Buying your own home is an exciting and potentially worthwhile investment, especially considering the rising cost of rental property in most Canadian cities. Buying a home is, for most Canadians, a long-term investment in the future. So, it’s crucial to have a clear understanding of what’s happening in the Canadian real estate market, and what drives prices, so that you can be confident that you’re making the right decisions.

 

What factors affect property values?

The residential real estate market is sensitive to a wide range of factors that can affect prices. Some of these are short term, which are more difficult to predict. But the longer-term factors are more important for a property buyer as they don’t tend to change suddenly and are most likely to continue affecting the value of their investment for years rather than months.

Covid-19

We all hope that the Covid-19 crisis will pass eventually. However, it has had an effect on the Canadian real estate market in the short-term and probably into the long-term too. At the start of the pandemic, it had a negative effect for a time as lockdowns changed the way property was marketed and sold and prevented closures on property sales.

However, the negative impact was surprisingly short-lived as realtors and buyers adapted to the “new normal” and moved more of the selling and buying process online. Real estate prices generally increased after the initial months of Covid-19.

Economic activity

In a country as diverse as Canada in terms of economic activity, regional variations can have a massive effect on the real estate market. Property prices in the Vancouver, Toronto and Ottawa metropolitan areas doubled between 2013 and 2018 and have continued to rise according to Statistics Canada, largely as a result of the growth in employment across government, information technology and services such as the finance sector and health.

In contrast, prices in Calgary have been reducing for several years and this is likely to continue for the foreseeable future. The reason for this is that during the oil boom, when the oil price was rising rapidly there was a massive program of property construction to meet the anticipated demand. However, as the oil price declined this has left an oversupply of residential property in the area, which has driven prices down. Add to this the lack of employment diversity in the area and you can see why the trend is likely to continue.

Interest rates

One of the biggest costs when it comes to buying a home are the mortgage repayments. And of course, this is directly related to the prime interest rate set by the Bank of Canada. Interest rates have been at historic lows since 2008/9 when governments around the world reduced them to help stimulate economic activity after the credit crisis. This has made homebuying very affordable and driven prices upwards over that time. The anticipation of upward moves in the interest rate will also have an effect on real estate prices as an increase in rates will reduce the affordability of mortgages.

General economic trends

The health of Canada’s economy is a significant factor in how real estate prices move. During economic recessions, particularly prolonged ones, prices tend to stagnate and reduce as people worry about their earnings prospects and their ability to take on a major commitment, such as a mortgage. The flip side is that, during prolonged periods of economic growth or stability, prices tend to increase steadily as potential buyers feel confident about their future prosperity.

Affordability

A major factor in the price of Canadian real estate is affordability. This obviously takes account of average income levels but also expected earning trends. In 2018 Statistics Canada reported that the average mortgage debt of Canadian households ranged from 2 times household income in New Brunswick to 5.6 times household income in British Columbia. 

These statistics vary between the type of property and reflect major variations in the price of real estate in major cities such as Vancouver and Toronto, which are significantly above the average. The Canadian Real Estate Association (CREA) reported that in January 2022 average real estate prices varied between$274,700 in New Brunswick and $1,031,067 in British Columbia. This gives you an idea of how location affects how much you will need to pay for that piece of real estate.

 

Price trends in Canadian real estate

The probable long-term effect of Covid-19 is a continuation of the significant increase in the number of us working from home. And this is likely to continue as employees and employers have adapted to home working. They realized it can be more productive and cost effective for a sizeable proportion of the workforce.

The effect on the Canadian real estate market is that out-of-town suburban property has become more attractive. People  appreciate the importance of having more space in their home, and as the commuting distance to major employment centres becomes less important. The result, according to Statistics Canada, is that condo type property in major urban areas is likely to increase less in price than it did pre-Covid. In major employment areas there is still likely to be demand for condos, so prices should remain positive.

However, demand for single family detached property in suburbs, particularly around major metropolitan areas, is likely to carry on increasing for the foreseeable future. In the short term, Covid has had an effect on the supply of building materials and has caused increases in the building cost of new property. This will take some time to work through, particularly as Covid-19 lingers on.

