The Cost of Calling Canada Home: Why Housing Prices Keep Climbing

Housing prices in Canada have been on a relentless upward trajectory, making the dream of owning a home increasingly elusive for many. From bustling urban centers like Toronto and Vancouver to smaller cities across the country, Canadians are feeling the squeeze of high housing prices. Homeownership affordability has deteriorated to record lows – by the end of 2023, the average Canadian household needed to spend over 60% of its income on ownership costs, double the traditional affordability benchmark of 30%. This affordability crisis is the result of multiple factors converging over recent years, from surging demand to constrained supply and everything in between. Below, we explore the key reasons housing prices keep climbing in Canada, and what it means for the housing market and everyday people.

A Surge in Demand: Immigration, Population Growth, and Urbanization

One of the fundamental drivers of Canada's housing boom is high demand fueled by rapid population growth. Canada has been welcoming a record number of immigrants and new residents, which has boosted housing demand significantly. This influx is largely due to immigration and has been directly linked to the current housing shortage and escalating prices. Simply put, many people arriving or forming new households in Canada need places to live, but the supply of homes has not kept up.

Immigration is concentrated in major cities and urban areas where job opportunities are abundant. Urbanization trends see both newcomers and Canadians from rural regions moving to big cities like Toronto, Vancouver, Montreal, and Calgary in search of work and amenities. These urban centers are magnets for talent and investment, but their housing markets are struggling to accommodate everyone. The result is intense competition for homes in cities – more buyers (or renters) chasing a limited number of units – inevitably driving up home prices.

Canada’s population boom has been unprecedented in recent years. While this growth supports the economy and labor force, it creates immediate housing needs. Many Canadians now find themselves priced out in their own cities as high demand from a growing population bids up the cost of both houses and apartments. Policymakers acknowledge that a rapidly increasing population has far outpaced the number of available homes, leading to increases in prices and rents.

Insufficient Supply: Construction Lags and Land Constraints

If booming demand is one side of the equation, limited housing supply is the other. Canada is simply not building enough new homes to keep up. Decades of under-building, strict zoning regulations, and geographic constraints have led to a chronic shortage of housing in the places where it’s needed most. In fast-growing cities, available land for development can be scarce – for example, Vancouver is hemmed in by mountains and ocean, and Toronto faces Greenbelt restrictions. Even where land is available, getting new housing approved and built can be a slow process due to municipal zoning rules, lengthy permitting, and community opposition.

The numbers tell a stark story. In 2023, demand exceeded new supply by roughly 218,000 homes in a single year. This imbalance pushed the national housing vacancy rate to a record low, indicating an extremely tight market with few homes available to buy or rent. When housing supply is so scant relative to demand, it's almost guaranteed that prices will rise. Housing prices and even rent prices have climbed as multiple buyers or tenants compete for the same limited units.

Canada’s federal housing agency estimates the country faces a massive supply gap. They project that about 3.5 million additional homes (beyond current building plans) are needed by 2030 to restore affordability. Put differently, housing construction would need to double for many years to catch up. The budget office likewise found that to close the gap by 2030, Canada would need to ramp up to building roughly 436,000 housing units per year – an 80% increase over 2023’s record completion rate.

Those construction costs have been rising, too, further hampering supply. Builders face higher prices for lumber, steel, and other inputs, as well as difficulties securing tradespeople, which means fewer projects get off the ground. Government policies at local levels also limit how quickly new housing can be added. All these factors contributed to a sluggish response on the supply side: when demand surged, supply could not react fast enough. This supply-demand mismatch – high demand and low supply – is at the heart of Canada’s housing price escalation.

Low Interest Rates and the Pandemic Real Estate Boom

Cheap credit has been another key ingredient in Canada’s housing price growth. For much of the past decade, interest rates were very low by historical standards. These low interest rates made it easier for buyers to take out larger mortgages, thus enabling them to pay higher prices for homes. When borrowing money is cheap, many people rush into the real estate market – both end-users and investors – which drives up real estate prices.

During the pandemic, mortgage rates fell below 2%. This sparked a frenzied housing boom. From 2020 to early 2022, Canadian home prices surged over 50% on average. Rock-bottom mortgage rates meant monthly payments were initially affordable even at higher principal amounts, encouraging buyers to bid up house values. The result was an unprecedented spike in prices across the country, even in smaller towns that previously saw little growth.

