The rising influx of immigrants, rock-bottom mortgage interest rates and work from home being the new normal, lead to sharp escalation in real estate prices in the country
By Samudra Roychowdhury
Every year thousands of immigrants come to Canada to restart their lives. The Indian-origin community in Canada consists of a sizeable portion of that pool. The influx of Indians into Canada has increased considerably during the past five years, after the US tightened its immigration policy.
According to Immigration, Refugees and Citizenship Canada data in 2019, the number of Indians admitted as Permanent Residents (equivalent to the Green Card in America) has increased from 39,705 in 2016 to 85,590 in 2019; a whopping 115 percent. Large numbers of immigrants have put a burden on the already stressed housing market of Canada. That is one of the important factors making Canada’s housing market one of the least affordable in the world. As per the International Monetary Fund (IMF) report in 2021, Canada ranks number 7 in the housing price to income ratio index.
The imbalance in Canada’s housing market is increasing faster than expected. It is generally said among people here that the bubble is going to pop. However, this has been said for more than five years and the bubble only gets larger. The pandemic has worsened the already bad real estate situation in Canada. Housing prices in Canada, on an average, have shot up by 30 percent from April 2020 to March 2021.
Canada is the world’s second largest country by landmass. But two-thirds of its population lives in a narrow strip of area that is within 100 kilometres of its southern border with the US. The area constitutes only 4 percent of the total area of the country. Even within this range, most of the population is around a few large cities like Vancouver, Calgary, Toronto and Montreal as most jobs are concentrated in these cities.
Almost all new immigrants to Canada try to settle around these cities. In 2019, out of 341,180 new immigrants, Toronto received 117,720 of them. Vancouver got around 40,000 and Montreal got 34,000 approximately. This kind of skewed distribution of the immigrant population in Canada is one of the factors which put enormous pressure on housing infrastructure in the large cities.
Low Borrowing Cost
Low borrowing cost is multiplying the impact even further. Canada’s mortgage rate is near a record low. In July 2021, prime rate was at 2.45 percent, which is just a tad higher compared to 2.25 percent in 2009-10. In December 2020, HSBC came up with a variable mortgage rate of 0.99 percent that is believed to be the first such rate below 1 percent in the history of Canada’s mortgage industry.
Not surprisingly, Canadians are accumulating housing loans at a record pace and this is fuelling housing prices. The federal government has been trying to contain this with various measures like stipulating that borrowers will have to qualify at a 2 percentage points higher rate than the market rate. It is a stress test to ensure that if the interest rate starts climbing, the risk of default will not increase dramatically. But that could not prevent a record increase in household indebtedness in Canada, fuelled by high residential mortgages.
High Demand for Housing
As a result, the imbalance in demand and supply of housing has widened further in recent years. According to a Bank of Canada report in February 2021, national housing resales are at a record high, whereas housing inventory is at a record low.
Royal LePage broker Anshuman Kumar echoes this concern. “Canada’s housing market is continuing to grow year over year and month over month since the pandemic, although July numbers are showing a sign of slowdown in sales with housing prices going out of control. Actually, this is one utmost important reason behind the demand for housing in Canada being immensely higher than the supply,” he explains.
The diagram from www.bankofcanada.ca shows the real picture of Canada’s housing imbalance.
Year-over-year growth in house prices in Canada reached 17 percent in February 2021. Price rise in bigger cities like Toronto is even higher. The pandemic encouraged families to move out from city centres as they have started working from home. This provided some relief to condominium prices within the core city, but it caused a dramatic increase in detached, semi-detached and townhome prices in city suburbs.
Nationally, during the post-pandemic period, the price of single-family homes has increased by 22 percent year-on-year, as compared to the price rise of condominiums by 4.13 percent. There is a huge demand for detached homes, especially from families with children whereas during the past decade, Canada has built more condominiums in and around its larger cities. Due to paucity in supply and high demand, prices of detached homes kept rising in the country.
Bidding wars became common in Canada’s housing scenario during 2016-17 and they have returned. Multiple offers on the same home and then full-on bidding have become the norm. New home buyers like Samrat Dutta had to face the brunt of this market dynamics. “In the current market, when a buyer has limited choices in terms of home inspection and multiple bids, our experience suggests we review our budget and set our expectations right. We were basically in a dilemma on whether to buy a new home or an established one,” said Dutta. Kumar, however, sounds optimistic as the market normally readjusts itself and panic will only cause further pain.
“Anyone looking to buy, sell, or invest in a house in Canada’s housing market over the last 1.5 years or two years can attest to the fact that the Canadian housing market has been on a wild ride. Home sales and price growth boomed at an unprecedented rate over the course of the pandemic and in the average Greater Toronto Area (GTA) a home is now selling for over a million dollars! Rock-bottom mortgage interest rates and work from home being the new normal has triggered rise in housing prices and sales in the outskirts and suburbs of GTA. The average national home price in Canada continues to increase, rising 15.6 percent year over year to $662,000, while the MLS Home Price Index rose 0.6 percent month over month, and 22 percent from 2020,” says Kumar.
Sharp Rental Market
Rental markets of bigger cities of Canada are under acute stress as well. Bidding wars have become commonplace even for apartment rentals. Rents touched astronomical highs in January 2020 just before the pandemic hit.
As per the national rent report in January 2020 by rentals.ca, rent increased 9 percent in Toronto, 11 percent in Vancouver, and a whopping 25 percent in Montreal.
However, the Covid-19 pandemic changed the situation in the rental market of the country albeit temporarily. Many moved out of core city limits which decreased rental prices of apartments in cities. Average rent fell for consecutive months for the rest of 2020 and for the first few months of 2021. But due to the return of normalcy, rents have started soaring again from May 2021 across several urban pockets of Canada. Canada is going to re-open its borders to international students soon. That is expected to eventually bring the rental market back to pre-pandemic levels sooner rather than later.
I would like to end with a positive note from Dutta who recently moved to a new house in Oshawa, a suburb of Toronto. “On this journey, we suddenly fell in love with the home we bought. We also believe the right house waits at the right time for the right buyer. Good luck from all of us.”
It seems Canada’s housing market needs loads of luck to correct from escalating mode, which is thwarting the dreams of many middle income people (including immigrants like us and NRIs living here) to own a home of their own.
(The writer is an IT professional, passionate about Indian history and current affairs. He is the founder of www.indicvoices.com)