Real estate prices continue to rise, leaving many households struggling to find a home. Increase of rates over the past two years should have lower housing prices substantially. However, this does not seem to be the case. So what are the real determinants of housing prices?
The following text presents two opposing trends. One concerns the impact of interest rates on real estate prices. Another suggests that strong immigration to Canada has maintained high prices, limiting impact of rising interest rates on housing prices.
Two perspectives
The impact of interest rates
During post-pandemic period, rates have increased very rapidly. From 2022 to 2023, they have increased tenfold, from .5% to 5%, as illustrated in the graph below.
On the other hand, house prices have not fallen much. In some regions, they even increased, while a more significant drop was expected due to rise of interest rates.
Rates raised very rapidly in 2022 and 2023, and it can be assumed that lack of time was responsible for keeping prices of houses high. But, il shoud be expected them to fall. Canada Mortgage and Housing Corporation (CMHC) estimated at the beginning of 2024 that approximately 2.2 million mortgages would be renewed over the next two years. This represents almost half of all mortgages currently in force in Canada. [1]
When these mortgages are renewed, rates will still be higher than during the pandemic, even with the decreases recently announced by the Bank of Canada. It is estimated that average payments will increase by 30% to 40%. Many properties will end up on the market with potential price decreases.
A continued rise in housing prices
The other perspective suggests a sustained increase in housing prices. In the long term, housing expenses would become increasingly important in household budgets. This hypothesis predicts a problem to access property for the youngest people.
Factors such as the growth of the immigrant population contribute to pushing up housing prices, so is the demographic structure. One might have thought that prices in larger markets such as Toronto or Montreal should be higher. However, markets with stronger growth in immigration have the highest prices.
How can this situation be explained? Growth of the immigrant population is not theorically limited. Where, in contrast, natural growth through births faces limitations. The opening of borders allows a population to grow at rates well above that of a natural growth rate. In a context of massive immigration, housing supply can’t expand at same rate than the population growth. This is precisely waht has caused prices to explode in Toronto and Vancouver.
The table below confirms this situation. It associates the growth of immigration in certain regions with housing prices. The proportion of immigrants in the census metropolitan area of Toronto was 47% in 2021 (latest data availabl.e). This indicates a very strong increase in immigration over the last 20 years, or 2,86 million immigrants, while the average price of the aggregate was $1,180,400. This proportion was 42% in Vancouver, or 1,089 million immigrants, while the average price of the aggregate was $1,274,400.
Prices seem to be determined by the proportion immigrants in a CMA. They are not determined by the size of the population. Average price in Vancouver is even higher than that of Toronto, where its population is more than half as small. The price in Montreal is less than half of Vancouver, where, even though, the population is almost twice as large.
In the CMAs of Montreal and Quebec, housing prices are much lower at $580,800 and $350,500. Consequently, the proportion of immigrants is also much lower, at 24.3% and 6.7% respectively.
Growth of the immigrant population in Canada
| Population | Proportion of the number of immigrants in 2021 | Population growth from 2019 to 2023 | Aggregate price 2nd quarter | |
|---|---|---|---|---|
| Canada | 40,097,761 | 23.0% | 7.1% | $809,200 |
| Quebec | 8,848,020 | 14.6% | 4.4% | $465,753 |
| Quebec (RMR) | 880 875 | 6.7% | 5.8% | $350,500 |
| Montreal (CMA) | 4,502,177 | 24.3% | 4.0% | $581,800 |
| Toronto (CMA) | 6,804,847 | 46.6% | 5.9% | $1,180,400 |
| Vancouver (CMA) | 2,971,853 | 41.8% | 9.4% | $1,274,400 |
- Notes: Immigrant status and period of immigration by mother tongue: Canada, provinces and territories, census metropolitan areas and census agglomerations including parts
- Annual Population Estimates, Census Divisions: Interactive Dashboard
- Annual Population Estimates, Census Metropolitan Areas and Census Agglomerations: Interactive Dashboard
- Royal Lepage House Price Study
Impact of high housing prices
High housing prices have consequences for social organisation. For families, governments should promote intergenerational housing. This will ensure a greater source of income in order to finance properties.
