Sources and notes: International house price databased sourced from Dallas Federal Reserve: https://www.dallasfed.org/research/international/houseprice. Data reflect real, or inflation-adjusted, home price indices for select developed countries with similar economic, demographic, and policy frameworks as Canada. Home price indices were based on local currencies. Past performance is no guarantee of future performance, and you cannot invest in an index. National home price indices may not reflect regional or idiosyncrasies within certain municipalities or neighborhoods. Note that most investments in residential Canadian real estate are in apartment condominiums. In 2023, Statistics Canada found that 42% of Ontario condos were held as an investment (non-owner occupied), compared to just 15% of single-family houses.

As seen in Chart 1, Canadian home prices outpaced those in other G7 countries after 2015. While home prices in Canada followed inflation-adjusted trends similar to its peers from 1975 to 2015, recent years have seen prices soar. This growth reflects a unique combination of demand drivers and constrained supply that set Canada apart.

Source: Statistics Canada

However, recent policy measures aim to temper this growth. The federal government has extended the Prohibition on the Purchase of Residential Property by Non-Canadians Act until 2027 and lowered annual immigration targets to 1% growth by 2026. While these measures may not immediately affect housing demand, they are expected to reduce rental market pressures over time, potentially slowing rent growth and softening investor returns.

Immigration’s influence on demand is also shifting. While Canadian cities have historically experienced upward price pressure from newcomers, changes in policy may moderate this demand. The extension of the Prohibition on the Purchase of Residential Property by Non-Canadians Act through 2027 and reduced immigration targets will likely decrease housing demand in the coming years.

Source: Refinitiv. Real Interest Rate represents the Bank of Canada rate less the corresponding monthly Canadian Consumer Price Index (CPI). 

As illustrated in Chart 3, real interest rates rose above 2% in 2024 for the first time since 2006. Higher borrowing costs have dampened demand and constrained affordability. The delayed effects of these rate hikes are expected to further weigh on the housing market, creating headwinds for investors relying on leverage.

Sources and notes: Real Home Prices Index (RHPI) and Real Personal Disposable Income (RPDI) data was sourced from the Dallas Federal Reserve: https://www.dallasfed.org/research/international/houseprice. The Dallas Fed study took data from OECD HH disposable income, inflation adjusted using the Personal Consumption Expenditure index. Household disposable income is the sum of household final consumption expenditure and savings. Income includes wages and salaries, mixed income (income from self-employment and unincorporated enterprises), income from pensions and other social benefits, and income from financial investments. It is less taxes on income, wealth, social security contributions paid by employees, the self-employed and the unemployed, interest on financial liabilities, and the change in net equity of households in pension funds.

Chart 4, sourced from the Dallas Federal Reserve and OECD data, highlights the affordability gap has widened since the 2010s as home prices have outpaced disposable income growth. While government housing initiatives aim to increase supply, their impact remains uncertain. Investors should consider how greater supply might affect rental markets and long-term price growth.

Canada’s chronic housing supply shortage continues to worsen affordability. With the CMHC estimating that 3.5 million units are needed by 2030 to restore balance, developers face regulatory and cost challenges that slow new construction. Until these barriers are addressed, the imbalance between supply and demand will persist, further elevating housing costs.

Another key factor contributing to the housing affordability crisis is the disconnect between wage growth and home price increases. Data from the Bank of Canada indicates that average wage growth has lagged housing price appreciation by an average of 3% annually since 2010. This growing disparity has placed homeownership out of reach for many Canadians.

The wage-to-price ratio is at a historical low, with average wages growing at just 3% annually, while housing prices have increased at a rate of 6%. This widening gap means that fewer Canadians can afford to buy homes, contributing to the growing demand for rental properties and driving up rental prices.

Sources and notes: Capital Economics, Rental.ca (Rents in Canada Decline for First Time Since COVID).

Rental growth trends, shown in Chart 5 (based on Rentals.ca data), reveal a decline or stagnation in key urban centers like Toronto, Vancouver, and Calgary. In October 2024, average asking rents for all residential property types fell 1.2% year-over-year, marking the first decline since the pandemic. Reasons for the softening trend in asking rents include an increase in purpose-built rental construction projects completed since 2018, recent changes to our immigration policy previously mentioned, and more recent softening in the labour market. Investors relying on rental income to offset carrying costs may face increasing financial pressure as rental markets soften.

While some investors have relied on leveraged real estate for price appreciation, rising costs and declining rental income threaten the traditional investment model. With rental growth stagnating or declining in key urban centers, investors should carefully assess cash flow projections before committing additional capital.

Source: Canadian Home Price Index, nominal (Dallas Federal Reserve), Canadian Equities (Bloomberg, S&P/TSX Composite Index), US Equities (Bloomberg, S&P500 Index in CAD), in nominal dollars including inflation, before fees, transaction costs, dividends or income and taxes. Past performance is no guarantee of future performance, and you cannot invest directly in an index. All data has been presented is in Canadian dollars, based on monthly returns converted to period specific compound annual growth rates (CAGR%).

As shown in Chart 6, equities have generally outperformed Canadian residential real estate in terms of total return over the past 50 years. While housing provided strong returns during certain periods, equities delivered greater long-term growth potential and liquidity. Investors should consider these differences when evaluating opportunity costs and risk-adjusted returns.

While Canadian housing has performed well in the past, equities have historically outpaced real estate when considering total returns over long cycles. Investors should take a diversified approach, taking into consideration the overall strategic asset allocation breakdown between public investments in cash, bonds, and stocks, and private investments in credit, real estate, and equities.