Rising Interest Rates, Strapped Demand, And New Property Prohibitions Cool Previously Hot Canadian Housing Market

Market Analysis

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After enjoying more than two years of staggering growth, surging demand, and near-zero percent interest rates - Canada’s housing market is now showing signs of cooling down as bulging prices and aggressive mortgage hikes by the country’s central bank price out potential buyers.

On top of higher prices, and burdensome interest rates that have seen stratospheric increases over the course of last year; a new law that came into effect on January 1, 2023, will now prohibit non-Canadian residents and foreigners from acquiring property or real estate in the country for the next two years.

The Prohibition on the Purchase of Residential Property by the Non-Canadians Act will bar non-citizens from purchasing homes, an effort introduced by the government to help alleviate the housing shortage crisis and help to deflate prices in major housing markets.

In an interview with CBC at the end of last year, chief economist at the British Columbia Real Estate Association, Brandon Ogmundson says "I think this is very much a political policy, more than an economic policy." Questions over the new law have left many puzzled over whether it could be a potential hit or miss for the country’s housing market that’s only now showing signs of stabilizing.

While the new law will purposefully exclude new Canadian immigrants and non-permanent residents, the central bank has mentioned that it will look to pause aggressive monetary tightening after positive December inflation data.

Data provided by Statistics Canada revealed that the Consumer Price Index (CPI) rose 6.3% year over year in December 2022, a slight decrease from the 6.8% recorded in November.

The better-than-expected data has prompted the Bank of Canada, the country’s central bank, to pause its aggressive interest rates hike after its meeting at the end of January. For now, it seems as if interest rates will increase - yet again - by 25 basis points (bps) next week before residents and buyers will enjoy a pause for the rest of the year.

The upcoming hike will be the central bank's eighth consecutive time since March 2 2022 that it’s hiked up its key policy.

With stabilizing prospects on the horizon, slowing inflation and key interest rates don't ignore elevated real estate prices and a shrinking inventory.

According to the Canadian Real Estate Association (CREA), a report shows that in some major property markets, prices rose by at least 60% since 2020. Similar to the United States, where some states experienced rapid price escalation, some provinces and counties saw prices nearly double since the COVID-pandemic.

In the province of Ontario, the highest increase was observed in North Bay, where prices jumped a staggering 111.1%. Other markets, including Woodstock-Ingersoll, Bancroft, and Brantford all experienced triple digital growth in prices, jumping 105.4%, 103.5%, and 100.4%, respectively.

As of December 2022, the average national home price was $626,318, down from $812,000 in early 2022. The higher prices across the country have now seen the market steadily cool down, with house prices dropping by 12% last year, and the total number of sales has fallen more than 39% since December 2021.

Signs of receding prices could help would-be buyers and investors to enter the real estate market - as long as they can prove they're Canadian citizens.

On top of declining prices and slowing sales, CREA estimates that the average home price will come down a further 5.9% in 2023, but will again rebound in 2024 by 3.5%. Once markets have returned to normal, overall the country could see home sales rise again by 10.2% in the better half of 2024.

Unfortunately, lower prices won’t necessarily mean any good for Canada's housing shortage crisis. As of the end of last year, there were around 4.2 months of inventory on a national basis, close to the measure in the months leading up to the pandemic. These figures are still well below the long-term average.

In a report released in mid-2022 by Canada Mortgage and Housing Corporation (CMHC), the agency found that the country will need at least 5.8 million new homes by 2030 if it’s looking to significantly push down real estate prices.

The report further reads, "Increasing supply will be difficult. Critically, increasing supply takes time because the time to construct is significant, but so is the time to progress through government approval processes [..] This delay means that we must act today to achieve affordability by 2030."

Affordability concerns, against the backdrop of shrinking inventory, have helped keep prices elevated for much of the years after the pandemic. The introduction of new tax and regulatory systems, such as the Underused Housing Tax, and Prohibition on the Purchase of Residential Property by the Non-Canadians are potential catalysts to help boost inventory while keeping prices at affordable levels.

Whether the government is hooked on the idea that imposing stringent regulations and immigration policies will help solve the domestic housing market, Canadian home buyers are in for yet another turbulent, and pricey year in the property market.

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