2021, like 2020, was once again a unique year for our National Real Estate Market. According to the Canadian Real Estate Association, monthly home sales were not as volatile as 2020 but still more volatile than what was seen in Canada during the 2008-09 financial crisis.[1] The high of monthly sales reached 807 250, contrasted with the low of 650 000 sales. This volatility took place in the macro situation of the COVID-19 pandemic and low-interest rates spurred by the Bank of Canada. The national average home price rose about 21% to $687 500 and is expected to increase again in 2022. The continued movement in the market made housing a top-button issue during the 2021 election, with the winning Liberal government set to implement their housing plan over the next four years. 2022, like the pandemic years before, is again looking to be a historic year for Canada’s housing market.

What’s in store for 2022?

The consensus seems to be that while 2022 will not feature the astronomical growth rates of 2021, the market is still set to increase, albeit at lesser growth rates than previous years. This year, the average price is still set to grow to $718 000 by 5.6%, per the CREA. As a result, Canada’s major urban centres such as Toronto or Vancouver as forecasted as having an enormous amount of risk in the annual global real estate bubble index.[2] Toronto specifically has been earmarked as having the second-largest housing bubble globally by Swiss bank UBS.[3]

While the housing markets of Toronto and Vancouver tend to dominate the conversation, REMAX anticipates the markets of other areas in Canada to start generating more buzz. In Atlantic Canada, Moncton and Halifax are expected to see increased prices respectively by 20% and 16% this coming year. Western Canada is expected to remain a sellers’ market in 2022, spurred by homebuyers hailing from Ontario and British Columbia.

Regarding BC, it appears that consumers are moving to regions outside of Vancouver. This trend is expected to maintain due to tight housing supply and powerful demand. In BC, buyers are moving to suburban areas outside the Greater Vancouver areas, such as Victoria and Nanaimo offer more affordable alternatives.

Ontario and Toronto offer a parallel situation to BC and Vancouver. It is expected that areas outside of the GTA, such as North Bay, Thunder Bay, Collingwood, Ottawa, and the Durham region, are expected to have increased average sales prices. Unless meaningful regulatory action is taken, these trends are likely to hold.[4]

2022: New regulations?

With Canadians looking to their government to act on the real estate market, 2022 may bring new laws and regulations. After September’s Federal election, we saw jurisdictions looking to make changes. In British Columbia, the province wants to create a cooling-off period where consumers have a few days after a sale to back out. This is reminiscent of cooling-off periods for pre-built condominiums in BC and Ontario but is instead targeted towards newly built homes.[5] As cooling-off periods are already found across Canada, BC adopting this new measure may set off a domino effect of other jurisdictions following suit.

The government is considering changing the rules regarding down payments on investment properties on a federal level. The Ministry of Housing Diversity and Inclusion and the Canada Mortgage and Housing Corporation specifically aim to target speculative investing. The Ministry sees speculative investing as something that causes Canadians to “overbid on properties, borrow beyond what they can afford, and push home prices even higher.” While they have not yet suggested a specific amount of which to increase the current 20% down payment that investors pay, industry professionals agree that an increase can curb the speculative market. [6]

When examining the mandate letter for the Ministry of Housing and Diversity and Inclusion, it is apparent the proposed increase in the down payment is in line with what the MInistry seeks to do in 2022. The mandate letter committed to other actions that seek to curb speculative investing in the real estate market, including, but not limited to:

Housing predictions and regulation – it’s all related

Of course, predictions are rarely accurate without some aberration in real-life results. Still, based on past trends, the experts are likely correct that housing prices are likely to increase. Demand is also set to increase outside of the major areas of Toronto and Vancouver due to unaffordability in those urban centres.

The main element set to affect the predicted trends are the regulatory actions’ that provinces, municipalities, and the federal government may take. Drastic new legislation may create powerful changes in the market – although such legislation can take months or years to have a visible effect. Outside of regulatory impact, it seems that the predictions of 2022’s housing market are set to be true.

[1] CREA: Quarterly Forecasts https://www.crea.ca/housing-market-stats/quarterly-forecasts/

[2] MacLean’s – Canada’s real estate market in 2022: What to expect in the new year https://www.macleans.ca/economy/canada-real-estate-outlook-2022/

[3] REMAX: Investors Remain Active in the Hot Canadian Housing Market https://blog.remax.ca/investors-remain-active-in-the-hot-canadian-housing-market/

[4] REMAX: 2022 Canadian Housing Market Outlook http://download.remax.ca/PR/2022CanadianHousingMarketOutlookReport_FULL.pdf

[5] British Columbia: BC working to strengthen protection for home buyers https://news.gov.bc.ca/releases/2021FIN0070-002097

[6] Financial Post: CMHC to review down payments on investment properties as part of federal strategy to tackle housings risks https://financialpost.com/real-estate/mortgages/cmhc-to-review-down-payments-on-investment-properties-as-part-of-federal-strategy-to-tackle-housing-risks

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So, is the real estate bubble finally popping? Well… not necessarily. There may be headlines claiming a real estate armageddon, but everyone has their own thesis. In this article, we reflect on what some of the top experts forecast for the future of the Canadian real estate market. We also review the factors steering us away from the idea that the real estate market is about to burst.

