When the coronavirus pandemic shut down the country, the federal government responded by unleashing the mother of all stimulus and relief programs, and the Bank of Canada (BoC) answered by slashing interest rates to nearly zero, injecting enormous amounts of liquidity into the economy and financial markets. This resulted in employed households flush with cash and the average conventional five-year mortgage rate falling to as low as 3.2 per cent. Despite scores of people anticipating a so-called COVID discount in the housing sector at the start of the once-in-a-century public health crisis, the opposite occurred. A buying frenzy overtook the Canadian real estate market, from British Columbia to Nova Scotia, as prospective homeowners enjoyed tremendous purchasing power. Families ditched 700-square-foot condominium suites in major urban centres and acquired three-bedroom detached houses in the suburbs, rural communities, and cottage country.

After the central bank kicked off its tightening cycle, the Canadian housing sector started cooling off, making the purchasing process more expensive and forcing both homeowners and homebuyers to sit on the sidelines. Owners lacked the incentive to erect for-sale signs on their front lawns as they enjoyed a three or four-per cent mortgage. At the same time, buyers contended with various barriers to entry, be it affordability or the heightened mortgage stress test.

Today, the Canadian real estate market is facing a trifecta of issues: higher mortgage rates, housing affordability, and shrinking inventories. And this is weighing on home-buying activity nationwide.

What are the numbers telling us?

Critical Shortage of Properties Hampers Home-Buying Activity

According to the Canadian Real Estate Association (CREA), national home sales tumbled 0.7 per cent month-over-month in July. At the same time, the number of new residential listings climbed 5.6 per cent on a monthly basis. Newly listed residential properties have been on an upward trajectory since April, rising from a 20-year low. That said, new listings are still below their average levels for this time of the year.

Moreover, the number of months of inventory – a measurement of the number of months it would take to exhaust housing stockpiles at this pace of sales activity – was roughly flat at the end of July 2023, coming in at 3.2. The long-term average is around five months.

New housing construction activity levels are roughly flat from a year ago. Data from Canada Mortgage and Housing Corporation (CMHC) show that housing starts totalled 123,756 units in the first seven months of 2023, down eight per cent from the same period last year.

Many major housing markets are reporting the same thing: an inventory shortage. And this trend is supporting the price growth seen amid a rising-rate climate.

For example, statistics from the RE/MAX Hot Pocket Communities Report show that nine of the 16 markets in the Greater Vancouver Area (GVA) recorded a shortage of supply in June, led by Gulf Islands and Whistler. Close to half of the 60 Greater Toronto Area (GTA) markets, such as Rosedale, Moore Park, Leaside, and Riverdale, also reported a drop in new listings.

It is not surprising that fewer detached homes changed hands on a year-over-year basis in the first half of 2023, as 95 per cent of surveyed markets reported a decline in home-buying activity.

“Anxious homebuyers were quick to identify the bottom of the market and jumped in with both feet in the second quarter of the year,” said Christopher Alexander, President of RE/MAX Canada, in the report. “The short burst of home-buying activity clearly underscored the resilience of the housing market, but the lack of inventory available for sale curtailed any real momentum from building.”

What makes the situation worse is that nearly one-quarter (22 per cent) of Canadian homebuilders have cancelled projects due to higher interest rates, further fuelling the housing shortage and affordability challenges gripping the national real estate market, according to the Canadian Home Builders’ Association (CHBA).

“Current conditions — with construction costs rising, labour shortages, and especially the current financing conditions — are preventing that from happening. Canada needs a holistic approach to increasing housing production,” said Canadian Home Builders’ Association (CHBA) CEO Kevin Lee in a statement. “Canada needs to build 3.5 million more homes than the 2.3 million we normally would over the next decade to make up Canada’s housing deficit and help address affordability. This is an important target. It will take a comprehensive approach by all levels of government to pursue this with any level of success.”

The CHBA estimates that the country needs to construct 5.8 million homes within the next decade to close the nation’s present housing supply gap.

While industry experts observe that interest rates could play a role in alleviating the issues plaguing the Canadian real estate market, housing observers purport that provincial and municipal governments also need to do their part by altering zoning restrictions and reducing barriers to new construction.