by Vaikunthan Ambalavanar

2021 was a record-breaking year for the Canadian housing market

Low rates, unabating demand, and increasingly tight supply conditions made 2021 a record-breaking year for the Canadian real estate market. Housing activity appeared to course correct in the summer, with sales cooling and price growth moderating, but the latest Canadian Real Estate Association (CREA) data suggest the market is heating up once again. For reference, activity in October was up 3.5% vs September and was the first month-over-month increase since March 2021. Tighter market conditions have continued to push housing prices up, with the average sale price up 23.4% year-over-year. Continued supply shortages combined with the prospect of rising interest rates could result in a pulling-forward of activity as we close off the year.

Looking Ahead – What To Expect in 2022?

Rate hikes by the Bank of Canada coupled with increased government intervention, could help rein in activity in 2022. CREA released its forecasts for next year, calling for a +5.6% increase in prices offset by a fall in sales activity (transactions) of 12.1%. The hope is that the market moves toward equilibrium, where there is ample inventory to meet demand. The Liberal government has proposed several ways to do just that, though investors should take the following with a grain of salt as it is uncertain which policies will be implemented by the minority government:

1. $4 billion Housing Accelerator Fund: The Liberals proposed to build 100,000 new homes by 2025 with the goal of working with communities to identify vacant/underused properties that can be converted into housing. The government aims to incentivize and promote faster builds. While the fund could be a major push forward in increasing supply, the pace of this can be hampered with local bureaucracy in relation to zoning/approvals/etc.
2. Establishment of an anti-flipping tax: The government is proposing to introduce a tax on anyone who sells their property within the first 12 months of purchase. While this sounds good at the surface, it could dissuade the many investors who acquire beaten down properties to turn-over as expected profit margins would likely shrink, making it a less attractive investment option.
3. Ban on foreign buyers: Foreign investor investment have helped keep real estate prices elevated and competition stiff. Perhaps incorporating a two-year ban could alleviate some of that pressure. However, foreign investor involvement has been less pronounced now than in the past and furthermore, incorporating such a ban could have implications on relations between countries.
4. Homebuyers Bill of Rights: The Liberal party is also planning to introduce a Homebuyers Bill of Rights. Under this bill, the Liberals are considering banning blind bidding entirely and ensuring banks and lenders offer 6-month mortgage deferrals to homeowners. While the Homebuyers Bill of Rights may not be a direct fix to the housing market, it allows for increased transparency and protections for buyers and sellers.

An Investor’s Take – Should You Buy?

Should the CREA prediction come to fruition, then perhaps, the housing market will lose some momentum in the coming year. However, with the government targeting one million new immigrants over the next three years, the housing market could continue to prove resilient, if housing supply isn’t meaningfully increased.

As an investor, there are couple of avenues to consider:

• Buy on continued price speculation that home prices would continue to rise: If you are an investor seeking maximum appreciation, you’d ideally seek out properties within the primary markets (GTA, GVA for example); however, the maximum rental income relative to the purchase price make for a difficult cash flowing asset. Should the market remain tight (demand exceeding supply), however, then prices should continue to rise as will the profit potential, particularly in the short-term as proposed policy effects usually take time to filter through.
  
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• Buy on the basis of generating cash flow: Even in pricey market conditions, real estate can prove to be lucrative, if you know where to look. In particular, certain markets, mostly secondary markets (smaller cities outside the GTA) have seen prices rise at a slower pace than primary markets and in absolute terms, are a relatively inexpensive way for investors to secure residential real estate. For example, you could acquire a multi-family property in New Brunswick for the price of a single-family home in Toronto and have it rented it out at market rents and be able to positively cash flow (after accounting for expenses, reserves and mortgage), generate equity through modest price appreciation and mortgage paydown. These secondary markets have, as a result of the pandemic, experienced robust migration and with expected immigration coupled with continued low vacancy rates (vacancy rates continue to be low amid low supply) stand to benefit meaningfully for the foreseeable future.

Net-net, the real estate market has enjoyed a strong 2021 and the outlook, while sprinkled with cautions, is positioned to remain resilient. Even though it may seem expensive at the surface, if you look close enough, you might just find that golden nugget!

Vaikunthan Ambalavanar is a Research Associate at Desjardins Capital Markets.

This article is re-published from the Winter 2021 issue of “Street Talk”, TiF’s flagship publication. Interested in writing for us? Click here for our submission guidelines.