Is Affordability In Sight for the Canadian Housing Market?

Affordability is a hot topic in Canadian housing market. Rising interest rates, intended to combat inflation, are significantly impacting homebuyers and in turn, sellers. Thus, home prices have begun to moderate from their record highs, but any savings is being offset by the higher cost of borrowing. It is no surprise that affordability is such a focus for Canadians. RE/MAX® Canada’s 2022 Housing Affordability Report outlines the concerns of home buyers from coast to coast.

According to a Leger survey commissioned by RE/MAX, Canadians are ready to relocate in order to find a house they can afford. Sixty-four per cent of survey respondents said they would pack up and head to a new city. Forty-three per cent of survey respondents said the high price was a barrier to entry into the Canadian housing market. Other hurdles include:

• A higher cost of living (35 per cent)
• A shortfall in salary (24 per cent, down two per cent from 2021)
• Market volatility (24 per cent)
• Rising interest rates (24 per cent, up six per cent from 2021)

Is there hope for homebuyers facing a financial crunch? In the face of demand and rising interest rates, some buyers are opting to sit on the sidelines for now. “The demand that was so strong just a few months ago has not gone away, but some buyers will likely stay on the sidelines until they see what happens with borrowing costs and prices. As they re-enter the market, they’ll find a bit more selection, but not as much as might be expected,” said Jill Oudil, Chair of The Canadian Real Estate Association (CREA).

As part of the RE/MAX Canada’s five-year housing outlook, Benjamin Tal, Deputy Chief Economist, CIBC, noted that there are several factors beyond interest rates that will impact housing affordability across Canada. “It’s the pace at which interest rates increase that poses a greater risk to the housing market and economy in the short-term. In the long-run, factors such as rising immigration levels putting further strain on demand, limited housing supply, supply chain hold-ups, and the shortage of skilled labourers will be the greatest hurdles in overcoming Canada’s housing affordability crisis.”

Regional Canadian Housing Market Overview (January-June, 2021 vs. 2022)

WESTERN CANADA
Western Canada is home to some of the most affordable homes in Canada but has some markets that have seen significant growth.

Competition from out-of-town or move-over buyers has put upward pressure on home prices year-over-year in a number of markets, including:

• Kelowna/Central Okanagan, BC +21.1%, $778,657 in 2021 to $942,977 in 2022
• Vancouver, BC +19.69%, from $1,097,000 in 2021 to $1,313,000 in 2022
• Victoria, BC +14.93% from $885,117 in 2021 to $1,017,292 in 2022
• Winnipeg, MB +12.66% from $388,291 in 2021 to $437,460 in 2022

The most significant factors impacting housing affordability in Vancouver and Victoria include the high cost of living in Canada’s second most expensive city, inflation and the housing supply shortage.

In Edmonton, residential construction delays, out-of-region buyers driving up demand, and rising interest rates contribute to affordability challenges. In Calgary, the primary factor is increasing interest rates.

When faced with an affordability crisis, Westerners turn to alternative living arrangements. Some regions across Western Canada are experiencing trends such as renting part of a primary residence to supplement monthly mortgage payments.

For those willing to move, Western Canada presents four of the most affordable markets in Canada. Red Deer, Regina, Brandon, and Edmonton top our list of the most affordable places to buy real estate in Canada.

ONTARIO
Due to rising demand and limited supply, regions outside of Toronto have experienced some of the highest year-over-year price increases in the first half of 2022. The markets include:

• Windsor, ON +24.42%, from $542,225 in 2021 to $674,637 in 2022
• Barrie, ON +24.40%, from $767,004 in 2021 to $954,133 in 2022
• Sudbury, ON +23.85%, from $402,855 in 2021 to $498,939 in 2022
• London, ON +23.26%, from $632,302 in 2021 to $779,383 in 2022
• Hamilton, ON +22.35%, from $775,742 in 2021 to $949,099 in 2022
• Thunder Bay, ON +17.58%, from $315,321 in 2021 to $370,761 in 2022
• Kingston, ON +20.83%, from $574,844 in 2021 to $694,576 in 2022
• Ottawa, ON +11.46%, from $728,205 in 2021 to $811,653 in 2022

Alternatives to traditional home ownership have also seen an uptick in some Ontario regions, as identified by RE/MAX brokers in Hamilton and Windsor. Some of the most significant factors impacting housing affordability in Ontario, highlighted by brokers in Windsor, Sudbury and Ottawa, among others, include low or diminishing housing supply, rising interest rates, cost of living and inflation, out-of-province/out-of-region buyers, and economic and employment conditions.

Economists from TD expect declining sales numbers and prices in Ontario in 2023. Sales activity in the Ontario real estate market is anticipated to endure a 31.7-per-cent crash this year and a 13.3-per-cent drop next year. On the pricing front, TD Economics projects a gain of 3.8 per cent this year and a decline of 9.4 per cent in 2023.

ATLANTIC CANADA
In Atlantic Canada, Halifax has experienced significant year-over-year price growth (+23.59% from $460,787 in 2021 to $569,475 in 2022). The price jump results from the move-over buyers migrating to the region for its relative affordability.

More modest price increases were experienced in St. John’s, NL (+6.23% from $313,364 in 2021 to $332,900 in 2022), Moncton, NB (+2.11 % from $331,003 in 2021 to $337,992 in 2022) and Charlottetown, PEI (+29.30% from $355,000 in 2021 to $459,000 in 2022).

St. John’s and Moncton are featured in the top 10 most affordable places to buy in Canada, with average prices under $340,000 in both markets.

Affordability in regions across Atlantic Canada is impacted by rising interest rates, low housing supply, out-of-province/out-of-region buyers, immigration, and insufficient new-home construction.

What’s In Store for the Canadian Housing Market?

Ultra-low interest rates and low supply contributed to record-high price growth throughout the pandemic. But, there are other factors to consider. As Benjamin Tal reminds us, “in the long-run, factors such as rising immigration levels putting further strain on demand, limited housing supply, supply chain hold-ups, and the shortage of skilled labourers will be the greatest hurdles in overcoming Canada’s housing affordability crisis. These must all be addressed in order to help balance supply.”

Elton Ash, Executive Vice President at RE/MAX Canada, noted that recent market moderation is overdue. “The shifts we are seeing in the Canadian housing market, with prices starting to ease across the country in tandem with softening demand and sales, are an overdue adjustment. A healthy housing market is characterized by price appreciation in the mid- to high-single digits, and many markets across Canada are re-entering that comfort zone.”

A possible recession is on the horizon, but recessions often bring strong rebounds, and real estate has traditionally been a safe bet. Looking ahead, urbanization will be a significant boon to future housing demand, as Canada’s urban population is projected to grow by 10 million by 2050.

One key to easing the affordability crisis is more homes. A new study by Canada Mortgage and Housing Corporation (CMHC) determined that the country needs approximately 3.5 million affordable housing units by the year 2030 to accomplish the federal government’s affordability objective. This is in addition to the 2.3 million new housing units already on track to be built by 2030.

Shifting interest rates, housing supply, and the state of the economy are all critical factors to monitor as we enter 2023 and see what the real estate market has in store.

Originally published on the RE/MAX Canada Blog.