Is Investing in Canadian Real Estate Still a Good Idea?

Over the last few years, investors have been said to have played a significant role in the housing boom that took place in the Canadian real estate market – especially in major markets like Toronto and Vancouver.

In March 2024, statutory registry services firm Teranet released the latest Market Insight Report. It revealed that investors owned nearly one-quarter (23.7 per cent) of Ontario homes in 2023, down slightly from 25.2 per cent in 2022. While a majority (53 per cent) owned two properties, close to eight per cent owned 11 or more homes. Interestingly enough, many of these investors are listing their surplus homes.

What a difference a decade can make. In 2011, investors represented just a small percentage of overall residential real estate transactions.

But this trend has been occurring nationwide, too, for quite some time. Last year, Statistics Canada data confirmed that approximately one-fifth of all homes in the country are owned by investors. This figure is highly concentrated in condominiums, as investors hold between one-third and close to one-half of them. While this does lead to some questions on affordability, market conditions and capital flows, it has sparked concerns about the state of real estate investing for mom-and-pop homeowners.

So, with that being said, now that housing market conditions have stabilized and are creating a more balanced environment, be it peak interest rates or homeowners ready to list their homes for sale, are investment properties still a wise strategy?

Are Investment Properties Still a Good Idea in the Canadian Real Estate Market?

Canada has made progress on the inflation front, doing even better than its American counterparts. In March, the annual consumer price index (CPI) slowed to below three per cent, better than the US inflation rate of 3.5 per cent. Now, economists have stated that the nation’s inflationary pressures would be worse if real estate prices were factored into Statistics Canada’s methodology. Nevertheless, the inflation rate is still above the central bank’s two-per-cent target. However, with the Canadian economy expanding at a snail’s pace and the labour market coming into better balance, the Bank of Canada (BoC) is widely expected to pull the trigger on its first interest-rate cut this year.

Should the central bank ease monetary policy and begin cutting interest rates, will this trigger a rally in the Canadian real estate market? Monetary policymakers are concerned that the housing sector would rocket on lower interest rates, potentially reigniting price pressures. With a strong start to 2024, economists believe that the housing sector is poised for solid growth. According to the BoC’s Summary of Deliberations from the March meeting, officials “expressed concern that the housing market continued to pose upside risks to the inflation outlook.”

Today, interest rates are at their highest levels in more than two decades, with mortgage rates hovering around six per cent. This has significantly lifted borrowing costs across capital markets. While a quarter-point rate cut is unlikely to make a significant dent in business and consumer borrowing costs, it would be a move in the right direction for all market participants, experts say

Of course, rate cuts would be welcomed news for real estate investors because lower mortgage costs would encourage prospective homebuyers to return to the housing market.

According to the Canadian Real Estate Association (CREA), demand has picked up, with sales activity rising about 0.5 per cent between February and March. Additionally, the national average home price advanced two per cent year-over-year to just below $700,000. In the red-hot Toronto and Vancouver housing markets, the average sales price remains above $1 million amid tight inventories, robust demand, and modest new construction activities. Ultimately, the BoC halting its quantitative tightening (QT) program, which has been prevalent in the Canadian economy since February 2022, could impact the housing industry and the broader financial markets.

At the same time, some financial experts worry that rate cuts could resuscitate the inflation threat, potentially igniting a second wave and adding to Canada’s various economic hiccups. BoC policymakers have insisted that they are waiting for better inflation data to extend them more confidence before they cut rates.

Of course, if investors had purchased these homes in the last couple of years when mortgage rates were climbing, then they could possibly refinance these loans at a lower rate.

Expect the Best in This Housing Market?

Could the Canadian real estate market plunge in 2024?

The financial markets are betting on at least two rate cuts over the remainder of 2024, with investors potentially doubling down on their bets should the consumer price index (CPI) inch closer to the BoC’s two-per-cent target. This has market watchers anticipating solid growth in both the housing sector and the broader economy.

According to the Canada Mortgage and Housing Corporation (CMHC), home prices are forecasting higher prices amid solid demand fueled by strong population growth. “Sales are expected to surpass the past 10-year average levels but remain below the record levels of 2020 – 2021. This is reflective of decreased housing affordability,” the CMHC stated.

As for the broader economy, CMHC experts anticipate weak growth in 2024 and regained momentum in 2025 and 2026 “as interest rates decrease.”

Meanwhile, here is what the Royal Bank of Canada says about the economy for the rest of 2024:

“The economic backdrop in Canada should look a little better in the second half of 2024, contingent on the BoC’s move to lower interest rates. Consumers will drive the bulk of the pick-up in the back half of the year. Services sector spending will provide most of the lift as consumers start to reprioritize discretionary spending as inflationary pressures around essentials abate. Population growth also continues to add to consumer demand. Still, the rise will be slow as households remain cash-strapped. The household savings buffer is not evenly distributed among income brackets. Wage growth has shown signs of slowing as labour demand (job openings) cool and the unemployment rate rises.”

TD Bank forecasts a solid rebound in 2025 and 2026 following a slow year.

“Following an economic slowdown in 2024 and subsequent rebound in 2025 and 2026, long-term Canadian real GDP growth is expected to decelerate to around 1.8 per cent annually. This will be driven by solid population and labour force growth, while productivity growth lags behind,” the bank wrote in a research note.

Indeed, it will be a balancing for the Bank of Canada as it attempts to engineer a soft landing, keeping the labour market intact, fighting inflation, and averting a recession. So far, the institution has achieved all three objectives, but it remains to be seen if it can sustain the momentum.