Canada’s housing market is now losing steam, as rising interest rates, a decline in purchasing power due to high inflation, and heightened economic uncertainty are pushing potential homebuyers to the sidelines.
During 2022, house prices in Canada’s eleven major cities rose by a modest 2.26%, a sharp deceleration from the prior year’s 15.47% growth, according to figures from Teranet – National Bank of Canada. When adjusted for inflation, house prices actually dropped 3.82% last year.
“The housing market story of 2022 was about high inflation and rising interest rates. The 2023 market will depend on the timing and extent those factors move back in the other direction,” said CREA’s senior economist Shaun Cathcart.
Ten of Canada’s eleven major cities saw a sharp slowdown in house price growth last year. Despite this, Calgary recorded the biggest house price increase during 2022 at 14.34%, followed by Edmonton (7.22%), Quebec (6.17%), Halifax (5.82%), and Montreal (5.06%). Meager house price growth was seen in Victoria (1.86%), Vancouver (0.86%), Winnipeg (0.85%), Toronto (0.58%), and Ottawa (0.56%). Only Hamilton registered a house price fall of 1.3%.
Canada’s house price annual change
Figures from the Canadian Real Estate Association (CREA) are more dismal, with the actual national average sales price falling by 12% (-17% inflation-adjusted) in December 2022 as compared to a year earlier.
By property type:
- One-story single-family home prices fell on average by 9.18% y-o-y in December 2022 (-14.58% inflation-adjusted).
- Two-story single-family home prices dropped 8.79% y-o-y (-14.21% inflation-adjusted).
- Townhouse prices were down by a more modest 4.22%, on average, over the same period (-9.91% inflation-adjusted).
- Apartment prices were more or less steady during 2022 but fell by 5.85% when adjusted for inflation.
The national average home price stood at CA$ 703,875 (US$ 527,627) in 2022, up by a modest 2.4% 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$ 996,694 (US$747,235) and CA$ 931,953 (US$ 698,697), respectively.
Both demand and supply are now falling. During 2022, the total number of residential property sales transactions plummeted by 25.2% y-o-y to 498,269 units from a record-high of 666,399 units in 2021, in contrast to annual increases of 20.5% in 2021 and 12.6% in 2020, according to figures from CREA.
Likewise, the total number of dwelling starts fell modestly by 3.4% y-o-y to 261,849 units in 2022, in sharp contrast to a huge 24.5% growth in 2021, according to CMHC.
The Canadian economy grew by a modest 3.6% during 2022, following an expansion of 4.5% in 2021 and a contraction of 5.2% in 2020, according to the Bank of Canada. However the economic outlook is now bleak, as higher borrowing costs adversely affect consumer spending and as export growth moderates amidst deteriorating global economic conditions. The central bank expects Canada’s economy to grow by a meager 1% this year.
A long and steady boom
Canadian house prices have risen almost continuously for nearly two decades:
- 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 surged by 15.47% (10.17% inflation-adjusted).
- House price growth slowed sharply to just 2.26% in 2022, and actually declined by 3.82% when adjusted for inflation.
Gloomy housing market outlook
Canada’s housing market is expected to continue to weaken this year, amidst bleak prospects for the overall economy. The national average house price is forecast to fall by 5.9% y-o-y to CA$ 662,103 (US$ 496,493) during 2023, according to CREA’s January 2023 Quarterly Forecasts. Likewise, property transactions will also decline slightly by 0.5% to 495,858 units this year.
- Ontario is expected to post the biggest annual decline in house prices of 8.7% during 2023, to an average of CA$ 850,876 (US$ 638,048).
- House prices are projected to fall by 7% in British Columbia, but will remain the most expensive housing market in Canada, with an average price of CA$ 926,705 (US$ 694,954).
- House prices are also expected to fall in Quebec (-6.5%), Saskatchewan (-5.4%), Manitoba (-5.3%), Nova Scotia (-1.1%), and New Brunswick (-0.8%).
- Modest to minimal house price increases are projected in Prince Edward Island (3.3%), Newfoundland (1.9%), and Alberta (1.1%).
Home sales falling sharply
During 2022, the total number of residential property sales transactions fell sharply by 25.2% y-o-y to 498,269 units from a record-high of 666,399 units in 2021, according to figures from CREA. This is in contrast to annual increases of 20.5% in 2021, 12.6% in 2020, and 6.5% in 2019.
