Supply and Demand Will Continue to be an Issue for Newcomers to Canada Wanting to Buy a Home

Despite record sales, a historic shortage of houses for sale continues to drive up prices for potential newcomer homebuyers in Canada's main housing markets, according to a new Housing report from Scotiabank.

In fact, as the 1.8 million immigration backlog caused by COVID-19 restrictions hopefully begins to clear in the months ahead, newcomers arriving with plans of homeownership face a very strong seller's market. 

Farah Omran, the author of the January Scotiabank report, says that in 31 markets tracked by Scotiabank, listings went down in 21. Of the 10 markets where listings increased, sales went up in six, which is "indicative of the tight supply conditions limiting sales activity relative to demand."

Home sales broke all-time record

 "The Canadian housing market wrapped up 2021 pretty much as expected," reports Omran. "With or without December, the level of sales in 2021 had already surpassed 2020’s by October, breaking an all-time record. Compared to 2020, itself a wild year for the housing market, 2021 saw sales increase by 20 percent, while listings went up by only 9 percent, resulting in a 21 percent increase in prices."

According to the latest data from the Canadian Real Estate Association (CREA), there were in total 666,995 residential home sales in Canada in 2021. That's a new record high, surpassing by more than 30 percent the average over the last 10 years. 

Housing inventory is at a record low

According to CREA senior economist Shaun Cathcart, “there are currently fewer properties listed for sale in Canada than at any point on record. So, unfortunately, the housing affordability problem facing the country is likely to get worse before it gets better.”

But the year did indeed strongly, points out Omran. Sales in the fourth quarter of 2021 were 61 percent higher than the 1988–2019 fourth-quarter average and second only to the fourth quarter of 2020.

By the end of 2021, there were only 1.6 months of housing-for-sale inventory (the time it would take to sell the current inventory at the current sales rate) left on a national basis.

Currently, inventory in the whole Toronto region sits at less than one month. The Toronto Regional Real Estate Board (TREB) showed 3,232 active listings in December. That's an astounding  60 percent drop from the 7,892 in December of 2021. 

According to a recent Scotiabank report by Jean-François Perrault, Canada now has the lowest housing stock of any G7 country. Ontario, Manitoba and Alberta have the fewest homes per capita. The report points out that It would take 650,000 homes to bring Ontario up to the same level as the rest of Canada. 

So far 2022 is shaping up as another seller's market

Clearly, for newcomers looking to purchase a  home, it's a seller's market. And that shows no signs of changing any time soon. 

“It is clear that 2022 is starting off the way 2021 ended in terms of the relationship between demand and supply in the GTA housing market,” said Toronto Regional Real Estate Board (TRREB) CEO John DiMichele in a news release issued Feb. 3. 

Immigration is a key factor in the housing market

"The strength was again motivated by improved labour market outcomes, acceleration in immigration, and demand from investors," reports Omran. "The level of employment in December had surpassed pre-pandemic levels—albeit the industry distribution of those added jobs looked different than it did before the pandemic. "

And although immigration data lag a month, "the number of admissions in November surpassed the record set in October, which itself surpassed the record set in September … you get the idea," said Omran, adding that December will likely be another strong month for immigration admissions. 

The majority of immigrants arrive with enough savings to buy

For newcomers arriving in Canada hoping to buy a home upon arrival (or, as the majority do within 3-5 years) following housing market trends is important, particularly when making the pre-arrival decision about where to settle. Home equity is one of the main sources of wealth in Canada. A study by the Canadian Bankers Association shows that  Canadians have significant equity in their home, averaging about 73 percent of the home’s value.

A pre-pandemic Royal Lepage survey showed that  75 percent of newcomers arrive in Canada with enough savings to buy a home. However, the average time immigrants wait to purchase a home is three years. The study also showed that 82 percent of newcomers choose to stay in their first city of residence, once again driving home the importance of settling in a city where the price of a house is affordable.

