Is Low Supply Keeping Canadian Real Estate Prices High?

A year ago, housing affordability dominated national conversations as the Canadian real estate market exploded in growth across major urban centres and rural communities alike.

This year, the conversation has ostensibly changed, with buyers, sellers, market analysts and industry experts discussing the path the Bank of Canada (BoC) will take in 2024 and immigration levels. Will the central bank cut interest rates next year or keep the policy rate higher for longer? How much will the immigration boom impact the Canadian real estate market?

This does not mean the housing affordability discussion is over, as national home prices remain above their pre-pandemic level. According to the Canadian Real Estate Association (CREA), the average selling price for a home rose nearly two per cent year-over-year in October to $656,625.

When the red-hot markets of Toronto and Vancouver are removed from the equation, the typical price for a residential property falls to around $600,000.

While price growth has slowed from the 2020-2021 housing boom, they have not cratered in a climate of higher interest rates and six per cent mortgage rates. Be it a single-family house or a condominium, residential prices remain elevated following their meteoric surge.

Is a Lack of Supply Still Keeping Prices High in the Canadian Real Estate Market?

According to statistics provided by the national real estate association, residential property sales plunged close to six per cent on a monthly basis in October and rose 0.9 per cent compared to the same time a year ago. Moreover, the number of newly listed homes fell 2.3 per cent from September to October, CREA data show. This was first the first drop since March.

Meanwhile, the number of months of inventory, which measures the number of months it would take to exhaust the current supply at the present rate of sales activity, came in at 4.1 in October. This was up from the May low of 3.1, but it remains below the long-term average of about five months of housing stocks.

New housing construction has slowed from the previous year. Canada Mortgage and Housing Corporation (CMHC) data show that housing starts remained roughly the same on a year-over-year basis in October, totalling more than 22,000. However, year-to-date housing starts tumbled seven per cent year-over-year, totalling 187,314 units.

Major urban centres are witnessing solid housing construction activity, particularly for apartments, says CMHC deputy economist Kevin Hughes. Although much of this was started during a climate of historically low interest rates, Hughes told CBC News that this could persist due to strong rental demand.

That said, demand and home sales mean more supply is coming on stream or existing inventory is sitting on the market longer. However, that increase is offset by demand from several months ago persists, experts say.

“We know housing demand is extremely high all across the country, but October’s resale data was further confirmation that it probably won’t be manifesting itself in the existing home market for the remainder of this year and likely not until spring 2024 at the earliest,” said Shaun Cathcart, CREA’s Senior Economist, in a statement. “The rebound in activity this past spring was an example of what we might see next year. It will really come down to whether the Bank of Canada has to increase interest rates again or whether by next March it’s simply a matter of how soon we’ll see the Bank make its first cut.”

While housing stocks are improving nationwide, the gains are mixed in key housing markets. For example, new residential listings in the Ontario real estate market soared nearly 26 per cent year-over-year in October, totalling more than 31,000 units, according to the Ontario Real Estate Association (OREA). This was about ten per cent above the five- and ten-year averages for this time of the year. Even active residential listings ballooned, climbing close to 36 per cent year-over-year to above 50,000 units. This, too, was 40 per cent above the five-year average and 14 per cent above the 10-year average.

In British Columbia, active residential listings are roughly 50 per cent below where they need to be to achieve a long-term balance in the provincial real estate market. The good news? They are up 12 per cent year-over-year and rose five per cent month-over-month in October, the British Columbia Real Estate Association (BCREA) reported.

Population Boom Supporting Prices?

As the nation’s population grows amid the federal government’s plan to welcome more than one million immigrants over the next couple of years, demand for Canadian real estate is expected to remain high. Although higher interest rates may minimize some of this demand, the post-pandemic hangover might persist.

Perhaps Jason Mercer, chief market analyst for the Toronto Regional Real Estate Board (TRREB), summarized the situation in the Canadian real estate market best last year: “We’re seeing a gap in the ‘missing middle.’” Until more housing supply comes online, it will prove to be challenging to see prices come down at a level whereby more families and households feel comfortable making that giant leap into homeownership, whether in downtown Toronto and Vancouver or a small town in Atlantic Canada and the Prairies.

Compare listings