The tale of Canada’s housing market was the same for years. Prices kept rising and, when people questioned how high they could go, they’d go higher. Then the pandemic hit. Soaring values spread from major centres to smaller towns as city folks sought more space for their primary residences or secondary properties.
But the housing market has finally reached an inflection point, Desjardins economist Randall Bartlett, senior director of Canadian economics, said in a conversation on what rising interest rates mean for the housing market and how to improve housing affordability.
Why rising interest rates are changing the housing story
Just two months after the Bank of Canada raised interest rates from prolonged historic lows, housing market activity is slowing and prices are stalling as money becomes more expensive to borrow after years of cheap access.
“Interest rates really are starting to bite,” Bartlett said.
Home prices will come down – they’ve already started to in the Greater Toronto Area – but Bartlett doesn’t believe they’ll collapse. There’s even potential the prices will stay higher than they were pre-COVID when real estate really took off.
“I don't think Canadians are going to lose their shirts in the housing market,” he said. “We anticipate a correction, but not a collapse in activity.”
Lower prices could be an opportunity for first time buyers to enter the market, although it’s a double-edged sword since higher rates will make it more challenging to qualify for a mortgage, Bartlett said. He’ll be paying particular attention to what happens to prices in smaller towns where values spiked to levels that don’t reflect their local economies.
How real estate investors affected affordability
But it’s not just small towns where prices don’t always reflect fundamentals such as population growth, income and supply. That’s in part because there are more investors and asset managers in the real estate space than there has been historically, Bartlett said. High returns on Canadian real estate have made multi-family residential properties – along with industrial and logistical properties – attractive to people and businesses.
“The landscape for real estate investment is changed by big players, and that's having impacts on the market,” Bartlett said.
Pension plans are some of the major players in the financialization of real estate, because that’s where the returns are to meet pension promises that have been made to workers, Bartlett said. That means workers who believe in affordability are simultaneously invested in making money from housing.
“It’s not as simple as investors versus homeowners, which is often how this is framed,” Bartlett said.
The federal government has announced a plan to tackle the financialization of the housing market. Bartlett expects it will be challenging to define what is inappropriate behaviour given how invested everyday Canadians are in the housing market.
Indeed, part of the rush for real estate investment is by individuals who’ve benefitted from high real estate prices investing in second or third properties, Bartlett said. For example, people who own multiple properties were the largest group of buyers in Ontario in 2021, making up more than a quarter of all purchases, according to Teranet, which manages the Ontario Land Registry. Other provinces, such as Quebec, have seen a similar trend, particularly with respect to purchasing recreational properties during the pandemic.
Why more of the right supply could help
Overall housing supply is the wrong benchmark for Canada’s housing situation when the supply that exists isn’t accessible to the people actually looking for a place to live, Bartlett said. The real question is how to meet the supply needs of the population that must be housed, not just investors and a smaller subset of the population, he said. As it stands, Canada has large, detached homes on one end and tiny condos on the other. Neither are particularly appealing or possible for first time home buyers seeking to settle down with families. This is the ‘missing middle’ of the housing market that is often discussed but difficult to address.
“We need to increase housing that's going to be useful for young families,” he said, pointing to the need for townhouses. “We just have this missing middle in housing in our country, particularly in Ontario and British Columbia.”
The new era of high interest rates will make it a more challenging environment for households, particularly lower-income households that weren’t able to build up a financial cushion during the pandemic, Bartlett said. This should be a key area of focus for policymakers, he added.