The real estate cycle and property value

If you’re an aspiring or existing homeowner, you’re aware of the significant growth in the real estate market over the past two decades. While this growth has benefited some home sellers with higher sale proceeds, it also created challenges for first time home buyers. One important question you may have been wondering is— “what’s driving the real estate prices?”.

Understanding the factors that affect real estate prices is important knowledge in this ever-changing market. In the following topics below, we’ll cover the four major factors that affect real estate prices in Canada, giving a clearer understanding of the relationship between the housing market and economics.

Economic Factors

Interest Rates

The interest rates play a significant role in the real estate market. Think about it in the same manner as demand-pull inflation. When the Bank of Canada sets a lower policy interest rate (not to be confused with mortgage interest rates), borrowing becomes more affordable, prompting a higher demand for homes which eventually pushes home prices upward. In contrast, when interest rates go up, borrowing cost also increases, driving a lower demand and pulling home prices downward.

Over the past several years prior to 2022, the Bank of Canada has maintained a low interest. This caused increased activities among homebuyers, which resulted in growing real estate prices across Canada, especially the major cities.

Canadian job market and income level

The health of the Canadian economy, as typically reflected in Canada’s job market and income levels, strongly impacts the real estate market. A robust job market and increasing incomes boost people’s confidence, encouraging them to buy homes which eventually drives prices. On the other hand, when there’s an economic downturn and job layoffs happen, homebuyer confidence in purchasing drops, leading to lower home prices.

We see this trend in bigger cities like Toronto and Vancouver, where growing job markets and increasing average incomes have created a higher demand for housing, leading to home price appreciation.

Supply and Demand

Housing inventory

One big factor that affects real estate prices is housing supply, which includes pre-constructions, newly built homes, and existing properties. When the housing supply is low compared to demand, home prices tend to increase, while an oversupply can result in a potential decline in home prices. You might ask, what influences housing supply? Generally, this can include construction cost (and raw materials), provincial housing policies and regulation, land availability, and municipal policies.

Population Growth

Immigration and population growth also play a role in real estate prices. When these two factors grow and outpace the number of homes being built, a supply shortage occurs. This lack of supply then pushes upward pressure on house prices. Conversely, a decline in population and immigration growth can lead to lower demand in housing, resulting in a potential decline in home prices.

Between 2016 and 2021, Canada welcomed over 1.3 million new immigrants, marking the highest number of new immigrants recorded in the Canadian census. While this may be an indication of an upward trend for home prices, it’s important to understand other factors that can also influence real estate prices.

Provincial and Regional Differences

Provincial and regional differences have a significant effect on real estate prices, which includes factors such as job opportunities, economic policies and conditions, and lifestyle preferences. Typically, big urban centers with growing economies tend to experience higher price appreciation due to strong housing demand and limited supply, while smaller rural areas have more affordable housing markets.

For instance, cities like Toronto and Vancouver have witnessed significant growth in home prices due to high demand and short supply for housing, while smaller surrounding cities and towns offer more affordable housing options.

Economic Indicators

Some economic indicators such as inflation rates, GDP, consumer debt, and consumer sentiment can also impact real estate prices. A strong economy with steady growth and low inflation generally drives an increased housing market environment. For example, cities with strong economic indicators, such as Calgary and Edmonton during the oil boom, experienced a strong housing demand and subsequent price appreciation.

Canada’s Government Policies and Regulations

Mortgage Policies

Mortgage regulations imposed by the federal government can impact the real estate market. For example, stricter lending requirements can reduce buying power, limiting demand and slowing price growth for houses in any given market. These measures aim to ensure market stability and prevent excessive borrowing from home buyers.

An example is the stress test in 2016 implemented by the government of Canada. The stress test was placed to prevent home buyers from borrowing a mortgage they may struggle to pay if their situation worsens. While this measure slows down demand in high-demand markets, it helps maintain market stability.

Land Use and Zoning Policies

The government's policies related to land use, zoning, and development regulations also impact real estate prices. Restrictive zoning policies and bylaws, such as limits on high-density construction and strict land development requirements for commercial or residential purposes, can limit housing supply and drive price appreciation.

