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Canadian two-storey house prices rose 9.07% this year. Too much, says the CMHC

Last Updated: November 30, 2015

House prices in Canada just cannot go on rising forever.  Or can they?

House prices in Canada’s eleven major cities rose by 5.64% during the year to end-Q3 2015 (4.56% inflation-adjusted), based on figures from Teranet – National Bank of Canada. And these price rises have been accelerating, with annual price growth of 4.73% (3.49% inflation-adjusted) during the first quarter, followed by 5.06% (3.98% inflation-adjusted) in the second quarter. The central bank has taken action repeatedly, but the house prices still spiral up, as if nothing can stop them.

Serious people who understand these things have been issuing dire warnings.  The Canada Mortgage and Housing Corporation (CMHC) recently made clear that it felt that Canadian major cities' housing markets are mostly overvalued

“In 11 of the 15 centers covered by the Housing Market Assessment (HMA) [there] is overvaluation," said Bob Dugan, CMHC's Chief Economist.

The CMHC highlighted its concern about Toronto, where "the continued rise in house prices has not been matched by growth in economic and demographic fundamentals", and also Montreal and Quebec, though the report concluded that there was little evidence of problematic conditions in Vancouver or Victoria.

According to the Canadian Real Estate Association (CREA):
  • The average price of a two-storey single family home increased by 9.07% y-o-y to September 2015.
  • The national average price of a one-storey single family home rose by 6.48% during the year to September 2015.
  • Townhouses / row houses prices increased by 4.40% on average.
  • Apartment prices increased by 4.22% on average.

CREA noted that the national average price rise was mainly caused by increased sales in Greater Vancouver and Greater Toronto, Canada's most active and expensive housing markets. When these two are excluded, the annual average price gain slowed to 2.9%.

There have been big regional variations:
  • Tight housing supply in Greater Toronto Area (GTA) and Greater Vancouver, plus low interest rates, pushed their house prices upward
  • The oil price slump hit oil-producing areas such as Calgary, dragging house prices down

Canada house pricesOf Canada's eleven major cities, seven experienced house price rises during the year to end-September 2015.  Hamilton's housing rose most (10.56%), followed by Vancouver (10.43%), Toronto (8.65%), and Victoria (5.93%).

House prices rose less in Edmonton (0.80%), Calgary (0.30%), and Ottawa (0.22%).

House prices fell in Quebec (-2.86%), Winnipeg (-2.26%), Halifax (-0.21%), and Montreal (-0.01%).
Rental Yields Last Updated: November 30, 2015

Rental incomes in Canada – Montreal yields 6.1% to 6.8%, Toronto yields from 4.2% to 5.6%

"Situation normal" for rental returns in Canada - returns on apartments in Montreal outpace those in Toronto. What is perhaps more surprising is how well these rental yields are holding up, remaining firmly in the satisfactory range. If you own a small apartment of 65 sq. m. in Montreal and rent it out, you are likely to make a return of around 6.8%. In this low-return era, in a low-risk country such as Canada, that is a really acceptable, not to say enticing, yield.

Even on a largish 120 sq. m. apartment in Montreal, you are likely to earn a gross rental return of 6.3%.

In Toronto, gross rental yields are lower, at between 4.2% to 5.6%. Taking account of the fact that we give gross figures - a guess might be that net yields would be 2% lower - then obviously the difference in returns between Montreal and Toronto is really significant.

If you are looking for rental returns, Montreal is the city that you want.

Meanwhile, we find it hard to collect yields figures for Vancouver, because of the habit of listings per room rather than per size.

Read Rental Yields »

Taxes and Costs Last Updated: November 30, 2015

Taxes are generally high

Rental Income: Gross rental income is subject to a fixed 25% tax, withheld by the tenant.

However, nonresidents can elect to pay under the section 216 of the Income Tax Act, wherein they will be liable to pay tax on their net income at progressive federal rates. Nonresidents electing under section 216 are also liable to pay 48% surtax.

Capital Gains: Only 50% of the capital gains are liable to tax. Capital gains are computed by deducting the costs incurred in selling and purchasing the property, capital expenditures, and such costs as additions and improvements in the property.

Inheritance: There is no inheritance or estate tax in Canada.

