October 22, 2024
Canada’s housing market has experienced significant volatility and change in recent years. A lot of factors have propelled the big spike in real estate prices that we saw in 2021, followed by the decline in the last couple of years, to where we are now in 2024. The factors that are discussed in this article are not just periodic, but they consistently have an influence on the real estate market. Having knowledge of these factors will help you understand the direction of real estate prices in the future. This article provides you with a deeper understanding behind the home prices that you see under a listing. Being aware of these factors can help you be a better investor and make more confident real estate decisions.
The first factor is a major one and it is the economic factor. The news often discusses Gross Domestic Product (GDP) and inflation. It may surprise you to know we’ve had greater inflation in the last few years than we’ve seen in 40 years! Target rates of inflation have usually been 2-3% but in the last couple of years, we have been over that 3% mark. This becomes clearly visible when we walk into the grocery store. The same amount of groceries from three years ago are costing people over 20% more today! How is that relevant to the real estate market? Well, in fact, that affects an average Canadian’s ability to save money for the purchase of a home, affecting the affordability of home buyers.
Making the headlines of the news periodically in the last few years are the Bank of Canada changes in interest rates. A-level mortgage financing went up to 5-6%, B-level mortgage financing is well over 6% and private could be up to 15% depending on the lender. When we see interest rates increasing, it’s important to keep in mind that the same demand remains for the properties in the market. However, as previously discussed, the affordability of home buyers has changed drastically as their income levels remain the same. Buyers are not positioned to deal with the interest rate increase. This poses a problem for the sellers and buyers. The sellers still need to sell. The buyers still need to buy. However, potential real estate transactions are stuck because of a big gap between the reasonable sale price for the seller and an affordable purchase price for the buyer. It has become difficult to find the midpoint where both parties would find the transaction worth it.
The third factor which arises from the increases in interest rates and lack of affordability, is increasing supply. Real estate transactions sit on supply and demand. As properties sit on the market a lot longer with a lack of transactions taking place, more properties come every month to add to that supply. The properties that sit in the market for longer must demand for a lower price point. However, sellers that put their property on sale still need to operate on the same timeline that is motivating them to sell. Whether that’s a new job, purchase of a new property, or the lack of affordability in keeping the property due to the hike in interest rates. The market is inevitably conditioning a situation where a seller must sell, but the buyer may or may not buy. Buyers now have more options in the housing market even though their mortgage interest rates are high because of the increase in supply. With the buyer’s having more choice than the seller, this forces home prices down.
Another factor affecting housing prices in 2024 is government policies. Government policies include things like zoning, taxes, foreign buyer taxes, and stress tests, that have all been affecting the housing market for the past few years. These government policies are affecting real estate prices today. The foreign buyer tax was designed to bring prices down because it places barriers against money coming in from foreign sources. This should ideally drive the prices down for domestic home buyers. However, this gets in the way of more money coming into the housing market, which affects funding for building projects. On top of less funding for building projects, we are heavily regulated by building permits and standards in Canada. This reduces supply in the housing market and increases prices of preconstruction properties, cycling back to causing unaffordability for home buyers.
The reduction in housing supply becomes a significant problem as Canada consistently welcomes a record-breaking number of immigrants each year. High levels of immigration and population growth contribute to increased demand for housing, particularly in urban centers like Toronto, Vancouver, and Montreal. These cities are popular among immigrants due to the job market, existing cultural communities, and established settlement services. The increased demand that comes with population growth can drive up home prices and rent prices, especially in markets where the housing supply is already constrained. This fast-growing demand is met with a slow lagging of housing supply caused by the already discussed limited funding for building projects, slow construction processes, and strict zoning regulations. Government policies that promote immigration, such as programs targeting skilled workers and international students, further amplify this effect by continually boosting population growth. For example, Ontario’s Provincial Nominee Program (PNP), which enables the province to choose immigrants based on specific economic requirements in the region, has been highly successful in drawing skilled workers. As this may strengthen the local economy, it elevates the demand in the Ontario housing market and drives up home prices for everyone.
Housing prices in 2024 are influenced by a complex web of factors that continually shift supply and demand, shaping the market’s overall direction. Economic conditions such as GDP growth and inflation play a significant role, as they impact overall home buyer affordability. The rising interest rates have added another layer of pressure for home buyers, further reducing affordability. This situation is met by an increased urgency among sellers to sell their properties that have been sitting on the market for a long time. On the other hand, stringent government policies that regulate real estate development reduce housing availability, and the housing market is unable to meet the demand driven by drastic population growth that comes with immigration. Understanding these intertwined factors is crucial for navigating the current and future landscape of the real estate market.
For investors, homebuyers, and sellers alike, being aware of these market influences can help anticipate potential shifts and prepare for upcoming changes. This awareness enables stakeholders to make strategic decisions, whether it’s timing a property sale, identifying investment opportunities, or securing a new home. By staying informed, you can better position yourself for success in the ever-evolving real estate market in Canada.
Back