The Canadian housing market ended 2021 on a high note. How has it been performing a month into 2022?
Canada’s sizzling housing sector has been resilient throughout the coronavirus pandemic. Despite the economic downturn and global health crisis, Canadian real estate markets from coast to coast have enjoyed unprecedented growth in sales activity and home valuations alike. What’s more, the gravity-defying growth has been consistent across virtually every segment of the market, with urban condominiums bouncing back after experiencing a lull in 2020, to the spike in single-detached activity in suburban and rural communities.
The key question for many market analysts, as well as homebuyers and sellers, remains: can the Canadian real estate market sustain this momentum? With talk of the Bank of Canada (BoC) raising interest rates this year and the federal government tightening mortgage lending standards, the market might indeed start to ease.
However, although borrowing costs may be on the rise, there is still one significant factor at play: historically low housing supply.
Canadian Housing Market Starts the New Year “Hotter Than Ever”
It is no secret that investors have become more active within the Canadian real estate market over the last several months. With prices soaring across the country, investors – professional and novice – are trying to grab a slice of the lucrative and limited real estate pie.
Recently speaking in front of the Ontario Securities Commission (OSC), Bank of Canada deputy governor Paul Beaudry noted that a “sudden influx” of investors supported the rapid price gains in 2021. Data from the central bank noted that investors and repeat homebuyers represented a bigger share of the market than first-time homebuyers last year.
“Our analysis finds that many Canadians are buying homes as investment properties — that is, in addition to their principal residence — and the importance of this phenomenon has grown,” Beaudry said in prepared remarks.
In the Ontario housing market, for example, a Teranet report revealed that investors account for more than a quarter of the province’s homebuyers, lifting prices even higher, especially in North America’s fourth-largest city: Toronto. This was unheard of five to 10 years ago, when investors made up a relatively minor segment of the sector. So long as inventory levels continue to shrink, this could be the norm moving forward.
According to Canada Mortgage and Housing Corporation (CMHC), new housing construction activity slowed on an annualized basis in December, tumbling two per cent.
“For SAAR housing starts in Canada’s urban areas, both single-detached and multi-family starts decreased in December,” said Bob Dugan, CMHC’s chief economist, in a statement.
At the same time, annualized rates of housing starts continue to be elevated, despite the drop in recent months.
“On a positive note, actual urban housing starts were 21 per cent higher in 2021, adding much-needed supply. The increase was driven by higher single-detached (+28 per cent) and multi-family (+19 per cent) starts and was mainly due to recovery following COVID-19 shutdown measures in 2020,” Dugan added.
But if rates go up, what happens then?
Industry observers and financial experts purport that a rising-rate environment generally deters investors. The primary reason is that higher rates would potentially decelerate price growth and possibly lower valuations, sending investors into more safe-haven assets that offer a safe yield, such as government bonds.
With that being said, until the central bank raises rates to where they were before the coronavirus pandemic, investors could continue competing with first-time homebuyers for scarce supply, and successfully outbid them for these residential properties. In an interview with CBC News, Ron Butler, one of the founders of Butler Mortgage, reports that he has seen this trend accelerate over the last year without any signs of slowing down.
“We’ve seen our clients forced to the upper limit of their affordability. But that’s the only option they have is to be at the highest point that they can possibly achieve from a borrowing point of view,” said Butler.
According to the RE/MAX 2022 Canadian Housing Market Outlook Report, average residential real estate prices are expected to increase 9.2 per cent nationwide this year. A Leger survey conducted on behalf of the RE/MAX Canada revealed that nearly half of Canadians still think that buying a home is the best investment decision you can make today.
“Canadians recognize the value and investment potential in their homes. However, market challenges such as rising prices and limited supply have impacted local markets from coast-to-coast, causing angst this past year among those looking to get into the market and those hoping to move up in it,” says Elton Ash, Executive Vice President, RE/MAX Canada. “Despite this, it’s encouraging to see that many are feeling confident in the housing market in 2022 and view Canadian real estate as a solid investment.”
All eyes will be on the central bank’s upcoming policy meetings as officials should provide guidance on what will happen on the interest rate front. But housing stockpiles will continue to be the focus for every player in the country’s lucrative market.