However, the era of ultra-low rates eventually came to an end. Starting in 2022, to combat inflation, the Bank of Canada began raising interest rates rapidly. These higher rates have cooled demand somewhat and even caused a modest price correction. Higher mortgage rates sidelined many potential buyers who could no longer qualify for large loans or afford the monthly payments, easing some pressure on prices.

Yet, despite a dip from the peak, housing prices remain far above pre-pandemic levels and housing costs are still crippling for new buyers. Today’s buyers face the double burden of elevated prices and steep financing costs. In essence, the legacy of low interest rates is that it left Canada with significantly higher home values, and now the climb in rates has made carrying a mortgage more expensive – a one-two punch for affordability.

Investors and Speculation: Housing as an Investment Asset

Beyond families looking for a place to live, Canada’s housing market has also attracted a growing number of investors and speculators. These are people buying real estate not primarily as a home but as an investment – to rent out, flip for a profit, or simply hold as a safe asset. In recent years, many Canadians have viewed real estate as a sure bet, given the steady climb in values.

Data show that the share of homes bought by investors has indeed ballooned. By early 2024, investors accounted for roughly one in three home purchases in Canada. In hot markets like Southern Ontario and British Columbia, investors – ranging from mom-and-pop landlords to larger speculative buyers – have been especially active. When investors compete with regular families for the same houses, they can often outbid by leveraging equity or holding multiple properties. This pushes house prices beyond what local first-time buyers can afford, contributing to the high cost of housing.

Foreign investment has been a much-debated factor here as well. Canada’s stable economy and strong property rights have attracted foreign buyers, notably from China and other countries, looking to park their money in real estate. Foreign investors were particularly drawn to major cities like Vancouver and Toronto. While foreign buying did have an impact – especially on high-end prices and sentiment – experts note it alone cannot explain the broad surge in prices. Domestic investors and speculative domestic demand have likely played a larger role in fueling price growth.

Regardless of origin, the growing view of housing as an investment asset has financialized the market. Homes are not just places to live but also vehicles for profit. Some purchase preconstruction condos or houses purely to flip at completion. Others buy properties to list on short-term rental platforms, taking supply out of the long-term rental pool. The rise of short-term rentals like Airbnb in popular cities has indeed reduced long-term rental supply, contributing to higher rent prices for locals. All these behaviors add demand that isn’t tied to end-user occupancy, making the market more competitive and pricing many people out.

Importantly, speculation can make markets more volatile. If investors believe prices might stagnate or fall, they could pull back quickly, which would remove a chunk of demand. But as long as real estate is seen as a sure investment, investor activity is likely to continue propping up prices. This dynamic is a key reason why real estate prices have remained elevated.

Government Policies and Their Impact

With housing affordability now a top issue for Canadians, government policies have come under scrutiny. Both federal and provincial governments have introduced various measures in attempts to cool the real estate market or improve affordability. These include taxes, regulations, and funding initiatives. While some policies have had modest effects, overall, the government faces criticism that its actions have not kept pace with the magnitude of the crisis.

One notable policy has been targeting foreign buyers. British Columbia and Ontario introduced foreign buyer taxes to dissuade foreign speculation. At the national level, Canada implemented a two-year ban on foreign purchases of residential property, later extended. However, since foreign buyers were only a small fraction of the market, analysts note that keeping foreigners out will do little to address the core supply-demand issue.

Another set of policies involves taxation and regulation to deter speculation and vacant properties. Vancouver and Toronto both enacted taxes on vacant homes to encourage owners to rent out or sell unused properties. British Columbia introduced a "speculation and vacancy tax" targeting investors who leave units empty. These measures have had some localized impact, but in the grand scheme, they address only a sliver of the housing stock.

Crucially, governments are now focusing on boosting the housing supply. The federal government created a Housing Accelerator Fund and a C$6 billion Housing Infrastructure Fund to support building and upgrading homes. The message is clear: Canada needs to build more homes faster. Ambitious targets have been floated, aiming for 3.9 million homes by 2031 in an effort to tame prices.

However, critics argue that government efforts so far are not enough. Even with new funding, getting new homes built takes time. The opposition has blamed the ruling government for being sluggish on housing. For instance, a federal program to leverage federal land for housing produced only a few thousand units by 2023, which is a drop in the bucket nationally.

