Canadian Housing: A Balancing Act Between Shelter and Investment

Samson Solomon

In the wake of the 2008 global financial crisis (GFC), the Canadian housing market experienced a profound transformation. At the time, housing was predominantly seen as a source of shelter, but it morphed into a hotbed for speculative investment. This shift was fueled by factors that made housing seem like an irresistible asset, making “Canadian Housing” humorously known internationally as its own asset class.

The Allure of Real Estate Investment

A confluence of economic and social factors has resulted in a notable increase in investment activity in the real estate sector. After the GFC, central banks adopted aggressive monetary policies, particularly lowering interest rates, to encourage economic recovery and make Canada’s mortgage rates more affordable. This situation made traditional savings options less attractive, leading investors to look for assets that offered better returns, especially in real estate. Moreover, favourable tax laws, especially those that reduced capital gains taxes on non-primary residences, further fueled interest in property investments both domestically and from foreign buyers, creating an increasingly appealing landscape for capital allocation.

The rise of short-term rental platforms, like Airbnb, has also changed the rental market, allowing homeowners to take advantage of profitable income opportunities from temporary guests versus long-term tenants. This shift increased speculation among investors, resulting in a higher demand for properties that could generate substantial rental income. Combined with a prevailing belief that housing prices would keep rising indefinitely, this trend created a sense of urgency among potential buyers, heightening competition and pushing property prices higher. These factors have established a robust investment environment marked by increased activity and rising values in Canada’s real estate market.

Recent Changes in the Housing Market

The Canadian housing market has seen significant changes recently, making it less appealing as an investment opportunity. An essential factor in this shift is the sharp rise in interest rates set by the Bank of Canada to combat inflation. This increase in borrowing costs has negatively impacted cash flow for homeowners and landlords, posing challenges for those profiting from rental income. Consequently, investors are finding it harder to sustain the same level of financial viability in the current housing market.

The long-held assumption that housing prices would always increase is now being questioned as price growth has slowed and, in some areas, even declined. This shift has reduced the attractiveness of real estate for investors looking for quick capital gains. Adding to this challenge are recent changes in tax laws that have made capital gains on non-primary residences less advantageous, further lowering potential returns. The higher interest on savings accounts and other fixed-income investments has created a more competitive environment, encouraging investors to explore safer options that provide similar returns, thus pulling capital away from the housing market. These safer alternatives offer competitive returns, drawing capital from the housing market as foreign and institutional investors divest or steer clear of investing in real estate.?

Necessary Return to Shelter

The Canadian housing market has increasingly shifted towards financial speculation, moving away from its primary role of providing adequate shelter. To tackle this issue, a necessary adjustment in housing prices and changing how we view housing as an investment are expected. This recalibration should lead to a drop in housing prices, helping to restore the fundamental purpose of housing as a place to live. While this transition may face various challenges, it is crucial for improving future generations' affordability. The current situation in Canada shows a worrying trend where the emphasis on financial returns has overshadowed the essential value of housing as a basic need.

Recent trends reveal a declining interest among first-time home buyers in purchasing condominiums, especially in major Canadian cities. Several factors contribute to this shift, including the burden of high condo fees, often making these properties less financially appealing than their initial sale prices suggest. Additionally, the smaller sizes of new condos than older ones make them less desirable for families looking for long-term living options. The market has also been significantly shaped by investor-driven construction, leading to designs that may not meet owner-occupied needs. Moreover, many potential buyers prefer owning a home with land. They are concerned about the long-term value of condos, which have historically appreciated at a slower pace than single-family homes.

Many first-time homebuyers (FTHB) are either moving to suburban areas in search of more affordable housing or delaying their plans for homeownership altogether. This trend leads to a noticeable slowdown in the condo market, especially in urban centres like Toronto and Vancouver, where many small, investor-owned units exist. This fact also highlights concerns about the decreasing size and quality of newly built condos, which are affected by rising land prices, strict zoning regulations, and the need to boost profit margins. These issues make it increasingly difficult for first-time buyers to find affordable and suitable housing in major cities.

Implications for the Future of Canadian Housing

The significant changes in the Canadian housing market bring several essential consequences that deserve attention. One of the most critical impacts is affordability; as speculative investments decrease, first-time homebuyers and those looking to upgrade their living situations may find it easier to navigate the market. With falling home prices and less competition from investors, these individuals will likely have an easier path to homeownership, which could promote a healthier demographic mix within communities.

Moreover, the rental market may encounter difficulties as investors pull back from the sector, potentially leading to decreased availability of rental properties. This situation could continue inflationary pressures on rental prices; however, the expected increase in the construction of purpose-built rental units may help alleviate this issue over time. Additionally, the fluctuations in the housing market are closely tied to the overall Canadian economy. While a cooling market might initially slow economic growth, creating a more stable and balanced housing environment is essential for the long-term financial resilience of average Canadians.