What is Everyone Saying About the Future of Canadian Real Estate?

There has been no shortage of predictions and research reports on what to expect in the near- and long-term of Canada’s residential real estate market. The CEO of Canada Mortgage and Housing Corporation (CMHC) provided a gloomy outlook on what’s to come. In a testimony to the House of Commons, he predicted that home prices could fall between 9-18% over the next year. One of the major fears that Siddall had was a “debt deferral cliff”, where mortgage deferral programs would come to an end and Canadians would need to start making payments again — whether they have the income to or not.

Not all experts agreed with Siddall. RBC forecasted that housing prices may decline 5% compared to last year; CIBC forecasted a 5-10% decline; and Moody’s, a financial services and research firm, estimated an 8% decline in Canadian real estate prices. And, in a surprising turn, TD predicted that home prices may increase by as much as 13.8% in some provinces by the end of 2020. While a 5-10% decline in housing prices is still significant, it’s nowhere near the possible 18% that Siddal had in mind.

Currently, CREA and other real estate boards have not reported significant declines in real estate prices, despite sales activity plummeting across the country. Not only has the pandemic resulted in fewer Canadians looking to purchase a property, but it has also delayed those looking to sell. Once restrictions of social gatherings and the threat of Coronavirus lifts, we may see momentum return to the real estate market on both the buyer and seller side.

Why We Likely Won’t See the Real Estate Bubble Pop

There are plenty of uncertain factors. For example, we don’t know how long social distancing measures will last in each province. We’re also unsure of how long it’ll take before we find a vaccine for Coronavirus. The longer social distancing is required and the longer a vaccine takes, the more negative effects we’ll see in the real estate market.

However, many factors point towards a healthy market once the COVID-19-era passes. This includes pent-up demand and supply, low-interest rates, and delayed housing inventory.

Pent-Up Demand and Supply

Many individuals hoping to buy or sell their home are waiting until Coronavirus ends. With the pandemic in place, it’s much harder to go through the whole process of hosting open houses and finding a home/buyer. This is one of the reasons why the price of residential units sold did not drop significantly or at all — because supply and demand for real estate declined in equal parts. As a result, it’s reasonable that sales activity will skyrocket once social distancing measures loosen up.

Further, the high cost of properties in cities such as Toronto and Vancouver is the result of a limited housing supply and high demand. The COVID-19 situation is neither reducing the demand nor increasing the supply — the ingredients required to pop the bubble. Instead, COVID-19 is reducing both demand and supply.

Low-Interest Rates Mean More Demand

When interest rates are low, demand for property goes up as it’s now cheaper to borrow money and purchase a property. Due to the Coronavirus pandemic, the Bank of Canada in March cut interest rates significantly and is currently holding it at 0.25%. This results in less costly mortgages (for the most part). Although we continue to see more uncertainty, these low-interest rates could drive even more demand in a post-COVID-19 world, meaning prices will only go higher if supply remains the same.

COVID-19 Has Also Stalled the Supply of New Homes

The construction of new homes is one way that the market can increase its supply of residential homes.  Although most construction is still permitted, the requirement for construction workers to socially distance themselves onsite has ultimately reduced productivity. In the prior mentioned report from CIBC, it estimates that social distancing regulations and the lag in overseas shipments have reduced construction productivity by 40%. This will ultimately result in a reduced supply of new housing.

What Factors Could Lead to Weaker Real Estate Prices?

Coronavirus has also birthed factors that could reduce demand to the point that prices may fall in the future. Due to the mass unemployment and rustles in the stock market, Canadians might prefer to delay their purchase of significant investments such as a home. Further, buyers who think that real estate prices will crash could be holding off until prices come down. Both of these factors could result in less demand. Although the unemployment numbers may point to a weaker economy, many of these jobs are layoffs. Companies that did lay off employees will likely rehire them once society recovers from the pandemic.

Many of the large Canadian banks predict that real estate prices will decline a few percentage points. This decline is possibly a market correction but not the bursting of a real estate bubble. Pent up demand, low-interest rates, and delayed new constructions could even result in higher real estate prices — not lower. There’s likely still time before a Coronavirus vaccine is found, but when it is, both buyers and sellers will be back in action!