Foreign Buyers and Speculation Taxes

Government measures directed at foreign buyers, such as non-resident taxes and speculation taxes, can impact the real estate market by dampening demand and stabilizing high real estate prices. These policies aim to address concerns about house affordability, speculative activity, and the influence of foreign investment on local housing markets. For instance, the introduction of foreign buyer taxes in British Columbia and Ontario in recent years aims to curb down speculative activity from foreign buyers that lead to higher affordability.

Mixing the pieces together

As you can see, real estate prices in Canada are contingent on a multitude of pieces that cover both economic and market dynamics. Understanding the relationship between interest rates, employment levels, population growth, housing supply, and government policies is crucial for comprehending the complexities of the Canadian housing market.

Whether you’re considering buying a home or already own one, staying informed can help you make educated decisions. In addition, this knowledge can help you strategically plan your finances, ultimately helping you navigate this rapidly evolving market with confidence.

Preparing to buy your first home? Understanding the real estate cycle and how it impacts the home buying process will help you make informed decisions as you navigate the market. We’ll cover what you need to know about the real estate world, so you can enter the market with confidence when the time is right for you.

The real estate market moves in a cycle, with ups and downs that recur every few years (although they may seem new or unique). To better understand this pattern, we first have to discuss the four real estate cycle phases: recovery, expansion, hyper supply, and recession. Often these phases are widespread and affect all of Canada. There may also be times when certain provinces linger in one period longer than other provinces. This depends on key factors like the economy, interest rates, and other factors, which we’ll discuss later. For now, let’s get into the unique perks and challenges each phase can present when it’s time to purchase your first home.

The real estate cycle phases:

Phase 1: Recovery

Since it’s cyclical, there’s no definite beginning or end to the real estate cycle, but most economists start with the recovery phase. This is the moment after a recession when the market begins to strengthen again. In this phase, housing demand will increase (albeit slowly), while home prices may rise or remain flat as the market gradually shifts into a buyer’s market. If you haven’t heard the terms buyer’s market and seller’s market before, it’s pretty straightforward. A buyer’s market means there are more homes for sale than there are buyers. In a seller’s market, there are more buyers than properties for sale. If you’re looking to buy your first home, doing so in a buyer’s market ensures you’ll have plenty of options to choose from.

Note, the recovery phase isn’t technically considered a buyer’s market yet (that’s the hyper supply phase, which we’ll cover soon). Compared to the recession phase though, more properties will appear on the market for lower prices. So, when house-hunting, you may see a wider range of homes within your budget, and find it easier to negotiate with sellers.

There are some other interesting features you may hear about during this phase, like low construction rates and a low percentage of vacant rental units, which is called a vacancy rate. When monitoring the real estate cycle, experts usually also discuss changes in the absorption rate, which refers to the rate of homes being sold in a specific real estate market during a certain time period. During the recovery phase, the absorption rate is considered moderate.

Phase 2: Expansion

Compared to the recovery phase, it’s far easier to recognize when the market is in expansion and the economy is picking up pace. At this point, both housing supply and demand are rising quickly and the market is now expanding—having recovered from the previous recession. The increased supply and demand causes the construction rate to rise and the vacancy rate to lower. The absorption rate (or the rate of homes sold in a certain market) remains moderate.

As renters and home buyers regain confidence in the market, competition for homes increases and properties start leaving the market quicker. With so many potential buyers, sellers can be more selective, which is why this period is often called a seller’s market. While you may be hesitant to shop for a home at this time, you can still find a place you love even when the market favours sellers. Set yourself up to succeed by being prepared to act fast and getting pre-approved before you start house-hunting, so you can get the ball rolling faster once you’ve found your perfect home.

Phase 3: Hyper Supply

The hyper supply phase, also known as the oversupply phase, is a full-blown buyer’s market. Often, it’s caused by an economic shift that reduces demand for real estate, but it can also be a result of too much property development and expansion. In this phase, more homes are being built than sold, as there is far more supply than demand. With so many properties to choose from and fewer shoppers ready to buy, the few buyers left will have their pick of the properties available. If you’re searching for a home at this time, you may find sellers are more inclined to negotiate with you on your offer, whether you choose to make your offer conditional on financing, a home inspection, and whether your current home sells. Plus, since sellers are looking to encourage more sales, home prices may lower.

