Supply issues in Canada – what impact are they having?

With 2021 having been another barnstorming year for Canada’s mortgage and housing sectors, it was unsurprisingly one of the country’s hottest markets – British Columbia – that led the way alongside Ontario in fuelling hectic activity.

While the second half of the year saw a marked cooling-off from the frenetic market of the first six months, house prices are still through the roof in that province, as recent data from the British Columbia Real Estate Association (BCREA) indicates average house prices are projected to have risen by an eyewatering 17% by the end of the year.

The pace of market activity in BC saw the provincial government introduce new legislation for a cooling-off period for home purchases last month, allowing homebuyers to change their mind within a seven-day window for acquisitions of newly built and resale properties.

The province has also been besieged by the much-referenced lack of housing inventory that’s become such a problem across Canada, with BCREA’s Economics Housing Forecast indicating that the BC housing market is likely to remain “extremely tight” even if sales moderate substantially next year.

New listings in recent months are now below pre-pandemic levels, the association said, with the market set to stay “undersupplied and under pressure” without a significant uptick in new listings and supply.

Catherine Ellis (pictured top), CEO of the Kelowna-based Cultivate + Evolve Financial, highlighted the stark imbalance between supply and demand in BC and said it was likely to take a significant amount of time to rectify.

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“Currently the total active listings in BC are about 50% below the level needed for long-term balance in the market, and rebuilding that inventory is going to take time,” she told Canadian Mortgage Professional.

“The biggest item at play right now is demand, and I think that sales are going to continue to trend upwards until such time that the supply comes into balance.”

For would-be buyers in that market, the good news is that BCREA forecasts a noticeably milder scenario in 2022 than the pandemonium of the last 18 months.

The organization said it saw little chance of a repeat of this year’s level of activity, with home sales to remain “vigorous” but down on the record-breaking pace set throughout 2021.

“Our baseline forecast is for a thriving BC economy, with broad-based employment growth and robust consumer demand,” it said. “While a rise in fixed mortgage rates over the next year and the higher minimum stress test rate implemented earlier this summer will temper demand somewhat, we are forecasting that provincial MLS home sales will reach 102,750 units in 2022.”

Still, Ellis said the fact that demand was unlikely to subside until more supply arrived on the market meant that things could remain hectic for some time to come.

“Demand is going to remain until the listings rise. I think the pent-up demand of homebuyers is going to continue throughout the beginning of 2022, potentially through to the fall or end of year,” she said.

Record-low interest rates throughout the pandemic have been some of the main reasons for sky-high demand in Canada’s hottest housing markets, with British Columbia no different.

In recent weeks, the Bank of Canada has indicated that it expects that low-rate environment to begin winding down in the middle quarters of next year – potentially as early as April – when it forecasts a hike of its policy rate.

Read more: Bank of Canada makes latest rate announcement

Still, with any rate increases expected to be moderate and measured, Ellis said that the introduction of new supply in the BC market – coupled with potential changes to government regulations on housing – would create a better situation for homebuyers in the province in the coming years.

“Although [rates will be] higher, they’re still competitive historically,” she said. “And then coming into 2023, hopefully we’ll have seen more starts on housing projects. We’ll potentially see changes in government regulations surrounding policies for first-time buyers to allow them to get into the market.

“And finally, with the rates rising, we’ll maybe have edged back on the investors interested in getting into the market and then soften things up for buyers to be able to get in.”

Of course, much of the province’s prospects for 2022 will depend on how things progress on the COVID-19 front, particularly with the Omicron variant remaining a cause for concern as noted in the Bank of Canada’s latest announcement.

“Like everything else, [the] outlook depends on the state of the COVID-19 pandemic,” BCREA emphasized. “British Columbia has made excellent progress with vaccinations, but cases remain elevated, and the end of the pandemic still seems distant. Consequently, the recovery may still be uneven.”