Market in Depth

Is Canada's amazing house price boom coming to an end?

Lalaine C. Delmendo | March 04, 2019

House prices in Canada's eleven major cities rose by a modest 2.51% during 2018 (0.51% inflation-adjusted). 

This is a sharp slowdown from last year's 8.92% rise.  And in the last quarter of 2018, house prices fell 0.95% (-0.73% inflation-adjusted), against the backdrop of rising interest rates and a slowing economy.

Demand is now falling. Construction is weakening. Sales plunged 19% in December 2018 from a year earlier, according to the Canadian Real Estate Association (CREA).

According to CREA:
  • Apartment prices posted year-on-year gains of 4.85% - but last year they rose 19.68%!
  • Townhouses/row houses rose 3.06% - but last year they rose 12.07%!
  • The average price of a one-storey single family home fell 0.27%, while two-storey homes rose 0.39%.
  • Victoria's house prices recorded the biggest year-on-year rise of 5.95% during 2018, followed by Ottawa (5.87%), Hamilton (4.4%), Montreal (4.37%), Toronto (3.72%) and Vancouver (1.41%).
  • There were house price falls in Calgary (-2.64%), Edmonton (-1.87%), Winnipeg (-0.49%), Quebec (-0.14%) and Halifax (-0.04%).

The central bank has taken action repeatedly – raising mortgage downpayment requirements and reducing amortization periods – but till now, prices spiralled up. However January 2018's squeeze is proving effective.  House price rises are decelerating sharply.

Canada house prices
“While economic and demographic fundamentals remain supportive for housing demand in many parts of the country, policy headwinds together with rising interest rates are limiting access to mortgage financing and negatively impacting homebuyer sentiment,” said CREA.

The Canadian economy expanded by 2.1% in 2018, a slowdown from the preceding year's 3% growth, mainly due to its ailing oil and gas industry. Bank of Canada expects economic growth to slow further to 1.7% this year before partially rebounding to 2.1% in 2020.

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 »

ECONOMIC GROWTH

Oilpatch woes adversely affecting the Canadian economy

The Canadian economy was estimated to have expanded by 2.1% in 2018, a deceleration from the preceding year’s 3% growth, mainly due to the slowing oil and gas industry.

Canada gdp inflation
"Here in Canada, lower oil prices have reached the point where they will have material consequences for our macroeconomic outlook,” said Bank of Canada governor Stephen Poloz.

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.

Oil price gap between Canadian crude and US benchmarks hit new records in October 2018, topping US$50 per barrel, mainly due to rising oil production, export bottlenecks and American refinery maintenance. In an effort to clear the oil glut, Alberta, Canada’s largest oil producing province, began to enforce mandatory production cuts on its largest oil producers in January 2019.

Bank of Canadaexpects that the country’s economic growth will slow further to 1.7% this year before partially rebounding to 2.1% in 2020.

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. For the 2019-20 fiscal year, the Canadian government is projected to post a deficit of CA$19.6 billion (US$14.8 billion), sharply up from a deficit of just CA$1 billion (US$754 million) four years ago. The federal government has run deficits every year since 2015, despite continued economic growth.

In November 2018, government debt stood at CA$671.7 billion (US$506.7 billion), up 4.8% from a year earlier, according to Statistics Canada.

The country’s annual inflation rate stood at 2% in December 2018, up from 1.9% a year earlier, as higher food and phone services costs offset lower gasoline prices, according to Statistics Canada. For the whole year of 2018, inflation accelerated to 2.3%, up from 1.6% in 2017 and the highest level in seven years.

In January 2019, the nationwide unemployment was 5.8%, up from 5.6% in the previous month but down from 5.9% a year earlier. British Columbia had the lowest jobless rate of 4.7%, followed by Quebec (5.4%), Manitoba (5.5%), Saskatchewan (5.5%) and Ontario (5.7%). Newfoundland and Labrador had the highest jobless rates in January 2019, at 11.4%.

Canada unemployment
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. During the latest fiscal year, the Canadian government targets to accept about 310,000 immigrants, after admitting about 273,000 immigrants in FY 2016-17 and 303,000 immigrants in FY 2017-18.

In November 2017, Canada’s Minister of Immigration, Refugees and Citizenship Ahmed Hussen unveiled the government’s plan to let a million new immigrants over the succeeding three years, in an effort to fulfill the country’s economic needs. The plan, dubbed as "Growing Canada’s Economic Future", aims to increase the number of new immigrants to 310,000 in 2018, 330,000 in 2019, and 340,000 in 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, director of the Canadian Immigrant Settlement Sector Alliance.

The immigrants are expected to reignite the economy - and boost the housing market.