All regions saw a decline in demand last year. British Columbia registered the biggest y-o-y fall of 35.2%, followed by Ontario (-32.3%), Nova Scotia (-21.6%), New Brunswick (-20.5%), Quebec (-20.4%), Manitoba (-20.2%) and Prince Edward Island (-17.9%). More moderate declines were seen in Saskatchewan (-11.7%), Newfoundland (-7.1%), and Alberta (-1.8%).
“In 2022, we saw one of the biggest single-year shifts on record in Canadian housing activity, from record highs last winter to just below the 10-year average to end the year,” said Jill Oudil, Chair of CREA. “That said, the market’s adjustment to higher rates may be mostly in the rear-view mirror at this point. That could start to bring buyers back off the sidelines this spring.”
The total number of newly listed homes fell by 6.4% in December 2022 from the previous month, led by declines in British Columbia and Quebec. It was one of the lowest December new supply levels on record.
As a result, the national sales-to-new listings ratio tightened to 54.4% in December 2022, from 50.2% in the previous month. Yet it is far from the 79.7% recorded in December 2021.
There were 4.2 months of inventory in December 2022, as compared to a record-low of just 1.6 months in the same period last year. Yet it remains nearly a full month below its long-term average.
Residential construction activity stabilizing
During 2022, the total number of dwelling starts fell modestly by 3.4% y-o-y to 261,849 units, in sharp contrast to a huge 24.5% growth in 2021, according to CMHC. Yet it remains the second highest dwelling starts recorded in recent history.
By property type:
- Apartments: starts were up slightly by 0.6% to 148,038 units in 2022 as compared to a year earlier
- Single-family homes: starts fell by 11.5% y-o-y to 72,647 units during 2022
- Semi-detached houses: starts were down by 13.9% y-o-y to 11,429 units in 2022
- Row houses: starts rose by a modest 4% y-o-y to 29,735 units last year
Ontario accounted for more than 38% of all dwelling starts in Canada during 2022, followed by Quebec and British Columbia, which represented about 20.1% and 17.9% shares, respectively.
Likewise, dwelling completions in Canada fell slightly by 1.2% to 219,942 units in 2022 from a year ago.
By property type:
- Apartments: completions dropped 1.6% y-o-y to 115,726 units last year
- Single-family homes: completions increased slightly by 1.3% to 69,744 units in 2022 from a year earlier
- Semi-detached houses: completions fell by 6.6% y-o-y to 11,360 units last year
- Row houses: completions were down by 3.9% y-o-y to 23,112 units over the same period
Interest rates rising rapidly, but the mortgage market continues to grow
Mortgage interest rates are rising rapidly in Canada, following the central bank’s successive rate hikes in recent months.
- Interest rates on 1-year mortgages averaged 6.34% in January 2023, sharply up from just 2.79% in January 2022, according to figures from Statistics Canada.
- Interest rates on 3-year mortgages averaged 6.14% in January 2023, far higher than the previous year’s 3.49%.
- Interest rates on 5-year mortgages averaged 6.49% in January 2023, up from 4.79% a year earlier.
In January 2023, the Bank of Canada raised its key interest rate further by 25 basis points to 4.5%, its eighth consecutive rate hike since March 2022, in an effort to curb inflationary pressures. The central bank also raised its bank rate to 4.75% and its deposit rate to 4.5% and is also continuing its policy of quantitative tightening.
“Inflation has declined from 8.1% in June to 6.3% in December, reflecting lower gasoline prices and, more recently, moderating prices for durable goods. Despite this progress, Canadians are still feeling the hardship of high inflation in their essential household expenses, with persistent price increases for food and shelter. Short-term inflation expectations remain elevated,” said the central bank.
Despite this, the mortgage market continues to expand. In November 2022, the total amount of mortgage loans outstanding rose by 7.6% to CA$ 2.08 trillion (US$ 1.56 trillion) from a year earlier, according to Statistics Canada.
The size of the mortgage market expanded strongly in recent years, rising from 39.7% of GDP in 2000, to 54.1% of GDP in 2008, to 63.1% of GDP in 2014, and finally to about 75% of GDP in 2022.
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 (US$ 0.94 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 introduced
In June 2022, the country tightened lending rules for riskier mortgage products, in an effort to address concern over high levels of mortgage debt driven by record-low interest rates during the Covid-19 pandemic, leaving the country more vulnerable to economic shocks.
Then in January 2023, the Office of the Superintendent of Financial Institutions (OSFI) is proposing tougher lending rules that would make it even harder for borrowers to get a mortgage, after a surge in borrowing costs increased risks to the banking system. These include:
- Limiting the share of highly leveraged borrowers in a bank’s mortgage portfolio;
- Toughening debt servicing metrics; and,
- Augmenting the mortgage stress test for risky loans.