Meanwhile, the Bank of Canada’s role has been pivotal through interest rate policy. Its rate hikes cooled what was a runaway market but also increased mortgage costs. Now, the Bank is trying to balance curbing price growth with not crashing the market.

At the local level, policies around zoning could greatly improve supply over time. Some cities and provinces are relaxing zoning to allow higher density housing in response to the crisis. Additionally, investments in public transit and infrastructure aim to open up new areas for development. Government policies will play a critical role in the coming years.

Stagnant Incomes and the Affordability Crunch

The final piece of the puzzle is the gap between housing prices and incomes. Even as home prices have doubled or tripled in some regions over the past couple of decades, wage growth and household incomes have not kept up. This growing disparity means that housing costs take up an increasing share of household budgets.

In recent years, home prices have risen much faster than earnings. Many younger Canadians find themselves unable to save enough for a down payment as housing prices outpace their ability to put money aside. Even renting can be challenging financially – rents in urban markets have surged. With job opportunities drawing people to cities, those who move for work are confronted with steep housing and rent costs.

The high cost of housing relative to income has broad impacts. Home ownership rates for young adults have been falling. Additionally, when Canadians devote large chunks of their paychecks to mortgages or rent, they have less disposable income to spend in the rest of the economy. It also increases inequality.

Policymakers are increasingly talking about affordable housing. However, the supply of these units is far below the need. Programs under the National Housing Strategy have aimed to create tens of thousands of affordable units, but demand likely runs in the hundreds of thousands. The affordability crisis thus persists and is in some ways self-perpetuating.

Until the gap between home prices and incomes is narrowed – either by significant price corrections, income growth, or a combination – affordability will remain a pressing issue. Some economists argue that boosting productivity and wages is part of the solution, alongside building more housing. In the meantime, many Canadians adjust their expectations: smaller homes, longer commutes, or help from family for down payments are becoming common.

Conclusion: Navigating the High Cost of Home

Canada’s housing affordability challenges did not appear overnight, and they won’t be solved overnight either. A combination of factors – surging demand from population growth, constrained supply of homes, years of low interest rates pumping up demand, active investor participation, and policy shortfalls – has created a perfect storm where housing prices keep climbing year after year.

Addressing this will require sustained effort on multiple fronts. Significantly increasing housing supply is widely seen as essential – building more homes, in the right places, at a faster pace. Innovative solutions like pre-fabricated construction and up-zoning single-family neighborhoods for multi-family units could help. There is also a push for better use of existing stock.

The challenge is formidable. Achieving affordability will also likely require mortgage rates that moderate without falling to unsustainably low levels again, and incomes that rise to bridge the gap. In the near term, prospective buyers and renters may continue to feel the strain. The real estate market in Canada is at a crossroads where all stakeholders – government, industry, and communities – acknowledge the problem. The coming years will show whether that acknowledgment translates into effective action.

For now, the trend of high housing prices persists. Even if price growth slows or plateaus, the elevated level of prices means the high cost of housing is here to stay unless bold steps are taken. Canadians are creative and resilient, and the hope is that with the right mix of policy and market adjustment, affordable housing will not be a forgotten ideal but a realistic goal.

If you're navigating the housing market and want expert guidance tailored to your goals, reach out to Adam Chahl, award-winning Vancouver Realtor with PLACE Real Estate Team – Oakwyn Realty. A proud Medallion Club member (top 10% of agents in Vancouver), Adam brings years of experience helping people just like you find the right property at the right price.

Contact Adam today to start your real estate journey with confidence.

Frequently Asked Questions (FAQs)

1. Why are housing prices so high in Canadian cities like Toronto and Vancouver?
High demand, population growth, limited land availability, and investor interest make real estate in major cities more competitive, pushing prices up.

2. How does foreign investment affect Canadian housing prices?
While foreign investment plays a role in price escalation, domestic investors and speculative activity have a larger impact in most urban areas.

3. Will interest rate changes help lower home prices?
Rising interest rates can slow price growth by reducing borrowing power, but unless housing supply increases, prices may stay elevated.

4. What is the government doing to fix the housing affordability crisis?
Governments have introduced taxes, zoning reforms, and funding initiatives like the Housing Accelerator Fund to increase affordable housing supply.

5. Can young Canadians still afford to buy a home?
It’s challenging, but possible. Many rely on family support, look to smaller markets, or adjust expectations to enter the housing market.