Canada’s Housing Market Is Hotter Than Bennifer. Will It Ever Cool Off?

As we were stuck in our small apartments or back in our childhood bedrooms during the pandemic, Zillow Gone Wild — the Instagram account highlighting real estate you didn’t know you needed to see — became the ultimate in escapism. But while browsing million-plus dollar homes (many with questionable, sometimes terrifying decor) may seem like a fantasy land, for many people trying to buy a house, it’s a harsh reality. 

ICYMI: The current housing market in Canada is hotter than J.LO and Ben Affleck’s rekindled romance. It’s been bolstered by high demand and low supply, low interest rates, and everyone being at stuck home and looking for bigger space. And prices are through the roof (pun intended): As of May, the average Canadian house price rose 38% year-over-year. That’s on top of an already strong 2020 during which prices on average climbed 6.3% from 2019.

But things can’t stay like this forever —  can they? We asked the experts for the latest about Canada’s real estate market and whether we can expect housing prices to ever fall.

Let’s rewind to the start of the year when we were seeing some unusual stuff happen in real estate. The winter, typically a sleepy season for buying and selling, was strong and the market continued its momentum into the spring. 

In Toronto, the average price of a home hit just over $1.1 million in May, up 28% year-over-year. Vancouver, Toronto, and, yes Hamilton, ON were recently named the least affordable housing markets in North America, respectively, by global forecasting company Oxford Economics. (FYI, these cities beat out NYC and L.A., so it may be time to pack your bags and follow your dreams of making it in Hollywood.)

This madness could continue. “Because we have low interest rates, even though prices are really high… I think there's still some room for this market to continue to run,” Diana Petramala, senior economist at Ryerson University’s Centre for Urban Research and Land Development, tells Refinery29 Canada. 

Not helping the cause: We’re still dealing with a supply issue. Many cities across Canada are wildly expensive due to “years of underbuilding [that] have left Canada with the lowest number of houses per 1,000 people of all the G7 countries,” reported the Financial Post. In other words, not enough family homes have been built in major cities in recent years and development has largely been condos.

The good news? Things are looking like they may be slowly cooling as we inch out of the height of the pandemic. According to just-released data from the Canadian Real Estate Association (CREA), national home sales were down about 7% between April and May. The national average selling price also fell about 1% in May from April, but that figure is still up more than 38% from May 2020. In other words, cooling doesn’t necessarily mean cheaper homes, it simply means potential for a less-frenzied market where a property may get three bids instead of 30.

For those looking to buy, now may be a chance to make more strategic choices and put in offers conditional on things like home inspections and financing — clauses that are typically thrown to the wind in a competitive market, says Wins Lai, a Toronto-based real estate agent.

“Millennial or first-time buyers who have been sitting on the sidelines might find this a great entry point,” Lai tells Refinery29. That is, for those who’ve been able to save up a downpayment, which is another story. “Traditionally, the entry level price points have been rife with multiple bids and selling prices well over market values.”

There’s also less doom and gloom if you look outside of hot spots: Homes in certain markets such as Edmonton are still considered affordable for first-time buyers with the average single-family home price sitting lower than half a million as of May. Winnipeg’s prices are more accessible, too, even with high sales.

The feds implemented a new mortgage stress test on June 1 to try and calm Canada’s runaway housing market. To put it simply, it checks to see if you can afford your mortgage payments should interest rates rise. Before June 1, the stress test was at an interest rate of 4.79%. With the new update, it’s now 5.25%. (This goes for both insured and uninsured mortgages.)

Don’t worry, you don't have to study for it. The test is automatically done when you apply for a mortgage by your broker or the agent at your bank, and how much of a mortgage you get is influenced by this test. A higher stress test means that buyers now can’t afford as large of a mortgage as they could have before the change.

For example, if someone earned $110,000 prior to June 1, they’d qualify for a property purchase price of $580,000, says Lai. “At the new qualifying rate, that would be reduced to $555,000.”

It’s still too early to see if the new mortgage stress test will have a significant effect on the market, but Lai says whenever a rule change is introduced it’s common to see some temporary cooling. 

There’s a lot of talk around what happens if the current historically low interest rates go up. The governor of the Bank of Canada said in May that current home price increases aren’t sustainable, and that interest rates will eventually rise. At the moment, fixed and variable are still sitting under 2%, but that could change as early as the second half of 2022 — something that could seriously affect debt payments. Petramala explains that mortgage rates kind of follow the market, so in hot markets you’ll see them slowly creep up, but when the market is sluggish, rates are lower to attract more buyers.

“My concern is that if interest rates start going up, households would not necessarily go underwater today, tomorrow or next year, but when their mortgages come up for renewal, their payments go up because interest rates have gone up,” Petramala says. “To me, that’s the bigger risk.”

The condo market took a hit in 2020 as demand declined in major cities including Toronto, Vancouver, and Montreal. This was largely due to people fleeing rentals during the pandemic as they craved more space while WFH, or returned to their parents’. 

Now, into the warm-weather months of 2021, things are picking back up. In Toronto, the average condo price rose 6.3% in May, to about $716,000. Lai says between high-vaccination rates, loosening travel restrictions, and hopeful returns to offices, the condo market is expected to gain strength, especially in big cities. “I do tell my buyers, ‘If you want to buy it, you should pull the trigger,’ not to create urgency, but because I think when Phase 2 or Phase 3 of the reopening starts, immigration starts opening up and students go back to school… that will really change the market,” Lai says.

The condo market is also seen as a more accessible option for so many of us who have been priced out of buying a single family home, Petramala says, which in turn, can drive up demand. 

As the saying goes, if you pre-build it, they will come. Data shows that more people are buying pre-construction and new condos in cities like Toronto and Vancouver. Over on the west coast, the Vancouver Island Construction Association says building permits for multi-residential, condo and apartment buildings have climbed in recent years.

According to the Globe and Mail, FOMO is a factor driving this trend as young buyers don’t want to be further priced out of the market. They may also find the structure of a pre-build attractive: You have more time to save and pay off your purchase on a longer-lead payment schedule. 

Remember: Even with more supply, prices on pre-construction condos have gone up. 

While we can all watch the trends, predicting the future of real estate is as hard as guessing whether J.LO and Ben will make it this time around. Prices 12 months from now could continue their climb, or higher interest rates could cool the market.

If you *can* afford to buy right now and, more importantly, you want to, experts say it’s best to avoid over-leveraging yourself as much as possible, and don’t be pressured into buying something you can’t realistically afford. Everyone is in their own financial situation and it’s perfectly okay to not enter the market — ever. Buying, especially in a bubble, isn't the best financial decision for everyone.

And if you’re going to take the plunge, think before you jump. “Try to seize when you have a choice,” Petramala says. “If the market is cooler, the chances are higher that you’re probably paying market value for a house.”