In October 2022, Ontario’s provincial government raised further its non-resident speculation tax for foreign property buyers to 25%, making it the highest in the country, as it seeks to discourage foreign speculative buying. Ontario had previously increased the tax from 15% to 20% in March 2022 and expanded its coverage to include the whole, instead of just the Greater Golden Horseshoe area of southern Ontario.
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 OSFI required lenders to test borrowers’ ability to pay higher interest rates 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 set a 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 Canada or the contractual mortgage rate +2%, whichever is higher.
- OSFI required lenders to enhance their loan-to-value (LTV) measurement and limits so they will be dynamic and responsive to risk.
- OSFI placed restrictions on certain lending arrangements that are designed to circumvent LTV limits.
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.
- 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.
Canadian prime minister Justin Trudeau, who won his third term in September 2021, announced last year that the rent-to-own program will be moving ahead, as he set out a CA$ 2 billion (US$ 1.5 billion) budget to improve housing affordability and double the pace of homebuilding in the country over the next decade. The new rent-to-own program aims to help Canadians transition from renting to buying their first home.
“For a lot of renters, saving to buy a home is increasingly difficult. Through this new program we’ll work with housing providers to help families go from renting to owning their home,” said Trudeau.
Aside from the rent-to-own program, the funding will also be used to build about 17,000 new homes across the country, particularly affordable and market-rate housing projects.
Rents rising strongly
During 2022, residential rents in Canada rose by 7.3% y-o-y to an average of CA$ 1,206 (US$ 901), according to figures from the CMHC. It was an acceleration from an average annual increase of 3.1% in 2011-21 and the highest growth recorded in the past three decades.
By no. of bedroom (based on CMHC data):
- Bachelor: monthly average rent rose by 6.8% y-o-y to CA$ 947 (US$ 708) during 2022
- One-bedroom: monthly rent increased by 7.1% to CA$ 1,147 (US$ 858) in 2022 from a year earlier
- Two-bedroom: monthly rent increased by 7.8% y-o-y to an average of CA$ 1,258 (US$ 941) in 2022
- Three or more bedrooms: monthly average rent was up by 7.1% y-o-y to CA$ 1,351 (US$ 1,011) last year
This is supported by figures from Rentals.ca, which showed that the average listed rent for all property types rose strongly by 12.2% y-o-y to CA$ 2,005 (US$ 1,498) in December 2022. For the full year of 2022, the nationwide rents increased by 10.9%, in contrast to an average y-o-y decline of 1.6% in the past two years.
By property type, in January 2023:
- Apartments: monthly rent rose strongly by 13.1% y-o-y to CA$ 1,840 (US$ 1,375).
- Condominiums: rents increased 13% y-o-y to an average of CA$ 2,190 (US$ 1,636)
- Houses/Townhouses: monthly rents rose by 9.4% y-o-y to an average of CA$ 2,224 (US$ 1,661)
“The exceptional growth in rents last year can be attributed to a combination of factors, including a recovery from declines experienced during the pandemic, record high population growth, a large pullback in home buying, and structurally low vacancy rates,” said Rentals.ca.
British Columbia and Ontario had the highest rents in Canada in January 2023, with an average monthly rent of CA$ 2,535 (US$ 1,894) and CA$ 2,358 (US$ 1,761), respectively, according to Rentals.ca.
Rental yields remain reasonable
Rental returns on apartments in Toronto tend to outpace those in Montreal. Montreal yields range from 2.15% to 5.29% with an average of 4.17%, according to a Global Property Guide research conducted in January 2023. Whereas in Toronto, the yields fall between 2.77% and 7.64% with an average of 4.49%. In this low-return era, in a low-risk country such as Canada, that is a really acceptable yield.
In Vancouver, gross rental yields are lower, at between 2.96%% to 3.71%. Taking account of the fact that we give gross figures - a guess might be that net yields would be around 2% or lower.
Hamilton produces yields between 3.94% to 4.98%. Ottawa yields are the strongest with 4.57% to 5.63%. Calgary yields are between 2.93% and 6.11%, with an average of 4.92%.
The vacancy rate falling again
During 2022, Canada’s vacancy rate for private apartments dropped to 1.9%, sharply down from 3.1% in 2021, 3.2% in 2020, 2.2% in 2019, and 2.4% in 2018, according to CMHC. It was the lowest vacancy rate recorded since 2001.
