Immigration Remains a Critical Factor in the Future of Housing in Canada

Immigration to Canada will continue to play a critical role in the future direction of the cooling Canadian housing market, according to Farah Omran, Housing economist for Scotiabank. 

"We are currently experiencing the most rapid pace of population growth in 50 years," said Omran in her recent Canadian Market 2022 WrapUp report. 

Last week, the Canadian Real Estate Association (CREA) reported that average house prices in Canada fell a record 12 percent in 2022. Sales dropped more than 39 percent from December 2021.

Prices are down significantly from the 2022 peak

In December, the average national home price stood at $626,318. That is down from over $816,000 from the early 2022 market peak, according to the CREA  report.

Meanwhile, the Canadian federal government, Omran notes, continues to set higher immigration targets that include an increasing commitment towards more economic immigration. And that, says Omran, translates into higher population growth and demand for housing. 

In 2022, Canada admitted a record-breaking 431,000 new permanent residents (mainly from India, the Phillippines and China).

Canada has set ambitious immigration targets 

Canada hopes to land 465,000 new immigrants in 2023. That number will rise to 485,000 newcomers in 2024 and will jump in 2025 to 500,000 new arrivals.

Toronto Star columnist Dave Olive concurs with Omran's forecast. 

The country’s real estate market has seen a historic drop, said Olive, but it will bounce back. Immigration is strong, people still want houses, and many are waiting on the sidelines for the bottom to be revealed.

Are interest rate hikes finally over?

The housing market in Canada has endured several interest rate hikes over the past year, leaving some homeowners with mortgage rates now over 6 percent.

However, in more good news for newcomers looking to buy this year, experts are now forecasting that the most recent Bank of Canada (BofC) rate hike will likely be the last for this year.

On Jan. 25, the central bank hiked the overnight rate up by 25 basis points (a quarter of a percentage point) to 4.5 percent, which is what markets had been expecting. The BoC also indicated that its rate-hiking campaign might be over, as it “assesses the impact of the cumulative interest rate increases.”

Economists generally expect mortgage rates to remain elevated for months before heading back down in late 2023 or perhaps early 2024.

Home sales have remained stable

In its latest report, CREA points out that national home sales have remained close to stable since the summer.

The report notes that this indicates that the "downward adjustment to sales activity from rising interest rates and high uncertainty may be in the rear-view mirror."

Shaun Cathcart, the senior economist at CREA, told the Toronto Star's Fares Alghoul that “the adjustment to higher rates is not fully over, but one major sign is that sales haven’t really fallen anymore since last summer. The market also tightened up in December.” 

Excluding the two huge sales markets of the Greater Toronto Area and Greater Vancouver slices roughly  $118,000 from the current average national price, says CREA. 

Still, the report says,  the 12 percent drop was an “all-time record.” 

CREA’s benchmark Home Price Index was $730,600 in December, down 1.6 percent from the previous month. That represents a 13.2 percent decrease since February, according to the industry group, when prices peaked before the Bank of Canada started hiking interest rates to curb inflation.

Buyers rushed into the market in early 2022

That demand in February of 2022 was somewhat boosted by a rush to lock in lower rates as expectations were mounting of an overnight rate hike in March as signalled by the Bank of Canada in its efforts to fight historically high inflation, notes Omran in her report. 

"The Bank of Canada began its hiking cycle in early March," said Omran, "and while a single hike wasn’t going to have a material impact, it was the expectation of more to come along with heightened rate sensitivity and worsening economic conditions, such as loss of purchasing power, fall in stock markets, and rising costs of inputs that drove movements in the market over the next few months."

Housing prices will continue to fall in 2023

A slight rise of 1.3 percent in Canadian home sales was reported in December from November, while the number of newly listed properties dropped 6.4 percent month-over-month.

CREA expects average home prices to decline a further 5.9 percent in 2023. But prices will rebound 3.5 percent in 2024, it predicted. Home sales are forecast to rise by 10.2 percent in 2024 as markets continue to return to normal.

The average home price in the Greater Toronto Area in December was $1,106,000. That represents a 1.1 percent drop from November and 8.9 percent from 2021.

Continued rate hikes will have an impact

The CREA report notes that the “decline already happened over the course of 2022; however, the record-setting start to that year will be reflected as a decline this year as prices are not expected to be anywhere near those record levels in 2023,” 

Jim Davies, a professor emeritus at the Department of Economics, University of Waterloo, told The Star that more interest rate hikes could ruin hopes of a turnaround. 

Higher rates make it hard for first-time buyers to qualify for a mortgage and enter the market, “and if the Bank of Canada raises interest rates further and we have a recession, then I would not be surprised if house prices fell more,” said Davies.

More housing supply is needed

In the GTA, “we don’t have enough product in the market” as new listings are still down, which justifies why the Toronto market is still expensive, Desmond Brown, a Toronto real estate agent, told The Star.

While some prefer to sit and wait, “there are still a lot of people who have to buy and sell for legitimate reasons,” he added. “The provincial government and city of Toronto are doing their best to try to bring in supply, but that supply is not coming soon enough.”

With the drop in sales, a positive outcome for newcomer buyers is their negotiating ability. “Now, properties are sitting longer in the market, and they are able to negotiate a price that ends up in most cases under the asking price,” Brown added.

Prices have not yet bottomed out 

So is it time for newcomers to Canada to enter the housing market? Have we reached the bottom? Omran says not yet.

"We still see some room for prices to decline in 2023, but by how much and for how long varies significantly across cities," she says.

In her report, Omran notes that the housing markets in Canada, for the most part, remain balanced.

"Of the 31 local markets we track," said Omran, "24 ended the year in balanced territory compared to 28 starting the year in sellers’ territory. 

Alberta's growth is keeping prices high

She added that cities in Atlantic Canada, St. John's, Saint John, and Moncton, and Sudbury in Ontario, remained in sellers’ territory. At the same time, buyers had the upper hand in Windsor, Barrie, and Toronto.

And as for the impact of population growth on housing, even in a down market, Omran points to Calgary, which is seeing prices rising still in the midst of a record-breaking increase in population in 2022.

"They are now higher than February 2022," said Omran. 

"As we look ahead, population dynamics are likely to continue playing an important role."