Navigating challenges in Canadian Housing
Updated: Nov 1
This report discusses five crucial topics related to the Canadian housing market as we approach the final months of 2023. In it, we discuss the impact of recent interest rate hikes on Canadian resale markets, the state of homebuilding in a high-rate environment, investor activity, and government responses to Canada's housing challenges.
The impact of interest rate increases on the Canadian resale market
After a rebound in the spring, the Canadian resale activity has faced downward pressure since the summer, primarily due to the Bank of Canada's decision to increase its policy rate in June and July. The 5-year Government of Canada bond yield has also risen significantly. This has led to a decline in home sales and average prices, particularly in British Columbia and Ontario, where affordability has reached historical lows. On the other hand, the Prairies and Newfoundland and Labrador have seen growth due to more favorable affordability conditions.
Outlook for 2024
New listings will continue to increase into 2024, but this supply will be limited by resilient job markets and weakened demand due to declining sales and prices. The expectation is that sales and prices will fall in the final quarter of 2023 and into early 2024 but recover starting in the second quarter of 2024. This projection is based on the assumption that the Bank of Canada will cut interest rates in the spring, unemployment rates will rise, and core inflation will move closer to the Bank's target.
As of 2023 Q1, investors accounted for a significant portion of home sales, 30%, up from the previous quarter. This increase has affected other types of buyers, particularly repeat buyers, whose share has declined. Despite rising interest rates, investor demand has remained relatively resilient, possibly due to the long-term returns associated with real estate investments. However, there is some uncertainty about the future of investor activity, especially if interest rates continue to rise.
The state of homebuilding in Canada
Despite rising borrowing costs and labor shortages, builders have maintained a robust pace of housing starts, exceeding pre-pandemic levels. Activity has been supported by high prices, past sales gains, and low unsold inventories. Purpose-built rental construction has also surged due to rent growth and government initiatives. However, there are concerns regarding the time it takes to deliver new supply to the market, especially in Toronto and Vancouver, due to regulations and project approval delays. There remains potential for a housing shortage, given Canada's growing population.
Governmental responses to Canada's housing crisis
Municipalities have made changes to zoning regulations to allow for more density, while provincial governments have implemented measures to improve housing affordability. The federal government has removed the GST on purpose-built rental construction and may consider further adjustments. The report suggests that governments can work together to eliminate construction barriers, review financing initiatives, and assess domestic programs to enhance workforce recruitment in the trades.
Adapted from TD Economics