Key Takeaways on Canadian House Prices Right Now
- Summer is traditionally a slower time for Canadian real estate, home prices and home sales
- Demand will continue to stay high, and supply will stay low
- Don't expect prices to fall, especially in Toronto and Vancouver
Ruth Saldanha: Canadian real estate has been volatile for some time now, with prices falling back in 2020 at the start of the COVID-19 pandemic and then oscillating ever since. In this four-part series, we will cover the four main aspects of real estate – residential, commercial, industrial, and REITs – and help you understand where the market is now and where it likely be over the medium term. Today, let's talk about residential real estate.
With rising home prices and rising interest rates, home ownership has become a tough proposition for many, especially in the urban parts of Canada. Is this likely to continue? The market is already slowing, and is that likely to continue? Brenda Lum, Managing Director of Credit Ratings at DBRS Morningstar, is here today to talk about this. Brenda, thank you so much for being here today.
Brenda Lum: Thank you for the invitation. Really excited.
Why Has the Canadian Housing Market Somewhat Cooled Right Now?
Saldanha: So, let's start by talking about the residential real estate market right now. It started to cool a little bit. What's going on and why are prices where they are?
Lum: Well, usually, the summertime is a little bit of a slower period. People are on vacation, school is out, so looking for houses are a little bit in the background. Generally, though, in the urban markets, we're still going to see high prices. Interest rates have risen, which normally should cause prices to fall or at least stay steady. But within certain urban markets, there's a different dynamic. There's both demand issue and a supply issue. Firstly, on the demand side, there's the choice for urban geography for immigrants to come in, and Canada is a very strong proponent of having immigrants come into this country. So, that's increasing demand. Supply though, on the other hand, is restricted because there's just not a lot of geography. So, as you can see, for example in Vancouver, in Toronto, the urban markets are growing upward towards the sky as opposed to maybe the 50s and 60s and 70s when they were growing outward. So, with a natural increase in demand and a limitation on supplies, particularly for single family homes, that the price will continue to rise.
What is Likely to Happen to Demand? And Supply?
Saldanha: I want to dig in a little bit on this, because like you said, people have been like, there's not enough supply right now. So far, real estate has been a solid investment for Canadians. Do you expect this to continue going ahead? Will it continue to be one of the most solid investments that we have?
Lum: I think so but selectively. I think if you're in the right geography. where there will be natural demand and limited supply, it's a great investment. I think if you're going into markets where you have an ability to increase supply readily and the demand is not necessarily there, so it may not be the first choice, then probably not so much, unless you're looking at it as a home as opposed to investment.
Which Canadian House Markets Would Make a Good Investment?
Saldanha: So, Brenda, I want to talk about that a little bit more. You said that there's some markets that would do well and some that are not so good. Can you give us a sense of which is which right now?
Lum: Sure. I would say that the urban markets will do well. And the primary reason is because you will have people who naturally be inclined to move into the urban markets. I think when you're looking at secondary and tertiary markets, the demand will be somewhat less. And as a result, I don't think you'll have that same appreciation of price. So, if you're looking at investment, probably urban is much more amenable than looking at some type of rural properties.
Some Risks in Canadian Real Estate
Saldanha: What are some of the risks that you're considering in residential real estate right now?
Lum: Some of the risks that we've continue to look at would be interest rate rising risk. We feel that there is potential for further increases. So, that will impede the servicing of debt. Right now, the servicing costs are very high in terms of the cost for ownership vis-à-vis the amount of household income. So, if rates are rising and you have to renew your mortgage, then that will just increase further. Hopefully, with potentially salary inflation that you can have some offset, but I don't think at this time that it will be a full offset.
Will Home Prices Rise in Canada?
Saldanha: And the last thing that everyone wants to know is, are prices going to rise from here. So, I guess, the question is, what's going to happen with prices from here on.
Lum: I think in the urban markets, yeah, I still think that they're going to rise. There's going to be – demand is going to outstrip supply. We're fortunate that there is some type of development in purposeful rentals. So, that may provide some relief on the rental side, but I doubt it on the acquisition side. I think you'll still have solid prices. People want to live in certain geographies. There is a demand for single family homes, and hence why those prices have risen more than the price of condominiums.
Saldanha: Great. Thank you so much for joining us with your perspectives, Brenda.
Lum: You're welcome. Thank you for inviting me.
Saldanha: For Morningstar, I'm Ruth Saldanha.
