The Changing Landscape: Trends in the Canadian Real Estate Market

April 27, 2016

Canadian consumer debt is on the rise, recently surpassing that of the average American. Yet despite uncertainty surrounding the potential economic impacts of reduced consumer spending, activity in the real estate market is still on the rise.

The average price of a home in Canada has risen to over $470,000 and continues to climb, while demand exceeds supply in many local markets. With consumer spending down and the dollar sliding lower, what’s spurring theses historic levels of activity?

Low Dollar Driving Foreign Investment

Since the 2008 credit crunch, foreign investors have looked to Canada as a safe, stable place to bring their money. Now, with the Canadian dollar performing considerably under par, investment from foreign sources has accelerated.

Buyers who might have once bought property in the United States are coming to Canada to purchase both residential and commercial properties. Buyers from China are the biggest players, with sales to Chinese investors accounting for an estimated 14% of new condo sales in Toronto, and up to a third of purchases in Vancouver. There is also strong interest from buyers located in India, the middle east, and the United States. Even Europeans, made hesitant by economic uncertainty in the “Euro zone,” are choosing Canadian properties over real estate in traditional locations like Germany, France, or Italy.

Despite the modest recent increases in the dollar, the exchange rate allows investors to overspend by 10-15% or more and still feel that they’ve received a bargain. As a result, competition for properties is fierce, especially in hot markets like Toronto and Vancouver where properties consistently sell above asking prices. Other areas such as the Maritimes are working to attract more interest by actively marketing their vacation properties as an investment for foreign buyers.

Strong Consumer Confidence

The Canadian real estate market is up 15% from last year, and foreign investors aren’t the only driving factor. Across the country, consumer confidence in the real estate market is high and many Canadians are eager to buy.

March 2016 was a record month for Canadian housing sales, making it clear that Canadians have money to spend on property. Sales are strong across most of the country, with Toronto and Vancouver experiencing the greatest levels of activity. Despite economic fluctuations and rising consumer debt, many buyers are even willing to overpay to secure the right home or condo, reflecting the “close to your heart” nature of real estate purchases.

This activity, combined with the market’s strength over the past fifteen years, has led to speculation that the Canadian real estate market is a bubble ready to pop. Yet the core factors that drive the real estate market remain strong. This is not an artificially built market, as in the U.S. prior to their housing crash. The current prices and activity are built on real capital, with demand from consumers and investors alike outpacing current supply. All signs point to strong continued activity.

Downturn in Oil Prices Creating Localised Pain

While areas like Vancouver and Toronto are benefitting from the ripple-effects of falling oil prices, the situation across Alberta is more dire. The area’s dependence on the energy sector led to a strong market in past years, but the recent downturn has had dramatic impacts on both the local economy and real estate activity.

In Calgary, developers had been planning for an influx of oil sands workers and years of continued growth. Because of the many projects underway, the number of cranes currently operating in Calgary rivals that of the booming Toronto market; however, unlike in Toronto, there’s no demand for these developments once they’re completed. There are already double-digit vacancies in existing buildings and this challenge will only be exacerbated as individuals and families go elsewhere to seek their fortunes.

Millennial Generation Shaping the Market

As the oldest members of the millennial generation age into their prime home-buying years, the real estate industry is taking notice. This generation has the potential to become the most powerful buying cohort in recent history—but for many buying a house isn’t yet a priority.

Millennials as a group are more interested in living downtown, walking to work, and having a short commute; many don’t own a car, and prefer not to deal with the expense and hassle that come with driving. These desires, and millennials’ live-play-work mindset, are shaping current property developments. With young couples looking to stay downtown, developers aren’t as interested in buying farmland to create sprawling suburbs. The condo market is also moving away from sprawling three and four bedroom units, as these expensive properties with their high condo fees are becoming increasingly hard to sell. Instead, condo developments are focused on urban living: small spaces in central locations with few frills and lower prices that aim to reduce
the barrier to entry for first-time buyers.

Lower incomes and the rising prevalence of contract work over permanent full-time employment has also led many millennials to remain renters. While some millennials may hope for a reduction in home prices in the next few years, many may remain renters for life. To respond to this shift in demand, developers are building more apartment units, despite the longer holding periods and timeframes required to turn a profit.

The shift in demand from the millennial generation is also exerting pressure on the commercial real estate market. In the past twenty years, the trend was for companies to move outside major metropolitan areas to lower overheads. However, with many in the millennial generation not owning cars and shying away from long commutes, an office location outside of the downtown core is becoming a barrier to attracting and retaining top talent. As a result, many organizations are moving back to the city, resulting in an increased demand for urban commercial properties.

Looking Ahead

While the future of the Canadian real estate market looks bright, the dollar is going to continue to play a significant role in determining real estate activity moving forward. A falling dollar may drive a further increase in foreign investment in Canadian real estate, though the benefits of that activity would likely be mitigated in part by other economic impacts in local markets.

In contrast, a rising dollar or a dollar back at par would cool foreign investment, but Canadians still have capital to spend and a strong interest in real estate here at home.

It’s clear that the Canadian real estate market is evolving, with shifts in demand and buyer patterns creating new trends that will affect the future landscape of this great country. Much of this change is positive, and signs point to continued strong growth and investment in the Canadian real estate market for years to come.

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To learn more, contact your local BDO office or:

Salmaan Alvi
Partner, National Real Estate and Construction Leader
905 946 5403

About BDO

One of the nation’s leading accounting firms, BDO Canada provides assurance, accounting, tax, and advisory services. As a member of the BDO international network, which spans more than 150 countries and 1,400 offices, BDO provides seamless and consistent cross-border services to clients with international needs.

About BDO’s Real Estate and Construction Practice

BDO’s Real Estate and Construction team has the knowledge,
expertise, and skills to serve your organization. Whether you require advice, a comprehensive tax reorganization or assistance navigating the ever changing complex accounting standards under ASPE or IFRS, we are available to help. Our team can also provide advice on structuring your latest real estate venture, and work with you to take your company, partnership or real estate portfolio public
through a REIT.