By no. of bedrooms, in 2022:
- Bachelor: 2.6%, down from 5.3% in 2021, 4.6% in 2020, 3% in 2019 and 2.9% in 2018
- One-bedroom: 2%, as compared to 3.8% in 2021, 3.5% in 2020, 2.3% in 2019 and 2.4% in 2018
- Two-bedroom: 1.8%, down from 2.6% in 2021, 2.8% in 2020, 2.2% in 2019 and 2.4% in 2018
- Three bedrooms or more: 1.6%, down from 2% in 2021, 2.6% in 2020, 1.5% in 2019 and 1.8% in 2018
“The demand for rental housing was higher than the strong supply growth, leading to the lowest national vacancy rate since 2001. The national vacancy rate for purpose-built rental apartments dropped from 3.1% in 2021 to 1.9% in 2022,” said CMHC in its latest Rental Market Report.
According to CMHC, the primary factors that led to the increase in rental housing demand are:
- Higher immigration and net migration
- More expensive homeownership
- Students returning to on-campus learning in several census metropolitan areas
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.
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 – surpassing the previous record from 1913.
Then in 2022, the total number of immigrants into the country reached 431,645 people – breaking the previous year’s record and becoming the largest number of people ever welcomed in a year, in Canada’s history.
“Today marks an important milestone for Canada, setting a new record for newcomers welcomed in a single year. It is a testament to the strength and resilience of our country and its people,” said Immigration Minister Sean Fraser. “Newcomers play an essential role in filling labor shortages, bringing new perspectives and talents to our communities, and enriching our society as a whole. I am excited to see what the future holds and look forward to another historic year in 2023 as we continue to welcome newcomers.”
The Canadian government plans to welcome about 465,000 new permanent residents in 2023, 285,000 in 2024, and another 500,000 in 2025, based on the government’s Immigration Levels Plan 2023-2025.
About five million Canadians are set to retire by 2035.
The bleak economic outlook for 2023
The Canadian economy grew by a modest 3.6% during 2022, following an expansion of 4.5% in 2021 and a contraction of 5.2% in 2020, according to the Bank of Canada.
However the economic outlook is now bleak, as higher borrowing costs adversely affect consumer spending and as export growth moderates amidst deteriorating global economic conditions. The central bank expects Canada’s economy to grow by a meager 1% this year.
“There is growing evidence that restrictive monetary policy is slowing activity, especially household spending. Consumption growth has moderated from the first half of 2022 and housing market activity has declined substantially,” said the central bank.
“As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment is expected to slow. Meanwhile, weaker foreign demand will likely weigh on exports.”
To buoy economic activity, the government recently announced CA$ 11.3 billion (US$ 8.5 billion) in new spending in the next two years.
The federal government posted a budget deficit of about CA$ 3.6 billion (US$ 2.7 billion) in the first eight months of the fiscal year 2022-23, sharply down from the shortfall of CA$ 73.7 billion (US$ 55.2 billion) during the same period last year.
The general government gross debt was estimated to have fallen to about 102.2% of GDP in 2022, down from 112.9% in 2021 and 117.8% in 2020, based on IMF figures. However, it remains far above the average gross debt of about 86% of GDP in 2009-19.
The Canadian dollar (CAD) depreciated against the US dollar by about 5.2% in the past two years, to reach an average monthly exchange rate of CAD 1.3422 = USD 1 in January 2023.
The country’s annual inflation rate eased to 6.3% in December 2022, down from 6.8% in the previous month and from a four-decade high of 8.1% recorded in June 2022, according to Statistics Canada. Inflation averaged just 1.8% from 2011 to 2021.
In January 2023, nationwide unemployment stood at 5%, down from 6.5% a year ago and 9.2% two years earlier, according to figures from Statistics Canada. The jobless rate reached a record-high of 14.1% in May 2020, amidst the Covid-19 pandemic.
There were about 1,046,000 unemployed in January 2023, down by 292,000 people as compared to the same month last year.
