Why Is Canadian Real Estate So Expensive?

Canada’s real estate market has experienced a significant surge in prices, making homeownership increasingly challenging for many. This trend reflects a complex interplay of various factors that have collectively driven up housing costs across the country. Understanding these contributing elements can provide clarity on the current state of the Canadian housing landscape.

Population Growth and Housing Demand

Canada’s ambitious immigration policies play a substantial role in shaping its housing market. The country plans to welcome 485,000 new permanent residents in 2024, and 500,000 in both 2025 and 2026, effectively doubling those from a decade ago. This influx of newcomers directly translates into increased demand for both rental and owned housing units.

Beyond immigration, natural population growth also contributes to the formation of new households, though at a slower pace. The overall Canadian population grew by 744,324 people in 2024, a 1.8% increase. This consistent demographic expansion creates an ongoing need for additional housing across various regions.

A significant portion of Canada’s population, over 80%, resides in urban centers, a trend that has intensified over time. Major metropolitan areas like Toronto, Vancouver, and Montreal act as magnets for both new immigrants and domestic migrants seeking job opportunities and amenities. This concentration of people in already dense areas exacerbates housing demand in markets with limited space.

Changes in household formation patterns further amplify the demand for housing units. A decrease in average household size, driven by factors like more single-person households or delayed family formation, means more housing units are needed to accommodate the same number of people. The number of Canadian households is projected to increase significantly, with estimates suggesting over 700,000 new households formed between 2021 and 2024 alone.

Investor Activity and Market Dynamics

Domestic investors significantly influence Canada’s housing market by purchasing multiple properties, thereby reducing the available stock for primary homebuyers. These acquisitions are often motivated by the pursuit of rental income, capital appreciation, or as a hedge against inflation. Data from 2020 indicates that the proportion of investors among property owners ranged from approximately 20.2% in Ontario to 31.5% in Nova Scotia. Condominium apartments are frequently acquired for investment purposes, with Ontario showing a high rate of 41.9% of condos used as investments.

Non-resident and foreign investment has historically impacted Canadian real estate, especially in luxury segments, by introducing substantial capital inflows that can inflate prices. A foreign buyer ban was implemented on January 1, 2023, and later extended to January 1, 2027, to curb this influence. This prohibition restricts non-Canadians from purchasing residential property in Canada.

Speculative buying, driven by the expectation of continued price increases, adds another layer of pressure to the market. When buyers acquire properties with the primary intent of quickly reselling them for profit, it can fuel rapid price appreciation. This behavior can create an artificial demand that distorts market values, making housing less accessible for those seeking a primary residence.

The proliferation of short-term rental platforms has also impacted housing availability and affordability. Properties converted from long-term rentals to short-term accommodations reduce the overall supply of homes available for permanent residents, pushing more individuals into the buying market or increasing rental costs. In 2023, there were approximately 235,000 active short-term rental listings nationwide, accounting for about 1.4% of Canada’s housing stock and nearly 5% of its long-term rental market.

Supply Limitations and Development Challenges

Geographic constraints play a substantial role in limiting the expansion of housing supply in many Canadian urban centers. Natural barriers, such as oceans, mountains, and lakes, particularly in cities like Vancouver, restrict the amount of developable land. Designated greenbelts around major urban areas, like Toronto, also impose limitations on outward expansion, concentrating development within existing boundaries. This scarcity of available land makes it challenging to build new housing to meet growing demand.

Restrictive zoning and land use regulations further impede the creation of new housing units. Many municipalities have zoning bylaws that primarily favor single-family homes, limiting the construction of higher-density housing options like multi-unit residential buildings. Complex land-use planning processes and lengthy approval times for re-zoning or development proposals can significantly delay projects. In urban areas like Toronto and Vancouver, a large percentage of residential land remains designated for single-family properties, hindering the development of more affordable, higher-density housing.

Rising construction costs and persistent labor shortages contribute directly to the increased price of new homes. The cost of building materials, such as lumber and steel, has seen significant increases, which are then passed on to prospective buyers. A shortage of skilled tradespeople and construction workers across Canada delays project timelines and increases labor expenses. Regulatory requirements, including evolving building codes and environmental standards, also add to the overall cost of construction.

Development approval processes are often characterized by their complexity and duration, adding both time and financial burdens to new housing projects. Municipal permitting delays and various development charges imposed by local governments can inflate the final cost of a housing unit. These charges, which can amount to tens of thousands of dollars per unit, are designed to fund infrastructure but ultimately increase the purchase price for consumers. The protracted nature of these approval processes can discourage new construction, leading to a lag in housing supply relative to demand.

Broader Economic Influences

Historically low interest rates have significantly impacted Canada’s real estate market by increasing borrowing power and making mortgages more affordable. This environment allowed buyers to qualify for larger loans and, consequently, bid higher prices for properties, contributing to the escalation of home values. Reduced borrowing costs stimulated a surge in home-buying activity.

The recent shift to higher interest rates has begun to influence market dynamics, reducing borrowing capacity and impacting affordability. While rising rates can temper demand by making mortgages more expensive, the underlying supply-demand imbalance means that prices may remain elevated unless there is a substantial increase in housing stock. Higher interest rates also increase the cost of carrying a mortgage, affecting homeowners.

Canada’s perceived economic stability and strong job market have historically attracted both domestic and international capital, further fueling demand for real estate. The country is often seen as a safe haven for investment, drawing high-income earners and investors who view real estate as a secure asset. This consistent confidence in the Canadian economy contributes to sustained demand for housing.

Despite periods of economic strength, housing price growth has consistently outpaced wage growth for many Canadians, leading to significant affordability challenges. While incomes have risen, the escalation in home values has been disproportionately higher, creating a widening gap between earnings and housing costs. This disparity means that even with low interest rates, the sheer cost of properties makes homeownership unattainable for a growing segment of the population.