Living space will also be significantly reduced according to urban planning. Additionally, family size reduction and costs of buying a home will contribute to this change. Furthermore, high housing prices could also compromise the ability of younger generations to become homeowners and finance their retirement.
CMHC estimates that Canada will need to build 3.5 million additional homes. These are in addition to those already under construction by 2030. This is necessary to make housing affordable. It represents the construction of 5,8 million units. [2]
In this regard, programs have been put in place to meet the strong demand. These include the accessory construction program and the increase in the insured ceiling. There is also the possibility of depreciating a property over 30 years. However, these programs could be insufficient and would only allow 70,000 new constructions, in addition to the 235,000 initiated without the effet of these measures. A report recently published by Desjardins indicates that it took three decades to build 5,8 million of the last housing units in Canada. [3]
Governments have no choice but to do something to lower demand for housing. They can do this by reducing immigration targets that will reduce pressure on prices. (see my article entitled We must review Canadian immigration targets.) However, here again, we will have to wait many more years before the market can reach an equilibrium to make housing more affordable.
Conclusion
In Canada, increase in housing prices is due to massive immigration that has taken place in recent years. The fall in interest rates also contributes, but to a lesser extent.
Immigration policy have high associated costs, particularly its impact on housing prices. It has contributed to reducing the effectiveness of monetary policy in its role to contain inflationary pressures on housing prices. Rising prices are reflected in mortgage payments and interest charges.
It also contributes to reducing accessibility and compromises retirement financing for many people.
In the long term, the maintenance of high housing prices will impact social organization. It will affect the construction of certain types of housing. It will also influence urban planning.
Louis Bellemare
[1] Mortgage to renew? Discover our mortgage calculator February 2014, Radio-Canada
[2] Canada needs 22 million housing units by 2030, estimates CMHC, Radio-Canada
[3] The federal plan for housing construction will face obstacles, La Presse
Real estate prices continue to rise, leaving many households struggling to find a home. Increase of rates over the past two years should have lower housing prices substantially. However, this does not seem to be the case. So what are the real determinants of housing prices?
The following text presents two opposing trends. One concerns the impact of interest rates on real estate prices. Another suggests that strong immigration to Canada has maintained high prices, limiting impact of rising interest rates on housing prices.
Two perspectives
The impact of interest rates
During post-pandemic period, rates have increased very rapidly. From 2022 to 2023, they have increased tenfold, from .5% to 5%, as illustrated in the graph below.
On the other hand, house prices have not fallen much. In some regions, they even increased, while a more significant drop was expected due to rise of interest rates.
Rates raised very rapidly in 2022 and 2023, and it can be assumed that lack of time was responsible for keeping prices of houses high. But, il shoud be expected them to fall. Canada Mortgage and Housing Corporation (CMHC) estimated at the beginning of 2024 that approximately 2.2 million mortgages would be renewed over the next two years. This represents almost half of all mortgages currently in force in Canada. [1]
When these mortgages are renewed, rates will still be higher than during the pandemic, even with the decreases recently announced by the Bank of Canada. It is estimated that average payments will increase by 30% to 40%. Many properties will end up on the market with potential price decreases.
A continued rise in housing prices
The other perspective suggests a sustained increase in housing prices. In the long term, housing expenses would become increasingly important in household budgets. This hypothesis predicts a problem to access property for the youngest people.
Factors such as the growth of the immigrant population contribute to pushing up housing prices, so is the demographic structure. One might have thought that prices in larger markets such as Toronto or Montreal should be higher. However, markets with stronger growth in immigration have the highest prices.
How can this situation be explained? Growth of the immigrant population is not theorically limited. Where, in contrast, natural growth through births faces limitations. The opening of borders allows a population to grow at rates well above that of a natural growth rate. In a context of massive immigration, housing supply can’t expand at same rate than the population growth. This is precisely waht has caused prices to explode in Toronto and Vancouver.