Since the market is slowly heading towards a recession, you’ll notice a dip in the absorption rate, although vacancy rates rise significantly, and construction rates are peaking.

Phase 4: Recession

This final stage offers some much-needed breathing room from the previous phases, where competition was higher and homes were selling quicker. If you keep an eye on the market during a recession, you’ll see more properties up for sale and notice they’re spending longer on the market. That’s because there’s an excess of housing supply and too little demand. The excess in housing supply will cause construction to slow as vacancy rates continue to increase.

With slower economic growth and the rising cost of living, Canadians may find themselves with less disposable income to spend on real estate. However, if you’re in the financial position to do so, a recession can actually be an ideal time to buy a home. Not only will you have a larger selection of homes to choose from (and potentially lower prices), but you may also be able to take more time in your search to find the right home for you.

Factors that impact the real estate cycle

Interest rates, the state of the national and global economy, and even global crises are just a few of the many factors that impact the real estate cycle. These external influences can all affect the length of an entire real estate cycle and how long each phase of the cycle lasts.

Canada’s economy plays a key role in its real estate market. When the economy is thriving, the same is often true for the real estate market. One of the reasons why is that economic shifts affect how confident people feel about their purchases and how often they buy. You may even notice this in your own spending habits. In a sluggish economy or a period of high inflation, you may find yourself penny-pinching a little more or even holding off on larger purchases, like a home, until the economy recovers. Conversely, when the economy is booming, you may find yourself spending more confidently, whether by treating yourself to takeout a few times a week or taking the leap into homeownership.

The annual real estate seasons

While the real estate cycle takes place over a span of years, the market also goes through a mini-cycle each year. Buying a home in April can be a very different experience from purchasing in fall or in the heart of winter. While spring and summer typically see an uptick in home sales, the colder months often see a “colder” or slow-moving market with less home sales. This pattern can change from year to year though, and it’s not uncommon to see a “hot” market in winter or a “cooler” summer season. Despite fluctuations, it’s still a good idea to get familiar with the general seasonal trends throughout the year, so you can plan your home purchase for an optimal time.

January to March

January to March is often seen as the best time to make an offer on a home—and for good reason. Prices are often the lowest and properties aren’t selling as quickly. So, compared to other points of the year, sellers may be more willing to negotiate home prices and other conditions of your offer.

April to June

With the arrival of spring, the housing market picks up a frenzied pace. Property prices rise and more homes go up for sale. Home prices often peak around June when there are more people looking to purchase and move in before summer. Due to the increase in potential home buyers, you could have more competition on your offers and bids. So, it’s best to act quickly once you’ve found the right place for you.

July to September

Starting in July, sales begin slowing and prices stop rising. Though this season is less popular, it can still be a great time to buy. With more homes on the market, sellers may be more flexible and willing to meet your demands, as they’ll be looking to sell quickly.

October to December

By the time the colder months roll around, the market has cooled off significantly. The holiday season sees the lowest amount of home sales. This could be another great season to purchase, because sellers often lower their prices to generate more interest.

When is the best time to buy a home?

There’s no one-size-fits-all answer—the right time to purchase is when you’re able to comfortably cover the cost. You can still find a great home even when the market seems slow-moving, so you don’t have to limit your home search to certain seasons or phases of the real estate cycle. That said, keeping your pulse on the market never hurts, and you can do so with resources like Zolo. With Zolo, you can search for properties in the areas you’re interested in and set your price range to view listings that fit your budget.

The bottom line

Before you start browsing real estate listings, be sure to shop around for a mortgage lender you’re happy with. When selecting your provider, it’s important to review more than just the offered mortgage rate, but to also ensure that the mortgage terms and conditions (including prepayment options) work for you. A mortgage can last for up to 30 years, and although some parts of the mortgage process are the same with every provider, there are some differences that could impact your experience.

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