Real estate in Canada - Long-term trends having a growing impact

April 21, 2017

Generally, the Canadian real estate market heats up along with the weather. As winter turns to spring, we in BDO's Real Estate & Construction practice want to offer our readers a high-level view of the major factors affecting the real estate market today, and their likely impact on the market over the coming year.

Most of the major forces affecting the real estate sector so far in 2017 are the same ones that were prevalent in 2016:

  1. The fluctuating dollar
  2. Foreign investment
  3. Affordability
  4. The US election

These are long-term trends, and the longer they persist, the greater will be their lasting implications. The dynamics occurring today are not only likely to continue – they're going to increase and accelerate, and they will increasingly affect local real estate markets in every part of the country.

In this article, we'll look at each of these in turn. What is important to remember is that, directly or indirectly, they all grow out of and contribute to the same transformative feature of today's real estate market: that is, its increasingly globalized inter-connections with the rest of the world. Canadian real estate is becoming more and more a part of the global real estate market.

1. The fluctuating dollar – the global attractor

Over the past year, the value of the loonie has bounced around, between 74¢ and 80¢ US, and showed similar volatility against other major currencies. In a financial world where movements of a fraction of a cent can cause a stir, this is the sort of thing investors notice.

A cheaper dollar makes Canada a more attractive place to think about, simply because an investor's foreign currency will go further here. Factor in our stable social, political, and economic environment, and it's not surprising that investors from the US and many other parts of the world would like to own a piece of Canada.

The easiest piece for them to buy is often real estate. If present trends persist, more money will flow into our real estate markets from abroad and, in turn, continue to drive up demand and prices. On the other hand, if the dollar should rise significantly, it could be a different story – international investors might choose to take a capital gain on their Canadian property, and invest the proceeds elsewhere. For now, it seems unlikely that the loonie will rise significantly in value for any sustained period.

2. Foreign investment – rising demand

When Canada's declining dollar and peaceful society stimulate foreign investors' interest in our real estate, that increases demand, which can then drive up prices in our real estate markets. To a great extent, that is what has been propping up real estate prices for several years, and this trend is likely to continue, in spite of efforts – such as the foreign buyer tax in Vancouver – to check it.

And as international interest continues, investors are looking for opportunities outside the traditional markets of Vancouver and Toronto – for instance, vacation properties in Newfoundland, the Maritimes and Manitoba. All told, the globalization of the Canadian real estate market is affecting markets from Gimli to Peggy's Cove in a significant and irreversible way.

3. Affordability – priced out

Rising real estate prices are having transformative effects on Canadian society as well. It's becoming difficult for local people to buy a home in their neighbourhood, or even to get into the real estate market at all. Young people in particular are having trouble starting out on their own – they're living longer with their parents, or renting apartments instead of buying a starter home, as their parents once did. In response, developers are building rental properties in places like downtown Toronto at a rate not seen for many years.

This is a different way of life for us in Canada, but it's an old story in other parts of the world. In essence, Toronto and Vancouver are becoming more like New York or London, Tokyo or Hong Kong. If people want to live in the centres of these cities, they have to rent – if they want to own a home, they have to live an hour-and-a-half away, and commute. Globalization, then, is not merely an economic phenomenon. It impacts our work-life balance on an unprecedented scale.

Affordability is also affecting the cost side of the real estate and construction market. Developers are finding it increasingly difficult to buy land, at several million dollars an acre, build houses on it, and sell them at a profit. Along with land prices, labour costs are rising as well. The flip side of the low-value loonie bringing foreign money in is the high-value US dollar that is pulling contractors and skilled labour out. If they can make more money working in the US, it reduces the supply of skilled labour here at home – and that in turn pushes the cost of that labour higher. Developers' profits are being squeezed, as a result, and their interest in constructing new homes and high-rises is diminishing. If this trend continues, it could restrict the supply of new properties, and drive up housing prices even faster.

4. The US election – uncertainty abounds

American political developments are impacting our real estate markets in a number of ways. On the one hand, the general uncertainty will make some cautious international investors appreciate the relative stability of Canada. Money that might have gone to Seattle or Boston may be diverted to Vancouver or Toronto, adding to the pressures we have already noted.

On the other hand, many of the policies that may be enacted by the new administration will have knock-on effects in Canada. President Trump has promised to initiate major federal investments in infrastructure. This would be a major attractor for Canadian contractors and skilled labour, with a significant impact on construction costs and housing prices here. Similarly, the US government's economic policies – such as the recent interest rate hike by the Federal Reserve, which may force up interest rates and the cost of a mortgage here in Canada – will influence the way international investors perceive the Canadian real estate market. If we remain attractive compared to the US, money will flow in. If the US grows more attractive, the flow into Canada could slow down, or even reverse. At the same time, “Buy American” provisions could make much of these aforementioned exporting benefits moot. On this one, time will tell.

Not your local real estate market anymore

It should be clear that all of the factors impacting the real estate market in 2017 also impact one another. The fluctuating dollar affects foreign investment inflows – foreign investment affects affordability, and so on. We can separate them in order to take a closer look at each one, but they are all part of the overarching phenomenon of globalization and interconnectivity.

More and more, local Canadian real estate markets are tied firmly to the world beyond our borders. Events in China or Germany can impact the price of condos in Victoria, or cottages in New Brunswick. The trend is growing in reach, and spreading well beyond the metropolitan areas of Toronto or the Lower Mainland.

For sound advice on how these trends could affect you in 2017, contact your local BDO office today or reach out to our National Real Estate & Construction Leader, Salmaan Alvi.

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