The table below confirms this situation. It associates the growth of immigration in certain regions with housing prices. The proportion of immigrants in the census metropolitan area of Toronto was 47% in 2021 (latest data availabl.e). This indicates a very strong increase in immigration over the last 20 years, or 2,86 million immigrants, while the average price of the aggregate was $1,180,400. This proportion was 42% in Vancouver, or 1,089 million immigrants, while the average price of the aggregate was $1,274,400.
Prices seem to be determined by the proportion immigrants in a CMA. They are not determined by the size of the population. Average price in Vancouver is even higher than that of Toronto, where its population is more than half as small. The price in Montreal is less than half of Vancouver, where, even though, the population is almost twice as large.
In the CMAs of Montreal and Quebec, housing prices are much lower at $580,800 and $350,500. Consequently, the proportion of immigrants is also much lower, at 24.3% and 6.7% respectively.
Growth of the immigrant population in Canada
| Population | Proportion of the number of immigrants in 2021 | Population growth from 2019 to 2023 | Aggregate price 2nd quarter | |
|---|---|---|---|---|
| Canada | 40,097,761 | 23.0% | 7.1% | $809,200 |
| Quebec | 8,848,020 | 14.6% | 4.4% | $465,753 |
| Quebec (RMR) | 880 875 | 6.7% | 5.8% | $350,500 |
| Montreal (CMA) | 4,502,177 | 24.3% | 4.0% | $581,800 |
| Toronto (CMA) | 6,804,847 | 46.6% | 5.9% | $1,180,400 |
| Vancouver (CMA) | 2,971,853 | 41.8% | 9.4% | $1,274,400 |
- Notes: Immigrant status and period of immigration by mother tongue: Canada, provinces and territories, census metropolitan areas and census agglomerations including parts
- Annual Population Estimates, Census Divisions: Interactive Dashboard
- Annual Population Estimates, Census Metropolitan Areas and Census Agglomerations: Interactive Dashboard
- Royal Lepage House Price Study
Impact of high housing prices
High housing prices have consequences for social organisation. For families, governments should promote intergenerational housing. This will ensure a greater source of income in order to finance properties.
Living space will also be significantly reduced according to urban planning. Additionally, family size reduction and costs of buying a home will contribute to this change. Furthermore, high housing prices could also compromise the ability of younger generations to become homeowners and finance their retirement.
CMHC estimates that Canada will need to build 3.5 million additional homes. These are in addition to those already under construction by 2030. This is necessary to make housing affordable. It represents the construction of 5,8 million units. [2]
In this regard, programs have been put in place to meet the strong demand. These include the accessory construction program and the increase in the insured ceiling. There is also the possibility of depreciating a property over 30 years. However, these programs could be insufficient and would only allow 70,000 new constructions, in addition to the 235,000 initiated without the effet of these measures. A report recently published by Desjardins indicates that it took three decades to build 5,8 million of the last housing units in Canada. [3]
Governments have no choice but to do something to lower demand for housing. They can do this by reducing immigration targets that will reduce pressure on prices. (see my article entitled We must review Canadian immigration targets.) However, here again, we will have to wait many more years before the market can reach an equilibrium to make housing more affordable.
Conclusion
In Canada, increase in housing prices is due to massive immigration that has taken place in recent years. The fall in interest rates also contributes, but to a lesser extent.
Immigration policy have high associated costs, particularly its impact on housing prices. It has contributed to reducing the effectiveness of monetary policy in its role to contain inflationary pressures on housing prices. Rising prices are reflected in mortgage payments and interest charges.
It also contributes to reducing accessibility and compromises retirement financing for many people.
In the long term, the maintenance of high housing prices will impact social organization. It will affect the construction of certain types of housing. It will also influence urban planning.
Louis Bellemare
[1] Mortgage to renew? Discover our mortgage calculator February 2014, Radio-Canada
[2] Canada needs 22 million housing units by 2030, estimates CMHC, Radio-Canada
[3] The federal plan for housing construction will face obstacles, La Presse
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