Residents: Canadian residents are subject to Canadian income tax on their worldwide income. Income is taxed at the federal level and at the provincial level.

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Buying Guide Last Updated: November 30, 2015

Transaction costs are usually low

Total costs and taxes for buying properties amount to around 4.7% to 11% of the value of the property. Transfer Tax differs in each province, ranging from 0.5% to 2%. Typically, real estate agent's commission is 7% on the first CAD100,000(US$88,495) of the sale price and 3% on the remainder, plus 6% Goods and Services Tax (GST). Total roundtrip costs are higher for new and renovated houses because of the additional 6% GST.

Read Buying Guide »

Landlord and Tenant Last Updated: November 30, 2015

Tenant protection laws are strong

Canadian tenancy institutions are pro-tenant.

Rent: The initial rent can be freely negotiated in all provinces, except in some provinces like Quebec, where initially negotiated rents can be appealed if they are higher than a rent charged by the same landlord for the same apartment within the previous 12 months.

Tenant Security: The contract cannot be terminated by the landlord within the duration of the fixed-term lease (usually one year), except for cause (e.g., tenant's non-payment of rent, tenant conducting illegal activity, and so on).

Subleasing needs a written permission from the landlord but this permission may not be unreasonably withheld. However, the landlord can insist on screening the prospective new tenants and may reject them on the basis of financial risk.

Read Landlord and Tenant »

ECONOMIC GROWTH Last Updated: November 30, 2015

Economic rebound in 2016

Canada gdp inflationCanada entered recession in the first half of 2015, with GDP contracting 0.8% in Q1, followed by a 0.5% drop in Q2, according to Statistics Canada (Statscan). But two consecutive quarters contraction, many economists don't seem too bothered.

“The Canadian economy does not yet appear to be in recession, despite satisfying the commonly employed definition of having experienced two consecutive quarters of declining GDP,” according to Moody Analytics' Associate Economist Alexander Lowy.

As Bank of Montreal's Chief Economist Doug Porter describe the situation, it is indeed the "Best. Recession. Ever".  Several reasons explain why.

First, the economic contractions for the past two quarters were tiny. Real GDP fell 0.1% during the second quarter (quarterly basis), following a 0.2% contraction in the first quarter. In June 2015 GDP actually rose by 0.5% m-o-m at a time when there is an oil price slump, and despite Canada's energy sector accounting for almost 28% of the country's GDP in 2014.

Second, “Canada’s economy just keeps on adding jobs, mostly of the full-time variety,” according to Porter. Around 180,000 jobs were added to the Canadian economy since June 2014, when oil and commodity prices started to crash, according to economists at Scotiabank. As of October 2015, employment rose by 44,000, which brings the number of employed in Canada to more than 18 million. Unemployment fell by 0.1 percentage points to 7% during the same period.

Third, robust consumer spending exemplified by big ticket purchases such as houses and cars. “On the recession debate, we will simply note that Porsche sales are up a tidy 30 per cent so far this year in Canada,” according to Porter.

Canadian economy is expected to rise by around 1.1% in 2015, down from a 2.4% growth in 2014. It is expected to rebound with a 2% growth in 2016, followed by a 2.5% GDP rise in 2017, based on the Bank of Canada's (BoC) October 2015 Monetary Policy Report. The country's annual inflation rose by 1% during the year to September 2015, slightly lower than the 1.3% annual inflation in August.

On November 4, 2015, Canada welcomed its newly-elected Prime Minister Justin Trudeau.  In the October 2015 federal election, Trudeau's Liberal Party won 184 seats, followed by former PM Harper's Conservative Party (99 seats), and by Thomas Mulcair's Democratic Party (44 seats).

Prime Minister Trudeau stated that his priority legislation after the parliament is reconvened in December will be lower taxes for middle-income nationals, and higher taxes for top 1% of income earners.

On November 5, 2015, PM Trudeau made headlines by appointing equal numbers of men and women cabinet members.

Title: Property in Canada | Canadian Real Estate Investment

Description: A look at real estate investment in Canada from the perspective of property income, taxes and Canadian investment prospects

Keywords: global property guide, property guide, global property, Canada, rental yields, overseas property, property markets, property investments