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Canada / Analyst Insights
2019 Canada Housing Update: Market Transition

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by Eva Koronios, Industry Analyst
Oct 29 2019

The latter half of 2019 has marked the recovery of Canada’s housing market, which closed out 2018 in a state of substantial uncertainty. The past three months, in particular, have also brought with them the potential for the housing market’s further growth over the five years to 2024.

According to Bloomberg, home sales in Vancouver rebounded 46.0% in September despite the city’s falling home prices, signalling the third consecutive month of year-over-year gains compared with the city’s performance throughout both the late summer and early fall of 2018.

Moreover, according to Bloomberg Canada, benchmark prices in Toronto jumped 5.2% year-over-year to reach $805,500 in September, which is also only $10,000 below peak housing prices just two years ago. In addition, the same source maintains that Montreal and Ottawa’s housing markets are continuing to perform well, and home sales in Calgary have risen 8.2% compared with September 2018.

Aside from Vancouver, where housing prices have fallen in recent years due to government policies designed to keep properties affordable, rising home prices across other cities’ housing markets indicate that overall consumer demand for housing has increased. When demand for housing is high, people are more likely to become homeowners. Furthermore, strong demand for housing reflects positively upon the Canadian economy in aggregate. This is because it correlates with strong consumer confidence, which IBISWorld estimates to have increased an annualized 2.7% over the five years to 2019.

However, it is critical to note that 2019 as a whole is expected to read as a transitional year for the housing market, with revenue in the Homebuilders industry in Canada (IBISWorld report 23611aCA) projected to fall 6.8% in 2019; nonetheless, this decline is largely attributable to the first half of 2019 instead of the second, considering the industry’s gains over the past three months. Rather, 2020 is bound to begin reflecting the industry’s positive changes, with revenue anticipated to rise 1.3% next year, part of an annualized 1.4% increase over the five years to 2024. It is also equally important to consider that conditions for homebuilders are not necessarily indicative of consumer demand for housing, and that consumer demand for housing can increase without the Homebuilding industry immediately reflecting this change.

Mortgage regulations stabilize the market

The improving state of Canada’s housing market is largely the result of new housing-related regulations that are helping to moderate price gains, in combination with stricter mortgage criteria that first took effect at the start of 2018. These new rules were enacted by the Office of the Superintendent of Financial Institutions (OSFI), an independent agency of the federal government with the primary function of supervising and regulating banks, insurance companies and trust and loan companies.

According to these new criteria, home buyers with a down payment of 20.0% or more are now subject to stricter qualifying criteria, also referred to as a “stress test,” that would effectively determine whether a homebuyer would be able to afford both their principal and interest payments should interest rates increase. This stress test would use either the 5-year benchmark rate as published by the Bank of Canada or the customer’s mortgage interest rate plus 2.0%, whichever is higher.

These stringent criteria are in place to ensure that anyone who buys a home in Canada can actually afford to do so, even in instances where the economy experiences a downturn. Although these new regulations, by design, have now made it much more difficult for potential homeowners to get approved, those that do get approved will likely be able to actually afford it. By taking the riskiest people out of the market, these criteria aim to insulate the market from potentially devastating future crashes.

Additionally, a global drop in borrowing rates, increasing immigration to Canada and a strong labour market (247,500 jobs were added to the Canadian economy in H1 2019) are helping to augment the positive effects of the mortgage regulations, as are low unemployment, high consumer confidence and rising per capita disposable income.

In 2019, IBISWorld anticipates Canada’s national unemployment rate will decrease 2.6%, part of unemployment’s overall annualized 3.9% fall over the five years to 2019. Per capita disposable income is also projected to have increased steadily during the same period at an annualized rate of 0.9%.

Supply outstrips demand amid stable interest rates

Canada’s housing market supply is currently lagging behind demand. For example, government-related fees on new homes in Toronto are among the highest in all of North America, and the International Monetary Fund has recently been encouraging the Canadian government to enact bureaucratic reform regarding construction, specifically with regard to permitting and zoning delays.

When supply falls short of demand, the typical consequence is a rise in housing prices, mirrored in increasing benchmark prices in major cities such as Toronto and in the uneven ratio between sales and new listings. Nevertheless, Canadians continue to buy homes, showing that Canadian consumers feel confident and are willing to pay more for a big-ticket purchase such as a house, even as prices rise.

The fact that interest rates have remained steady since 2018 is another key factor for this demand. Ultimately, stable interest rates make people better able to plan for buying a home and paying their mortgage. Simultaneously, low unemployment indicates that people are working at the highest level. If this is the case, per capita disposable income will increase in turn, along with general consumer spending, which IBISWorld expects to increase 1.6% in 2019 alone. Any market is likely to have a maelstrom of factors that interact with each other and play off one another, with Canada’s housing market being no different in this respect.

Next steps

Lastly, it bears mentioning that Canadians (or at least, current and prospective homeowners) have now become accustomed to the OSFI’s stricter mortgage regulations, which have been in place for nearly a year. This regulation most likely serves as the principal reason behind why housing is rebounding in the first place, as any changes wrought by shifts in market regulations usually take at least a few months to appear after the enactment of a new policy. 

This is further supported by the Homebuilders industry’s expected growth over the five years to 2024, as its revenue is anticipated to increase throughout every year of the upcoming reporting period.

Because markets instinctually dislike volatility, taking risky homeowners out of the market has acted as a stabilizing force upon the market in a broader sense. Moreover, with homeowners better able to handle their payments, there’s less of a chance that they will be late on them, keeping banks happy to lend and, hopefully, keeping homeowners out of debt. With the conclusion of Canada’s election season as of October 21, it will prove interesting to see whether one of the federal government’s areas of focus moving forward will involve instituting further policies meant to help the housing market usher in an era of new growth.



For related coverage on North American housing market conditions in 2019, check out our previous article on residential construction trends in the United States on Industry Insider!





Edited by Kieran Newton

Infographic Design by Alexandria Valenti