When I first began in real estate, there was chatter about a housing bubble that was supposed to be inevitable. Fast-forward 8 years and that 800 sq ft. downtown condo that would have cost $450k is now worth double. Statistically speaking, housing prices in Canada, primarily in its major cities, have been increasing at a steady pace for years. So what’s behind all of this?
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Supply & Demand
Inventory. The demand for housing simply outweighs the supply. The bidding wars taking place day in and day out every time a house goes up for sale provides enough evidence to support this. As long as people continue to compete for a limited supply, prices will grow. I know what you are probably thinking…“we need to build more houses”. I get it and although true and necessary, the lack of new homes is not the only issue here. To put it into perspective, even through the pandemic, according to better dwelling, Canada saw the most homes delivered in 2021 since the 1970s. So what gives?
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Population Growth
The Canadian population growth adds fuel to the lack of supply. With thousands immigrating to Canada on a yearly basis, it makes meeting the demand much harder. According to statistics Canada, there were about 1.8 million new people that called Canada home within the last 5 years. Canada has also been ranked the lowest in housing to population ratio amongst G7 nations. However as noted above, Canada has been building homes at a significant pace. So if housing production has indeed been keeping par with population growth, then how come we still have a supply problem?
Investors
Show me the money! The notion that all the properties are bought by people over seas has been around for some time. While investors do play a big part in this, it doesn’t automatically mean they are overseas. Canadians who bought properties 10 years ago are reaping the benefits of high appreciation today. They have made enough equity to make another purchase. Plus, many new homes being built are better suited for rental investments as oppose to being primary residences. New condo projects are a perfect example of this as all the smaller units are the first to sell in a city like Toronto. With a large quantity of international students coming in, it makes perfect sense from an investor’s perspective.
Interest Rates
You get a mortgage, they get a mortgage, we all get mortgages!!!
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Interest rates are at an all time low in Canada and this has propelled the housing market prices. Low interest rates create higher demand as affordability/purchasing power for borrowers increases. The more people with money to buy, the greater the competition. On the other hand, higher rates tend to do the opposite.
There is no specific “fix it” formula to cool down the housing market. I’m not saying that higher interest rates, vacancy taxes or an influx of supply will slow down prices. What I do know is that once we come out the other side of the pandemic, I expect a change. Low interest rates are being used to help the economy. As long as people have access to cheap money, they will spend. Only the Bank of Canada can determine whether to raise rates and with the uncertainty of any new variants, there are many variables to consider.
Feature image by Étienne Beauregard-Riverin
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