Rising Housing Costs Add to Canada’s “Cost of Living Crisis”

Dated: May 22 2021

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It’s been a bit of a guessing game as to when the real estate market will bottom. And, with the country’s housing agency warning last year that a correction was imminent, it might have been a bit too early to panic. The average selling price of a home in Canada hit a record high in March 2021. The rapid rise in home prices has raised concerns about Canada's housing affordability and has prompted calls for action from politicians.

 

In April, the Canadian government announced plans to tax empty homes owned by foreigners. This initiative is part of Prime Minister Justin Trudeau’s plan to address Canada’s housing shortage. “Houses should not be passive investment vehicles for offshore money,” finance minister Chrystia Freeland recently claimed in a budget speech. Economists say that blaming foreign investment for the current housing shortage is misguided and ignores the leading cause of the problem.

 

The rise in supply is expected to boost the housing market, which is already struggling with a shortage of available homes. A warning from Frances Donald, the Montreal-based chief economist at Manulife Financial, states the country's housing market is already pricing out young Canadians, which could affect their economic competitiveness. 

 

Record-low interest rates have driven the rise in house prices. Tiff Macklem, Bank of Canada governor, said, “We're not seeing enough supply to meet the demand." Macklem also noted that rising prices could still cause buyers to overstretch themselves. Ron Rapp, the Homebuilders Association of Vancouver CEO, points to the lack of new homes for sale as a contributing factor to the price rises.

 

Covid-19 has caused shortages in timber and labor costs, which are affecting the construction industry, according to industry experts. Canada has also promoted the use of greenbelts to reduce urban sprawl. However, this strategy has failed to reduce the demand for houses, which has caused overheated markets.

 

House prices in Oxford County, Ontario, have risen by over 35 percent in just the past year. The region is also known as the “dairy capital of Canada.” Niagara, Vancouver, and Chilliwack are among the regions attracting urbanites escaping the pandemic's grip. “It’s these more remote communities that are really on fire,” says Peter Norman, chief economist at Altus Group, a Toronto real estate consultancy.

Despite an economic backdrop that's usually cool, the housing market is still Strong, says Mark Norman, chief economist at TD Bank. Canada’s population grew at its slowest pace in six decades last year as the effects of the pandemic eased. Despite the rise in home prices, Canada’s housing market can still prove resilient. There have been few signs of bubbles bursting since the Second World War. “Some of what’s happening right now seems divorced from the fundamentals. Property bubbles are easier to look at in the rear-view mirror than ahead.” Norman suggests.

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