Real estate investments in Canada. Full Detailed guide.
Canada: real estate winding down until the next boom?
House prices in Canada’s eleven major cities rose by just 1.95 percent in 2019 and actually fell by 0.32 percent when adjusted for inflation, based on figures from Teranet – National Bank of Canada.
This is a clear slowdown, and the weakest performance since 2008 when house prices declined by 0.79 percent. House prices rose by a minuscule 0.32 percent (0.14 percent inflation-adjusted) in the last quarter of 2019.
However, property rates are likely to rise soon. Construction has fallen, inventory is low, but demand is rising rapidly, partly in response to strong immigration.
That is not apparent to date (Canadian Real Estate Industry figures):
- Apartments recorded average gains of 3.35 percent in 2019 (1.05 percent inflation-adjusted).
- On average, single-story family home prices increased by 3.32 percent in 2019 (0.97 percent inflation-adjusted).
- Two-story single family home prices rose 3.09 percent (0.79 percent inflation-adjusted).
- Townhouse prices rose by 2.55 percent on average during the same timeframe (0.27 percent inflation-adjusted).
Of the 11 major cities in Canada, Ottawa’s house prices increased highest throughout 2019, followed by Halifax, Montreal, Hamilton and Toronto. Minimal house price rises were seen in Quebec, Victoria and Winnipeg.
House prices fell in Vancouver, Edmonton and Calgary.
Why house prices are expected to rise soon
The central bank has taken concerted action to reduce risky purchases – to raise mortgage downpayments and to decrease amortization periods. This has culminated in a sharp decline over the last two years. However, competition is rising, inventories are decreasing and development is declining. The real estate listings available for purchase are now at a 12-year low, based on CREA figures.
In December 2019, sales increased 22.7 percent from the previous year, according to the CREA Statistical Survey. Transactions surpassed the previous year’s amount in most of Canada, including all of the largest urban markets. Total sales for the whole year 2019 were projected at 486,800 units, up 6.2 percent from the previous year.
The national average home price was CA$ 500,200 (US$ 376,215) in 2019 , up by a modest 2.3 percent from the previous year, according to CREA. British Columbia and Ontario had the most expensive housing markets in the world, at average prices of CA$ 699,300 (US$ 525,965) and CA$ 606,400 (US$ 456,092) respectively.
The Canadian economy was reported to have grown by just over 1.7% in 2019, mainly due to the beleaguered oil and gas industry, along with the US-China trade tensions. Bank of Canada expects the country’s economic growth to remain low this year, with a forecast GDP growth of 1.6 percent, before slightly rebounding to 2 percent in 2021.
There are almost no restrictions on foreign buyers of property in Canada.
Rental returns to Toronto are modest
Rental returns on Montreal apartments continue to outpace those in Toronto. In recent years, we’ve found that even with a 120 square feet wide. m. apartment in Montreal, you are likely to earn a gross rental yield of more than 4.5 percent for your investment. If you own a tiny 60 square flat. m. you ‘re likely to make a return of around 6% in Montreal and rent it out. In this low-return age, in a low-risk nation like Canada, the yield is very appropriate. Unfortunately, though, this year, we have no details on yields for Montreal, so to say this, we are depending on the extrapolation of previous years’ estimates.
In Toronto, average rental yields are lower, from 3.9% to 5.5%, often even lower. (Read here about Toronto real estate market). Taking into account the fact that we are offering gross figures – it could be expected that net yields would be 2% lower.
We continue to find it hard to gather data on Vancouver’s yields.
The cost of purchases in Canada is generally fair. The Canadian property market is cooling down.
Transaction costs are usually low
Total costs and property purchase taxes are approximately 4.7% to 11% of the value of the property. Transfer Tax in each province varies from 0.5 percent to 2 percent. Usually, the fee of the real estate agent is 7 percent on the first CAD100,000 (US$ 88,495) of the sale price and 3 percent of the rest, plus 6 percent of the Goods and Services Tax (GST). Total roundtrip costs are higher for new and renovated houses due to an extra 6 percent GST.
Landlord and Occupant Tenant
Tenant protection laws are strong
Rent: Initial rent can be freely negotiated in all provinces, except in some provinces such as Quebec, where the rent originally negotiated may be contested if it is greater than the rent charged by the same landlord for the same apartment in the previous 12 months.
Tenant Security: The arrangement can not be terminated by the owner within the period of the fixed-term lease (usually one year), except for good reason (e.g. non-payment of rent by the tenant, illegal activity by the tenant, etc.).
Subleasing requires written permission from the landlord, but this consent may not be unreasonably withheld. However, the landlord may rely on the screening of potential new tenants and may refuse them on the basis of financial risk.
Oilpatch woes adversely affecting the Canadian economy
It is projected that the Canadian economy grew by just about 1.7% in 2019, a decline mainly due to the beleaguered oil and gas industry, along with the US-China trade tensions.
Canada’s oil and gas industry is expected to continue to struggle this year as a result of the growing demand differentials between US benchmark oil prices and Western Canadian Select (WCS) heavy crude oil and the potential negative effects of the corona virus outbreak.
In order to stop the spread of the virus, people are now advised to restrict or cancel their journeys, especially to China, which is expected to reduce fuel demand.
Bank of Canada expects the country’s economic growth to remain low this year, with a forecast GDP growth of 1.6 percent, before slightly rebounding to 2 percent in 2021.
The government has boosted public spending, reduced certain rates, and boosted child care, among others.
The downside is that the budget deficit is swelling.
The government recently announced that the budget deficit for the 2019-20 fiscal year was estimated at about CA$ 26.6 billion (US$ 20.2 billion). The federal government has been reporting deficits every year since 2015, amid sustained economic growth.
The deficit is expected to peak at CA$28.1 billion ( US$ 21.4 billion) in the 2020–21 fiscal year, before falling to CA$11.6 billion ( US$ 8.6 billion) in 2024–25.
The debt-to -GDP ratio of Canada declined to 31 percent in fiscal year 2019-20, from 30.8 percent in the previous year. It is projected to remain at that point until the end of 2021.
The Bank of Canada expects inflation to stick around the 2 % target this year, with some variations due to energy price volatility.
In January 2020, national unemployment was 5.5 percent, down from 5.6 percent in the previous month and 5.8 percent in the previous year, according to Statistics Canada.
In the October 2019 elections, Justin Trudeau’s Liberal Party remained in power but fell short of a clear majority, in the wake of a series of scandals that rocked his first term.