Market in Depth

House prices rise

Lalaine C. Delmendo | February 15, 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.

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.

Canada house prices
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.


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.

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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.

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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.

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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.

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ECONOMIC GROWTH

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.

Canada gdp inflation
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.

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.