- Teranet-National Bank House Price Index continues still down in December (Teranet and National Bank of Canada): https://housepriceindex.ca/2023/01/december2022/
- Historic loss of value in the residential market (Teranet and National Bank of Canada): https://housepriceindex.ca/2023/01/historic-loss-of-value-in-the-residential-market/
- Canada´s home prices to fall almost 6% this year, CREA forecasts (Financial Post): https://financialpost.com/real-estate/home-price-forecast-crea-2023
- Canadian home sales edge up to the end of 2022 (The Canadian Real Estate Association): https://stats.crea.ca/en-CA/
- Quarterly Forecasts (The Canadian Real Estate Association): https://www.crea.ca/housing-market-stats/canadian-housing-market-stats/quarterly-forecasts/
- New Housing Construction Activity — Canada (Canada Mortgage and Housing Corporation): https://www03.cmhc-schl.gc.ca/hmip-pimh/en/Profile/DetailsNewHousingConstructionCountry?geographyId=1&t=1
- Canada to fund ´rent-to-own´ program under $2-billion housing plan (Financial Post): https://financialpost.com/real-estate/mortgages/canada-to-fund-rent-to-own-program-under-c2-billion-housing-plan
- Rental market data (Canada Mortgage and Housing Corporation): https://www.cmhc-schl.gc.ca/en/professionals/housing-markets-data-and-research/housing-data/data-tables/rental-market
- Rental supply increases but demand surges (Canada Mortgage and Housing Corporation): https://www.cmhc-schl.gc.ca/en/blog/2023/rental-supply-increases-but-demand-surges
- Rentals.ca January 2023 Rent Report (Rentals.ca): https://rentals.ca/national-rent-report
- Rental returns in Toronto are moderate to good (Global Property Guide): https://www.globalpropertyguide.com/North-America/Canada/Rental-Yields
- Canadian regulator tightens rules for riskier mortgage products (Reuters): https://www.reuters.com/business/finance/canadian-regulator-tightens-rules-riskier-mortgage-products-2022-06-28/
- Bank regulator proposes new rules to tighten mortgage lending (The Globe and Mail): https://www.theglobeandmail.com/business/article-industry-react-osfi-tighten-mortgage-eligibility/
- Ontario raising foreign homebuyer tax to the highest in Canada (CTV News): https://toronto.ctvnews.ca/ontario-raising-foreign-homebuyer-tax-to-the-highest-in-canada-1.6123337
- Interest rates posted for selected products by the major chartered banks (Bank of Canada): https://www.bankofcanada.ca/rates/banking-and-financial-statistics/posted-interest-rates-offered-by-chartered-banks/
- Labor force characteristics, monthly, seasonally adjusted, and trend-cycle, last 5 months (Statistics Canada): https://www150.statcan.gc.ca/t1/tbl1/en/cv.action?pid=1410028701#timeframe
- Consumer Price Index, December 2022 (Statistics Canada): https://www150.statcan.gc.ca/n1/daily-quotidien/230117/dq230117a-eng.htm
- Canada cuts 2023 GDP forecast but says economy to avoid recession (Reuters): https://www.reuters.com/business/finance/view-canada-cuts-2023-gdp-forecast-says-economy-avoid-recession-2022-11-03/
- If you thought 2022 was bad, wait until you see what 2023 has in store for the economy (CBC): https://www.cbc.ca/news/business/2023-economic-forecast-1.6695497
- Bank of Canada increases policy interest rate by 25 basis points, continues quantitative tightening (Bank of Canada): https://www.bankofcanada.ca/2023/01/fad-press-release-2023-01-25/
- Canadian government posts $3.6 billion deficit between April and November (CTV News): https://www.ctvnews.ca/politics/canadian-government-posts-3-6-billion-deficit-between-april-and-november-1.6249204
- Credit liabilities of households (x 1,000,000) (Statistics Canada):
- The first-time home buyer incentive (Canada Mortgage and Housing Corporation): https://www.cmhc-schl.gc.ca/en/consumers/home-buying/first-time-home-buyer-incentive
- Canada broke another record by welcoming 341,000 immigrants in 2019 (CIC News): https://www.cicnews.com/2020/02/canada-broke-another-record-by-welcoming-341000-immigrants-in-2019-0213697.html
- Canada welcomes the most immigrants in a single year in its history (Government of Canada): https://www.canada.ca/en/immigration-refugees-citizenship/news/2021/12/canada-welcomes-the-most-immigrants-in-a-single-year-in-its-history.html
- Canada welcomes historic number of newcomers in 2022 (Government of Canada): https://www.canada.ca/en/immigration-refugees-citizenship/news/2022/12/canada-welcomes-historic-number-of-newcomers-in-2022.html
- Notice – Supplementary Information for the 2023-2025 Immigration Levels Plan (Government of Canada): https://www.canada.ca/en/immigration-refugees-citizenship/news/notices/supplementary-immigration-levels-2023-2025.html