Rentals.ca fell by 7.1% y-o-y to CA$1,723 (US$1,352), in contrast to a 4.4% increase in December 2019.

By property type:

  • Single-family homes: monthly rent fell by 9.3% y-o-y to CA$ 2,361 (US$1,853) in December 2020.
  • Condominiums: rents plunged 18.5% y-o-y to CA$ 2,009 (US$1,577) in December 2020.
  • Rental apartments: rents were up 8.4% y-o-y to CA$ 1,603 (US$1,258) over the same period.

Ontario and British Columbia had the most expensive rental housing in Canada in 2020, with an average monthly rent of CA$ 2,090 (US$ 1,641) and CA$ 1,996 (US$ 1,567), respectively, according to Rentals.ca.

Canada average monthly rents

Yet 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 at an all-time high

Toronto’s vacancy rate for rental apartments surged to 5.7% in Q4 2020 from a year earlier, sharply up from just 1.1% in Q4 2019, according to consulting firm Urbanation. It was the highest on record since CMHC started collecting data in 1971.

In the Greater Toronto Area (GTA), the overall vacancy rate was up 4.6% in Q4 2020 from 1% a year ago.

“The GTA rental market faced its toughest challenges to date in 2020 due to COVID-19,” said Urbanation president Shaun Hildebrand.

“While rents have a long way to go before returning to their peak and supply will continue to be a headwind in the near-term, some improvement can be expected in 2021 as vaccinations eventually lead to higher immigration and at least a partial return to the office for downtown workers and in-class learning for post-secondary students.”

Canada rental vacancy rate

Accordingly, rental demand in Toronto and other city centers fell sharply in 2020, due to increased relocations from cities to suburbs, as well as low immigration, high unemployment, and a sharp decline in the number of post-secondary students.

Before the pandemic, the national vacancy rate stood at 2.2%, down from 2.4% a year earlier, according to the CMHC. It is considered very low by international standards. Because of skyrocketing house prices in recent years, an increasing number of Canadians have no choice but to rent.

Canada to boost immigration

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.

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 from 2018 to 2020, 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.

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

In a bid to boost its economic recovery from the pandemic, Canada recently revised its multi-year target and now plans to welcome more than 1.2 million newcomers in the next three years, according to the Canadian Citizenship & Immigration Resource Center Inc. (CCIRC). Under its immigration plan, the government expects 401,000 immigrants in 2021, 411,000 in 2022, and 421,000 in 2023.

“Immigration is essential to getting us through the pandemic, but also to our short-term economic recovery and our long-term economic growth,” said Marco Mendicino, Minister of Immigration, Refugees and Citizenship. “As we look to recovery, newcomers create jobs not just by giving our businesses the skills they need to thrive, but also by starting businesses themselves. Our plan will help to address some of our most acute labour shortages and to grow our population to keep Canada competitive on the world stage.”

About five million Canadians are set to retire by 2035.

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.

Canada gdp growth and inflation rate

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

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.

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.

Canada unemployment

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.


Sources:

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