The Canadian housing market has defied expectations of a correction and has made a remarkable comeback, according to the Desjardins Canadian Residential Real Estate Outlook. This resurgence can be attributed to several factors identified by senior director of Canadian Economics, Randall Bartlett, and principal economist, Helene Begin.
Traditionally, rising interest rates have been associated with a slowdown in the housing market. However, the market stabilized in early 2023 as the Bank of Canada paused rate hikes. This pause, combined with a surge in home sales in April and May, has shifted the Canadian housing market back into seller’s territory and driven up home prices, especially in major cities.
One of the key drivers behind this surge in sales and prices is population growth, fueled by a significant influx of immigrants and non-permanent residents. Statistics Canada research indicates that immigrants often play a significant role in Canada’s housing market, with higher rates of property ownership compared to Canadian-born homeowners. They tend to own properties such as condominium apartments, row houses, and semi-detached houses.
Another contributing factor to increased home sales is the strength of the Canadian job market. Sustained employment and income gains have improved households’ financial positions, making homeownership more accessible. Although there was a slight decline in employment among Canadians aged 15 to 24 in May, it is not expected to have a significant impact on the overall labor market or monetary policy.
Furthermore, Canadians have accumulated substantial savings during the pandemic, which has further contributed to the rebound in the housing market. These savings provide potential homebuyers with increased purchasing power and confidence.
However, the Desjardins report cautions that the recent interest rate hikes by the Bank of Canada, coupled with persisting inflation, may discourage some potential homebuyers due to higher borrowing costs. Economists anticipate another 25 basis point rate hike in July, which could give prospective homeowners pause before entering the housing market, considering the likelihood of further rate hikes.
The report also highlights that the full impact of last year’s rate hikes, including the most recent one in June, has yet to be fully felt. Not all Canadians, especially homeowners, are experiencing the same level of impact from higher interest rates. Many homeowners have fixed-payment variable-rate mortgages and have not yet seen the full effect of the additional interest costs.
Despite strong housing demand, concerns arise regarding the availability of housing supply. Although home construction has held up well despite rising interest rates, elevated housing starts are not expected to be sustained as resale activity is still below its peak. Additionally, the majority of housing starts are in the form of condos, which reflects the limited supply in the “missing middle” housing segment, including townhomes, duplexes, and low- to medium-rise apartments. This shortage of new housing options exacerbates the upward pressure on home prices, and government policies do not currently offer meaningful relief.
The state of the housing market varies across provinces and cities. In British Columbia, resale activity, primarily in the Greater Vancouver Area, has driven up home prices. Ontario has also experienced an increase in sales and prices, particularly in the Greater Toronto Area, driven by international migration.
Alberta, Saskatchewan, and Manitoba have become popular destinations for young Canadians due to affordability and a booming economy. Despite being the most affordable regions, the Atlantic provinces have seen significant price increases, making homeownership increasingly difficult for locals. Quebec has experienced a slight increase in housing inventory, but it remains a seller’s market overall.
Desjardins predicts that the recent gains in the Canadian housing market will continue, further eroding affordability. Strong housing demand driven by population growth, a tight labor market, and accumulated savings will support market activity. However, higher interest rates and limited housing supply are expected to temper further increases.
It is worth noting that while the Desjardins report provides valuable insights into the Canadian housing market as a whole, it does not specifically address the housing market in Prince Edward Island (PEI). PEI, known for its picturesque landscapes and charming communities, also experiences its unique dynamics within the housing market. The island’s real estate market may have its specific trends, challenges, and opportunities, which can be explored further to understand the local housing landscape.