The Canadian real estate market is one of the hottest in the world today. Despite the coronavirus pandemic affecting the G20 economy and leaving two million people out of work, the Canadian housing sector has been booming throughout the COVID-19 public health crisis. There have been many factors contributing to this impressive growth nation-wide: historically low interest rates, pent-up demand, evolving consumer preferences, and strong supply-and-demand fundamentals.
Yet the question that dominates many sector-related discussions is whether this monumental activity is part of a housing bubble on the edge of a catastrophic burst! The Bank of Canada (BoC) confirmed that it is taking a wait-and-see approach. Robert Kavcic, the senior economist at BMO, dismissed bubble concerns. David Rosenberg, chief economist and strategist at Rosenberg Research, thinks Canada is facing “one of the biggest bubbles of all time,” driven by record-low mortgage rates. Meanwhile, a RE/MAX executive is calling it an “affordability crisis.”
So, who is right?
While “housing bubble” discussions aren’t surprising, they distract from what is going on in real-time in the Canadian real estate market: prices are skyrocketing, sales activity is through the roof, housing stocks are being depleted, and demand is strengthening. Every corner of the housing industry is experiencing enormous growth, from major urban centres to rural communities. Most forecasts project these conditions to last throughout 2021 and possibly heading into 2022.
At this point, there might be only two things that could cool down the nation’s housing sector: rising interest rates and new supply. The former may not happen for a couple of years, especially as BoC Governor Tiff Macklem is welcoming accelerating housing prices for economic growth in the post-coronavirus recovery. But it is the latter that could be unfolding right now.
Canada Real Estate News: Home Completions Country-Wide Moving at Lightning Speed!
According to Canada Mortgage and Housing Corporation (CMHC), new home completions surged in 2020, particularly in the fourth quarter as they climbed nearly 13 per cent year-over-year and outpaced population growth. In the October-to-December period of 2020, the housing sector delivered more than 50,000 new homes, bringing the ratio of completed homes to ‘per person added to the population’ to 18.
Has this momentum carried into 2021? Here are what the numbers looked like in January:
- Housing Starts: 16,779
- Completions: 11,621
Bob Dugan, the CMHC’s chief economist, said in a news release that the national trend in housing starts is being seen in both single- and multi-family properties and in urban and rural areas.
CMHC explained that suburbs are fueling housing starts and completions, with many properties under construction in locations outside Toronto, Vancouver and Montreal. The data highlighted that the number of starts and completions peaked in areas between 20 and 30 kilometres from major city centres.
“First, the increasing trend toward suburbanization may accelerate housing external costs (infrastructure investments, roadway congestion and greenhouse gas emissions),” said the report. “Second, the relatively low level of housing development in low-income areas in Montreal (and to a lesser degree in Toronto) may indicate affordability challenges in those neighbourhoods.”
Falling Population Growth to Ease Housing Prices in Canada?
Another crucial factor to consider is that population growth declined to a historic low last year, with annual growth coming in at an all-time low of 0.54 per cent. The last time the Canadian population increased at such a tepid pace was in 1946!
The Royal Bank of Canada (RBC) predicts that the federal government will fall short of its immigration target this year, with new arrivals likely to decline for the second consecutive year. The financial institution estimates that Canada will open its door to 275,000 new permanent residents, below the goal of 401,000.
In 2020, Canadian immigration collapsed to less than 185,000, the lowest level in more than 20 years. But the government will eventually return to these targets in the years following the COVID-19 public health crisis, says RBC economist Andrew Agopsowicz.
“In the long-run, Canada does have the capacity to hit the ambitious targets set out last fall and population growth from new immigration will again return as the main driver,” Agopsowicz said. “However, with the effects of the pandemic looking more likely to remain into the spring and summer, the headwinds listed above will keep immigration into Canada low throughout most of 2021.”
But this trend could be beneficial for hopeful homebuyers across the country. If fewer consumers are competing for limited housing stock, it could ease skyrocketing valuations that have been seen across the Canadian real estate market over the last year. At the same time, this could produce long-term consequences for the broader economy.
No More Sitting on the Sidelines for Canadian Homebuyers?
As the spring demand kicks off in the Canadian real estate market, homebuyers will find that there is little supply available. And, for the available properties, there are going to be inevitable bidding wars within both large urban centres and smaller suburban markets alike. Is there hope on the horizon, particularly for first-time homebuyers? Canadian Real Estate Association (CREA) senior economist Shaun Cathcart summarized the situation:
“The best-case scenario would be if we see a lot of sellers who were gun-shy to engage in the market last year making a move this year. A big surge in supply is what so many markets really need this year to get people into the homes they want, and to keep prices from accelerating any more than they already are.”