A Look At Canadian Housing
For years, Millennials and Generation Z have felt disenfranchised with the housing market in Canada. With nearly a 9x price to income ratio, the dream of home ownership for many seems to only be achieved through co-signers or through help with a down payment from family members. Could we see this change? In this newsletter, I'm going to lay out a case for why I think there could be further downside pressure on the Canadian housing market, and why I think the next two years could pose an attractive entry point for aspiring homeowners.
The main factors driving this opinion would be the following:
1. Increased Interest Rates
2. Decrease in Immigration
3. Surge in Rental Unit Supply
4. Potential Job Losses/Recession
To start off - let's recap what has happened in the housing market over the last 5 years. We've seen a massive increase in home prices in 2020, reaching a high in Q1 2022. From the high point in 2022, we've seen a 16% decline so far in this current correction, with a time period a little greater than 3 years from the peak. (See chart below)
To put this in perspective, when the US housing market had a correction around the time of the Great Financial Crisis, the housing market peaked in Q2 2006, and it bottomed in Q1 2012. This marked a 27% decline over this period, and the peak to trough period was almost 6 years! While a direct comparison of the US housing market to the Canadian housing market is difficult due to specific differences, I think it speaks to the fact that the housing market is different than the stock market, and price corrections take longer to work their way through.
Now, let's dive into some of the topics which I think could cause some downward pressure on Canadian real estate.
1. Interest Rates: People buy monthly payments, not houses
In 2020, the average 5-yr fixed rate was 2.18%. On a $500,000 mortgage amortized over 25 years, this represents a monthly payment of $2,160 - not bad! Fast forward to 2025, and the current average 5-yr fixed rate throughout the year so far is ~4.5%. Running the numbers again, a $500,000 monthly mortgage payment jumps up to $2,760. This represents a 27% increase in the monthly payment. This matters because 60% of all renewals in Canada are happening in 2025 and 2026. This is the highest number of renewals occurring in a two year period in the history of the country. The biggest mortgage year in the history of the country was in 2021, coinciding with some of the highest prices paid for homes, which means large mortgages.
This sharp increase in monthly payment can cause stress on borrowers, and could leave them to rethink their purchase decision or have them look to downsize. We've already seen an increase in the number of active listings in Ontario over the last number of months.(See below)
At the same time that active listings have been increasing, sales haven't been keeping pace, and the sales to new listings ratio is at one of its lowest levels in decades. (See below)
At the end of the day, if you have increasing inventory and sales aren't happening, this puts downward pressure on home prices.
2. Decrease in Immigration
In 2024, Canada as a whole saw ~485,000 permanent residents along with 2.8 million temporary residents claiming Canada as their home. This is dramatically up from 2020 where the targets were ~185,000 permanent residents and 1.4 million temporary residents. A change of policy direction in 2025 has shown to dramatically decrease these numbers. As Ben Rabidoux from Edge Realty puts it, "Canada’s population grew by just 20,000 people between January and April of this year, a quarterly growth rate that rounds to zero and was the third lowest of any 3-month period in over 75 years of data. And one of those quarters was 2020 when the borders were literally closed!"
The federal government have committed to reducing non-permanent residents (NPR) to 5% of the Canadian population over the next two years, and this currently stands over 7%. There is still a long way to go for Canada to hit their target here.
Overall, if we are seeing a decrease in immigration over the next couple of years, this reduces buyer demand for new homes as well as demand for rental units. If rental rates are reduced, investors may even need to sell their properties due to cash flow constraints, further increasing available inventory for home buyers.
3. Surge in Rental Unit Supply
This category is an interesting one - as Canada is seeing hockey stick like growth in the purpose built rental unit market. (See charts below) Purpose built rental units are essentially condos or apartment buildings built specifically with the purpose of renting out the units, and not selling any of the condos on the resale market. They're typically owned by a REIT or a large property firm.
Here are Ben Rabidoux's comments regarding rental unit construction: "The number of rental units in the construction pipeline has exploded to nearly 160k or 6.6% of the existing primary rental stock with some parts of the country seeing more than 10% of their existing stock under construction. Said differently, over the next couple years, the supply of primary, purpose-built rental units nationally will grow by nearly 7% into an environment of soft (and potentially even NEGATIVE) rental demand.
You don’t need an economics degree to see that vacancy rates will trend higher, likely doubling over the next couple years in most metros and that rent growth will be very subdued over that time.
Regarding rents, we should be very clear as to exactly what drove the tight market over the past couple years. The relationship between rents and temporary resident growth is pretty hard to miss, and the trajectory for rents going forward is pretty clear unless we see a major change in policy." (See below)
This is speculation on my part, but I can't help but wonder if immigration slows, rental demand is soft, and buildings have vacancies if some of these purpose built rental units end up due converting to resale inventory at some point. This could be a stretch, but even if more rental unit supply lowers rents across the board, this should in turn reduce investor appetite for properties and shore up more supply for aspiring home owners. (More rental unit supply should lead to lower rents, lower rents mean investors have reduced cash flow, potentially leading them to divest from the asset.)
4. Potential Job Losses/Recession
Now for the last risk which I think is potentially the most damaging. There is risk of the Canadian economy suffering job losses or a recession due to the ongoing tariff battle with the US. If we start to see sectors of the economy suffering in Ontario, job losses could create the biggest risk for the housing market to fall further. In the case of a job loss, once your savings are depleted, there is serious pain that can start to kick in.
We've already seen headlines (due to reduced international enrollment) of Ontario Colleges reducing the headcount of staff in Canada by 10,000, and if our auto sector or steel sector gets hit, it could cause sharp pain in the Southern Ontario area.
In conclusion, I think due to the various risks I've outlined above we may continue to see stagnant or declining house prices for the next couple of years. Let me know if you think differently or if you have any questions!
Best,
Jon
Jonathan Adomait
Financial Planner | CFP, CIM, B.Eng