Investor demand for housing also driven by immigration

Omran's report points out that investor demand for housing is also strong, and "at least partly driven by strong immigration, which is a prime source of rental demand."

Investors are keen to rent to newcomers and the increase in their activity in the housing market impacts both the owned and rented market segments in Canada, says Omran. 

"Investors play a critical role, providing essential rental supply. The share of investors reported by the Bank of Canada captures units that are bought and flipped for a profit—however, the Bank reports that in recent years, homes bought and resold within six months have accounted for only one percent of transactions, while those flipped within 12 months have accounted for two percent.

Supporting the increase in rental demand

"Therefore, to the extent that units purchased are not kept vacant, the increase in investor activity will support the increase in rental demand, which is important in a market that faces shortages in both market segments, owned and rented."

Rate-sensitive Investors, Omran points out, obviously had their eye on rate hikes expected from the Bank of Canada, perhaps starting as early as the spring of this year. 

Compared to the same time last year, home purchases by investors were 99 percent higher, compared to 66 percent by repeat-home buyers and around 47 percent by first-time home buyers. This is a divergence from historical trends, where home purchases across the different groups generally moved in tandem. The share of first-time homebuyers in the market has subsequently fallen to its lowest level since 2015, while that of repeat-home buyers and investors increased to their highest level since 2015."

Rate-sensitive Investors, Omran points out, obviously had their eye on rate hikes expected from the Bank of Canada, perhaps starting as early as the spring of this year. 

Repeat-home buyers also driving the market

"A new dataset from the Bank of Canada offers new insights into the makeup of mortgaged homebuyers. While the data is only available up until June of 2021, it points to an influx of investors to the market. Compared to the same time last year, home purchases by investors were 99 percent higher, compared to 66 percent by repeat-home buyers and around 47 percent by first-time home buyers. This is a divergence from historical trends, where home purchases across the different groups generally moved in tandem. The share of first-time homebuyers in the market has subsequently fallen to its lowest level since 2015, while that of repeat-home buyers and investors increased to their highest level since 2015."

In addition to the national average house price increasing by 17.7 percent, the country’s rental market also began stabilizing during the second half of the year. Rental “bidding wars” were once again regular occurrences in Vancouver, Toronto and Montreal by the end of last summer. 

Home prices in Canada are rising quickly. The price of a typical home hit $798,200 in December, up 2.1 percent ($16,700) from the previous month. According to the CREA report, home prices are now 26.6 percent ($167,500) higher than last year. 

This trend is expected to continue in 2022. 

Best deals found in secondary cities

"We expect new inventories to be almost immediately picked up by buyers," said Omran, "so stay tuned for what is likely to be yet another busy spring market."

As for where the deals are right now, a recent MoneyWise story in the Financial Post listed Fredericton, New Brunswick, Edmonton, Alberta, Saskatoon, Saskatchewan and Winnipeg, Manitoba as four interesting secondary Canadian cities where homes cost well below the national average.

Home prices in Canada’s most attractive markets (Toronto, Vancouver, Montreal) have risen so rapidly over the course of 2021 that buying in those gateway markets so attractive to newcomers is no longer feasible for many potential homebuyers. This is making Canada's secondary cities, like the ones highlighted by MoneyWise, attractive to newcomers looking to buy and settle, and to investors. 

“With the housing supply issues facing the country having only gotten worse to start 2022, take any decline in sales early in the year with a grain of salt because the demand hasn’t gone away, there just won’t be much to buy until a little later in this spring,” said CREA chair  Cliff Stevenson. “But when those listings eventually start to show up, the spring market this year will almost certainly be another headline grabber. “

Christopher Alexander, President of RE/MAX Canada, said in the 2022 Canadian Housing Market Outlook Report that  “less-dense cities and neighbourhoods offer buyers the prospect of greater affordability, along with liveability factors such as more space.

"In order for these regions to retain these appealing qualities and their relative market balance, housing supply needs to be added. Without more homes and in the face of rising demand, there’s potential for conditions in these regions to shift further.”