Housing Market: Tips for Buying a House in Canada Vs. the US

Is the Average Canadian Housing Market in the Real Estate Bubble?

The Canadian housing market is a major topic for discussion. Many are still determining whether it's going to crash or correct. To answer this question, RBC predicted the market will hit its lowest point in spring 2024. But it doesn't mark the end of the correction because the RBC forecast a 5% decline in home prices across Canada, which is still to come.

Key Highlights

  • Despite a massive increase, the current average price is still 3.9% lower than in April 2022.

  •  In April, Canada saw an increase in home sales of 11.3%, but the new listings saw only a minimal increase of 1.6%. The new housing supply has been low for 20 years.

  • Canadian real estate market experienced a notable decline in national home sales.

In a report, RBC analyzed the regional trends where different regions will experience various degrees of decline. Ontario, British Columbia, and Alberta are expected to drop 19%, 16%, and 6%. This will be a correction phase where the prices will respond to the rapid rise in home prices between late 2020 and February 2022. Also, the recent market shift is a normal part of the cycle, moving away from the global pandemic and historically low-interest rates.

If you look at the Canadian housing market, it has already slowed down since 2022. RBC expects a major economic recession. A significant recovery is anticipated in 2024 as the economy stabilizes, inflation softens, and the Bank of Canada gradually reduces its interest rate.

Again, the forecast provides an opportunity for buyers to enter the market as home prices decline and affordability becomes less expensive. It is also important to note that buyers have to prepare for a potential increase in mortgage rates in 2024 when the Bank of Canada reduces its key interest rate. For sellers, it is essential to lower their asking price to attract buyers as home prices will decline.

How Much Growth Does an Average House Price Have in Canada?

The average price of houses in Canada in 2022 was around $741,400. In September 2023, housing prices in Canada started to rise. It is surprising that the prices are unstable or even in trend. After a year, the average home price in September 2023 was $655,507. The picture is very different in various demanding places. Some saw a drastic increase, while some felt a drop.

But Why Did Such a Difference Occur in the Country?

The drop in home prices in a few places in the country is because the Bank of Canada decided to raise the interest rates in July 2023. This resulted in increased borrowing, made mortgages more expensive, and eventually made it harder for people to afford homes. This unaffordability led to a decrease in home demand and caused home prices to drop in Canada.

Particular criteria determine whether the market favors the buyer or seller. It is called the sales-to-new-listing ratio. If the ratio is below 40%, it is a buyer's market; if the ratio is above 60%, it is a seller's market. In September 2023, the ratio was 51%, which indicates a balanced market. It also shows healthy competition among the buyers of properties. 

Historical Data for Lowest and Highest Home Prices in Canada

If we look at the historical data, house prices have experienced significant fluctuations. The record high was made in 1989 when prices reached an all-time high of 16.5%. The low was created in April 1991, with a record low of -9.7%. From 1982 until September 2023, house prices have increased by 1.9% per year.

Are Average Houses More Expensive in Canada Than in the USA?

Surprisingly, the Canadian housing market is more demanding than the US market. Houses in Canada are more expensive than the homes in the USA. It is also true that home prices in Canada are different in different states, but they have risen to new heights. If we look at the number, it indicates that Canada's homes are 40% more expensive than those in the USA.

Home prices in Canada and the USA used to be the same about a decade ago. But in the past ten years, there has been a considerable difference between them. To add to the gap, COVID-19 again played a significant role.

Canada's two most active housing markets are the Greater Toronto Area and Greater Vancouver. They are the most expensive areas. Also, the GTA joined the race in October last year when the price reached $1,114,387.

It is essential to bring out that if we exclude the two crucial and expensive markets from the calculation, the average home price in the country would drop significantly. This implies that GTA and Greater Vancouver are important factors in calculating the housing prices in the country.

Related Articles: What do I need to know before asking for a home loan?

What's the Average Sales Price Growth of Houses Sold in Canada?

In April this year, the average sales price in Canada increased by 4.3%. This was a significant rebound in the real estate market. The Canadian Real Estate Association data reveals that the average non-adjusted price was $716,000. It was a severe increase of more than $100,000 since January.

Toronto and Vancouver markets have experienced substantial growth. This will lead to an increase in housing prices in Canada. The strong growth is because buyers entered the market, and supply remained limited.

The difference between the increase in sales and new listings increased the sale-to-new-listing ratio to 70.2% in April. This again implies high demand and limited supply in the Canadian real estate market.

 Why are house prices so high in Canada?

 The Canadian housing market is the new talk, continuously growing and beating all other global markets. What are the reasons behind this disparity and frequent growth?

  1. More demand than supply: Demand and supply are the deciding factors of a price. If the demand increases and the supply stays constant, the price increases. The same is the case with the Canadian housing market. It is even more severe because the houses sell at higher prices than the asking price. As demand continuously increases, people willingly give more for property, and sellers with more options accept the bid in which they are paid more. This high demand is because more people in Canada prefer to own a palace than in the USA.

  2. More than lower interest rates: Canada's interest rates are currently down. These rates are lower than the rates in the USA. Low interest rates drive more people into the market to purchase homes. Though the number of homebuyers increases, the supply remains constant, which means the number of homes available for sale is limited. Low interest rates make borrowing easy and affordable. It reduces the cost of mortgage financing and attracts more people.

  3. Role of foreign investors: Foreign investors play an important role in the country's real estate market. Speaking of Canada, Canadian provinces like Ontario and British Columbia grab a keen interest from foreign investors. Toronto and Hamilton are the best examples of foreign investors contributing. Foreign investors with ample wealth compete with residents for the property. Toronto and Hamilton perfectly fit the example where foreign investors were involved in about one-fifth of the home purchase.

  4. Immigration: Canada is open to welcoming thousands and more immigrants. This is a strategic move, as Canada wants to counter the country's declining population. The entry of thousands of people eventually increases the demand for a place to live. It later leads to owning a place to live. This increases the competition for available homes in the country and raises the price.

The Current Outlook of the Canadian Housing Market

The Canadian housing market was once characterized by a rapid price increase fueled by soaring demand and limited supply. But now it is undergoing significant transformation as, over the past two years, ultra-low mortgage interest rates have made it affordable to buy a house in the country where new buyers are allowed to enter the market. However, a drastic change occurred due to increased mortgage rates at the beginning of 2022. This challenged the accessibility of ownership mainly to first-time buyers.  

The Canadian housing market, which was once at its boom, is experiencing its end due to the combination of increased borrowing costs, elevated inflation, and softening labor market spells. As housing affordability in Canada is expensive, it will ultimately result in a demand reduction, leading to a decline in prices soon. 

The Ontario housing market is currently under the spotlight, which may trigger the outcome of the 2008 financial crisis. A recent Toronto Dominion Bank study revealed that Ontario's sales-to-new listing ratio has reached its lowest since the crisis. This indicates a potential downturn in the Canadian housing market. Even the analyst has suggested that if the interest rate continued to impact the demand, the ratio might even go to the level witnessed in the late 1980s and mid-1990s.

Bottom Line

Owning a house is a difficult choice, and the increasing housing prices add to the difficulty. The average house price is at its peak in Canada. Despite having price fluctuations, Canada has experienced a drastic increase in its real estate properties. The recent decision made by the Bank of Canada to raise interest rates has been a challenge for many to afford a place to live. This has decreased the demand for housing in a few parts of the country. Experts even say that Canada may experience one of the most significant housing bubbles in history, where it will experience a 24% decrease in home prices. However, there is a positive outlook for 2024 as the housing market will get more stable due to the declining mortgage rate.

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07 Dec, 2023


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