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Increasing price inflation is causing some concern that the Bank of Canada will soon start increasing interest rates. However, the majority, around 74%, of mortgages in Canada are fixed rate, so modest increases in interest are unlikely to have a major effect on real estate prices.

If interest rates rise significantly, it may cause concern that some existing mortgage holders might struggle with the increased cost when their fixed-rate terms come to an end. The average term of a mortgage in Canada is 5 years or less. This is the term a rate deal is set for, whether variable or fixed. At the end of the term the borrower must re-negotiate the new term. It’s also worth bearing in mind that Bank of Canada is responsible for setting interest rates that promote a healthy economy. So, any rises are likely to be modest, and starting from a very low point.

 

Why is all this important?

Good question! If you’re buying a home to live in for decades, what does it matter if it increases in value? Firstly, it’s important to have confidence that your housing costs, the major one being the mortgage repayments, will remain affordable. Any, or all, of the above factors could affect your personal situation depending on where you are buying and your occupation.

Secondly, if you are truly buying your “forever” home then these factors are not as important as long as you feel you are paying a fair price and that the costs will be affordable. However, a forever home should still be seen as an investment, and the Canadian Association of Accredited Mortgage Professionals estimates that on average Canadians own between 4.5 and 5.5 homes during their lifetime.

So, if you aspire to move to a larger property or one in a more desirable location, even in the distant future, you need to have confidence that the value of your property will keep pace with the market generally so that an eventual move up is achievable. If you’re a first-time buyer, possibly with a down payment of less than 20%, and maybe stretching your finances to get into the Canadian real estate market, you need to know that you aren’t likely to end up in a negative equity situation.Negative equity is when you owe more than the value of your property and it can be a major problem if you need to sell your home for any reason. Having a good idea of whether you are buying the right home, in the right place, and within reason, at the right time will help you avoid headaches further down the line.

 

Other things you need to consider before you buy a house

 

Down payment

You’ll need a down payment of at least 5%. But with a down payment of less than 20% your lender will need to take out mortgage default insurance. The premium for this depends on several factors but will be between 2.8% and 4% of the mortgage amount. The bigger a down payment you have the lower the premium rate.

But the premium is added on to your mortgage and will affect the repayments. The bigger a down payment you can raise, the better. Having a larger down payment will also open up the range of mortgage deals available to you and get you a better interest rate.

Research the mortgage rates available to you

Before you even start looking at buying your dream home you need to get a realistic idea of what the monthly cost will be and how much you can borrow. A great place to start is with a mortgage comparison site, where you can see what deals are available. You should then get a mortgage pre-approval, which gives you a good level of confidence that you have a mortgage deal and also gives you a locked-in interest rate for, normally, between 90-130 days from the date of the pre-approval.

Give a good deal of thought to the type of mortgage rate you opt for. 74% of mortgages on Canadian real estate are fixed rate. This normally comes with a slightly higher rate than a variable rate, but gives you comfort that your payments won’t increase for the term of the mortgage.

Additional costs

There are several costs you’ll need to be aware of, as these will be payable at the time of the closure on the purchase. The main ones are:

  • Land transfer tax: this varies depending on the territory and province.
  • Legal fees: you’ll need to pay a lawyer to prepare and check the documentation. The fees could amount to about $1500.
  • GST/HST if you’re buying a new property.
  • Home Inspection: this is optional but is a good idea if you’re buying an older property. The cost of this is normally around $500.
  • Mortgage default insurance: If you are borrowing more than 80% of the purchase price you’ll have this cost, although it is added onto the mortgage.

 

The bottom line

As with any major purchase, or investment, being armed with as much information as possible will give you the confidence that you’re spending your money wisely. Be realistic about what you can afford and open-minded about what your ideal home looks like. It’s better to live in a more modest home and sleep at night than constantly worry about making ends meet.

And be prepared to delay the purchase if it means you can save a bigger down payment and maybe get a better deal. Although real estate prices might be increasing, don’t ever panic buy. Take the time to get all your finances in place and then go out and buy with confidence!