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In this article, we explain these tools and look at how they can help you buy a home. The tools include the Home Buyers’ Plan, the new First-Time Homebuyers’ Incentive, and the various tax rebates and credits available to first-time homebuyers.

Home Buyers’ Plan: Borrowing from your RRSP

The Home Buyers’ Plan lets any first-time homebuyer buying or building a home to borrow up to $35,000 from their Registered Retirement Savings Plan (RRSP). This amount used to be $25,000 until March 19, 2019, when it was raised to $35,000. If you’re purchasing your home with someone else, like a significant other, each person can use the Home Buyers’ Plan for a total of $70,000.

Although it mentions “first-time” homebuyers, if you’ve previously participated in the plan, you may be able to do it again if your borrowing balance is 0 as of January 1st of the year. Just remember that every year that the money isn’t in your RRSP is another year that it’s not growing. Without the help of this appreciation, it could impact what you have ready for retirement.

Although withdrawing this money is tax-free, it has to be repaid within 15 years to remain so. The repayment period starts the second year after the year that the money is withdrawn. So funds withdrawn in 2019 have 2021 as the first year of repayment. The tax consequences of not paying back the loan within the allotted time could result in a hefty income tax.

Unlike mortgages and other loans, there are no consequences for paying back the money early.

First-Time Homebuyer Incentive: Sharing Equity with the Government

The First-Time Homebuyer Incentive (FTHBI) started on September 2nd, 2019 as part of the government’s national housing strategy. It’s expected to help Canadians fitting into a specific criterion reduce monthly mortgage payments by $286.

The government does this through a shared-equity mortgage program, where they provide a first-time homebuyer with 10% of the purchase price of a new home, or 5% of a resale home. This capital comes interest-free because it is not a loan. The government is actually purchasing part of the equity.

When the property is sold or after 25 years, the homebuyer must pay back either 10% or 5% of the home’s current market value. Thus, if the home declined in value, the homeowner pays back less than what they got. If the home’s value appreciated, they must pay back more.

For example, a homebuyer purchases a $100,000 new home and receives $10,000 (10%) from the FTHBI. If the home appreciates to $400,000 after 25 years or when they sell, they’ll have to pay back $40,000—10% of the market value after 25 years or at the time of the sale. One big benefit is that this amount can be paid back at any time, meaning you could pay it back when the property market is weaker to maximize the benefit.

As great as it sounds, there are severe limitations to this tool. To qualify for FTHBI, homebuyers must have a combined household income of $120,000 or less. The price of the mortgage plus the incentive amount also cannot exceed more than four times the buyers’ household income. This effectively limits the maximum purchase price of a qualified home to around $500,000. This likely rules out Vancouver or Toronto purchases, as even most condos in these cities have surpassed this maximum purchase price.

Another drawback of the program is that homebuyers using the plan with less than a 20% downpayment still need mortgage default insurance. If you have 10% of the purchase price ready and hope to get another 10% from FTHBI, this won’t help you wiggle your way out of default insurance. The FTHBI is almost like a second mortgage on your home—not part of your down payment.

Tax Rebates and Credits

In addition to tools that can help you get the money you need for a down payment or to reduce monthly mortgage payments, multiple tax rebates and credits can help avoid some of the costs of purchasing your first home.

First-Time Home Buyers’ Tax Credit

The First-Time Home Buyers’ Tax Credit came into effect in 2009. It provides a $5,000 non-refundable tax credit if you and the home you’re buying fit a certain criterion. The credit works out to a maximum of $750 back in your pocket.

To qualify, you and your spouse/common-law partner need to buy a qualifying home and must also have not lived in another home owned by you or your partner in the past four years. You and your partner also get a combined total of $5,000 tax credits. This means that regardless of whether it’s a solo or joint purchase, the maximum tax credit is $5,000.

HST/GST Rebate

The HST/GST housing rebate allows a homeowner to recover the GST or federal portion of HST from the purchase of their home or from any renovations that they made to it. To qualify, this home must be your primary place of residence, among other conditions. Depending on your province, the PST or provincial portion of the HST may also be recoverable.

Land Transfer Tax Rebate

If you’re a first-time homebuyer purchasing a home in British Columbia, Ontario, or Prince Edward Island, you could also recover some or all of the land transfer tax paid on your purchase. The recoverable amount depends on the specific province. The City of Toronto also provides a rebate on the city’s land transfer tax, in addition to the provincial one. The qualifications for each rebate differ depending on the province and whether you’re purchasing in the City of Toronto.

As a first-time homebuyer, many tools can help you purchase your first home. You can borrow from your RRSP through the Home Buyers’ Plan, split the equity of your home with the government via First-Time Homebuyer Incentive, or recover some money through various tax credits and rebates. Make sure to speak to an accountant and your realtor to make the best use of these tools.

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