None of us have a foolproof crystal ball. If we did, we might all have bet on Sidney Crosby scoring the golden goal in 2014 and cashed out with some big bucks! When it comes to real estate markets and what we might see over the next few years, history can generally provide some great lessons about what might be coming up, even as interest rates continue to fluctuate.
The past few years have been a bit of an outlier, and the COVID-19 pandemic undoubtedly threw the real estate market for a loop. Months in lockdown left most Canadians feeling restless, and led to them either taking on home renovation projects with their own two hands (with decidedly mixed results), or looking to move homes altogether.
That shift led to pricing spikes throughout 2021 as buyers sought after record low inventory, but the market is shifting yet again. According to data released by the Canadian Real Estate Association (CREA), market activity was on the rise again this spring after the previous tumble last year. While prices are still significantly down from their peak, they too have begun to climb again.
So what does this mean for real estate market trends moving forward? In a world where the previous three years were nearly impossible to predict, it’s difficult to fathom what could be coming down the pipeline for the next five. We spoke with CREA economist Ryan Biln, and Christopher Alexander, President of RE/MAX Canada, to get some of their thoughts on what the Canadian real estate market could look like in the next five years.
Those unpredictable interest rates
While the Bank of Canada’s overnight interest rate was at near-record lows at the start of 2022 to stimulate post-pandemic borrowing, they’ve climbed steadily since then—rising from 0.25% in January 2022 to a whopping 4.75%, their highest in two decades. The rate hikes have been fairly continuous, and while they’ve certainly slowed down, it’s unclear as to when the hikes will end as some economists are predicting at least one more before the end of 2023.
According to Alexander, “the Bank of Canada still holds the key for the long term” when it comes to forecasting, but more interesting is the hike does not seem to be causing buyers to pause. They may be adjusting their borrowing numbers, but are ultimately still choosing to enter the market rather than attempting to wait out the hikes until rates cool down.
Biln also sees the interest rate significantly affecting the market over the next few years.
“The interest rate effect will continue to work its way through the economy over time. It will hamper the housing market since it becomes harder for potential homebuyers to purchase property and squeezes costs for developers trying to build new supply,” he says. “Those higher mortgage rates also affect current homeowners who have mortgages, creating challenges for those renewing now and for those that will have to renew over the next few years.”
The challenges of availability
In Alexander’s view, while interest rates may be dominating the conversation, it’s the lack of available inventory that’s creating a real challenge, something CREA continues to focus on repairing on behalf of Canadians. While interest rates have definitely had an impact on home buyers, Alexander says one of the major trends we’re seeing is a sheer lack of availability, especially in the country’s most populous cities such as Toronto and Vancouver (Montreal appears to have benefitted from Quebec’s relatively stable market).
Biln points to the lack of availability and an increased population growth creating tight market conditions and a nationwide affordability crisis.
“|Lack of Inventory] creates market imbalances because we end up having more Canadians nationwide looking for suitable housing than there is currently available on the resale market,” he explains. “When you consider the additional layers of uncoordinated policy measures by various levels of government and limited levels of new supply coming through the pipeline, we end up with the record housing prices we’re currently seeing across the country.”
Plus, according to Alexander, the availability challenges are many fold. The first is bureaucratic red tape seems to be hampering the expansion of availability of new builds by making it harder to get shovels in the ground. Delays in planning and permitting have impacted pricing in many city centres because developers simply cannot keep up with demand.
A wide open landscape
While markets in Toronto and Vancouver have been in top demand for years, Alexander says he’s encouraged by much of what he’s seeing across the rest of the country. Provinces such as Alberta, Saskatchewan, and Newfoundland and Labrador, have recognized their availability of more reasonable housing prices, and are doing what they can to diversify their economies and attract new residents.
The result has led to smaller cities across the country working hard to welcome home buyers. Whereas the benchmark home price in the Greater Toronto Area is $1.17 million, in Regina it’s closer to $300,000.
For millennials looking to enter the real estate market, Alexander suggests the trends will likely point to these smaller cities.
“If you really want to own a home,” said Alexander, “you can find a way to do it. You’re going to have to be really creative, and maybe expand your area of search.”
Biln suggests more intergenerational or roommate living situations could be common over the next five years as people continue to grapple with the affordability of homeownership, but stresses that overall, the current lack of available inventory makes it difficult to predict how the Canadian housing market will look in the near future.
“It took almost ten years for current levels of inventory to get this low nationwide,” he says. “We started to see a drawdown in inventory after the 2014 oil price shock which resulted in the Bank of Canada lowering interest rates to stimulate the economy and started a multi-year trend where we saw Canadians leave Alberta and other energy dependent regions across the country to mainly British Columbia and Ontario. This resulted in higher prices in these regions and an overall drawdown. Currently, we’re seeing some of those interprovincial migration trends reversing.”
While it’s impossible to make firm predictions on where the market is headed over the next five years, we can look at data that may help identify general trends and opportunities to current and prospective home buyers. If you’re wondering what the market is like in your area, speak with a local REALTOR®. They can give you information not only on homes, but also on the overall housing market, to help you make the most informed decision possible.
Prepared by CREA (Canadian Real Estate Association)