Political Sentiment Changes, Deflecting Blame on Immigration

The housing crisis in Canada is one of the most severe examples of capitalism's failures. It has become a widespread issue that impacts nearly every urban area in the country. Housing and rental costs have skyrocketed, resulting in a notable rise in homelessness and below-adequate shelter.?

In light of this growing crisis, political leaders are resorting to scapegoating, with immigrants being unfairly blamed as the leading cause of housing inflation. One politician stated that "100 percent of housing problems" stem from immigration, a view that another prominent politician also supports. Even the government, usually seen as pro-immigration, has changed its approach, enacting policies to limit the number of international students. This trend of blaming immigrants distracts from the real issue as multiple governments failed to find practical solutions to the housing crisis, and their policies continue to contribute to the problem.?

The idea that immigrants are responsible for the housing crisis in Canada is not only incorrect but also harmful to the country's social cohesion and economic stability. Immigrants play a crucial role in strengthening the Canadian economy by addressing labour shortages and helping to mitigate the effects of an aging population. The actual causes of the housing crisis lie in systemic political failures, where poor government policies have limited the housing supply and complicated the construction process. Blaming immigrants diverts attention from the essential reforms needed to ease the housing shortage and enhance living conditions for all Canadians.

Pointing fingers at immigrants is not only unfair but also counterproductive, as it risks alienating talented individuals who make significant contributions to the workforce and the economy. There is an inconsistency in politicians' actions, who, while accusing immigrants of causing the housing crisis, also rely on them to build new homes and support Canada’s economic growth. Canadians need to reject this damaging narrative and instead push for substantial policy changes that tackle the root causes of the housing crisis. By simplifying regulations and creating a more favourable environment for construction, the government can make meaningful progress in addressing this urgent issue.

Is the Problem Supply or Demand in Housing?

The idea that immigration is the leading cause of the housing crisis is similar to saying that high demand compared to supply is the reason for rising prices. While this might seem reasonable initially, a closer look shows that this reasoning has significant flaws. The recent increase in immigration doesn't sufficiently explain the dramatic rise in housing costs, which have outpaced population growth significantly.

For example, from 2005 to 2024, Canada's population grew from 32 million to 41 million, about a 30% increase. In contrast, the average home price jumped almost 200% from $241,000 in January 2005 to $720,000 by January 2024, peaking at $836,000 in February 2022. A well-functioning society should be able to build enough housing to meet growing demand, a concept often supported by free market advocates who believe the market will restore balance.?

The situation is quite different; even with a population growth rate in 2023 that was the highest since 1957, the number of new housing starts fell compared to earlier years. This failure of the market to self-correct has led to various suggestions from commentators, including changes to zoning laws and tax incentives. However, these solutions primarily benefit property developers and do not tackle the root problems that have led to the housing crisis.

Redefining the Housing Market

The idea of a "strong" housing market needs to be reconsidered, focusing more on stability than rising prices. A genuinely healthy market is one where prices are stable or decrease, making housing more affordable and accessible for first-time buyers and renters. This approach shifts the focus from just price increases to the critical need for financially attainable housing for the average person.

The standard real estate and media narrative often links increasing prices with a thriving market. This perspective mainly benefits existing homeowners and investors while sidelining those looking to enter the housing market. Such inflated markets can result in serious economic consequences, including the misallocation of resources, slowed economic growth, and increased wealth inequality.

To create a more sustainable housing environment, it is essential to adopt a new mindset that values affordability and accessibility over speculative investments. Recent policy efforts aimed at cooling the housing market are a positive step. Still, additional actions are needed to ensure long-term affordability and fairness for future generations, ultimately building a housing market that meets everyone's needs.

Homeownership Still A Priority

A recent Royal LePage survey reveals that 84% of young Canadians aged 18 to 34 see homeownership as a worthwhile investment, even with their affordability issues, especially in regions like Saskatchewan, Manitoba, and Atlantic Canada. Young Canadians perceive homeownership as a strategic move for building long-term wealth. Among those in this age group who do not own homes, 74% express a desire to purchase one, but only 54% believe it is within their reach, highlighting a disconnect between their aspirations and reality. The biggest obstacle to homeownership is housing costs, such as soaring property prices, high mortgage rates, and a lack of housing.?

Final Thoughts

The Canadian housing market is transitioning, moving away from the speculative investment that has defined it in recent decades and returning to its fundamental role of providing shelter. The adjustments in policy, market sentiment, and buyer behaviour indicate a rebalancing, which, while challenging in the short term, could lead to a more sustainable and equitable market in the long run. Addressing the core issues—housing supply, affordability, and systemic inequities—will be essential to creating a housing market that works for all Canadians.

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Contact us today to start your mortgage renewal or homeownership journey. Let nesto mortgage experts help you find an affordable solution for your mortgage.

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