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The Real Estate Rollercoaster: Understanding the Ups and Downs of the Housing Market

The province of Ontario is currently grappling with a severe lack of affordable housing, which is causing the most pronounced effects in its major urban centers. It is thus becoming increasingly difficult buying a home in today's market. Furthermore, increasing mortgage and interest rates, limited inventory, and intense competition have exacerbated the issue (Jones). This makes homeownership a distant dream for many. As a result, people are finding it hard to locate affordable homes and must navigate a market that is heavily geared toward sellers and investors (Porter). In particular, first-time and middle-income buyers face significant hurdles in doing so (Bahney). Despite the challenges, there are still opportunities for prospective homebuyers to succeed, which will be discussed later.


In this article, we will explore the challenges that homebuyers are currently facing in the housing market and delve into the factors that contribute to the affordability crisis. We will also consider the obstacles that middle-income buyers encounter and provide innovative solutions that could potentially help them achieve the dream of homeownership.




Figure 1.1 (Lafleur)


Challenges for Homebuyers and Sellers:

The current housing market is highly competitive, presenting significant challenges for potential homebuyers. One of the key factors contributing to the competitiveness is the influence of corporate investors, who have reduced the availability of rental options and made the dream of homeownership increasingly elusive (Meredith). According to a report by Statistics Canada, at least 20% of residential real estate is owned by investors, which has contributed to rising prices (Paglinawan). Since the early days of the pandemic, investor buying has advanced by 20.1% in the Greater Toronto and Hamilton area, further driving up prices ("Are investors driving up Canadian real estate prices?"). Christopher Alexander, president of ReMax Canada, described the trend of money managers buying single-family homes to rent out as "a new phenomenon" in the

Canadian market (Arsenault). On top of this issue, high interest rates, bidding wars, the shortage of homes, and the conflict with builders have led many to hold off on purchasing (O'Bannon). In a poll conducted by Ipsos exclusively for Global News, 63% of Canadians who do not own a home have "given up" on ever owning one, despite a sizeable drop in home prices over the past year and government measures aimed at addressing housing affordability (Lord). This indicates a sense of pessimism and hesitation among potential homebuyers in the face of the current market conditions.


On the other hand, sellers are not better off than buyers in the market, as dilemmas such as low inventory make finding suitable replacement homes difficult ("Canada's real estate market: Buyers are back, but where is the inventory?"). Additionally, the reluctance to lower prices creates hardships for potential buyers to find affordable options, further exacerbating the challenges faced by sellers (Punwasi). Canadian real estate sellers typically wait until the Spring market to list, but sales have been slow so far, with new listings falling in major cities like Toronto (Punwasi). For example, it was found in a report that Vancouver's and Toronto's urban luxury single-family home markets experienced some of the most pronounced improvements in spring activity ("A new era of diversity for Canada's luxury real estate market as performance diverges across major cities"). The market also lacks diverse options, with limited inventory but an enlarged focus on luxury housing. Furthermore, sellers remain in a "wait and see" pattern, holding on to their homes in hopes that supply will increase or leaving properties on the market at unrealistic price points (Punwasi).




Figure 1.2 (Lord)


The challenges associated with buying and selling a home create a complex environment with limited options, affordability concerns, and intense competition. Overall, overcoming these hurdles requires careful planning, flexibility, and strategic decision-making.


Understanding Real Estate Prices: Factors Influencing Market Trends

Understanding real estate prices is key to navigating the complex and dynamic Canadian real estate market. Real estate prices are influenced by a range of factors, including supply and demand dynamics, interest rates, changing demographics, and economic health (Nguyen). These factors interact in complex ways, and their impact on real estate prices can vary depending on the specific market conditions. Supply and demand dynamics play a critical role in determining real estate prices. When demand exceeds supply, prices tend to rise, while an oversupply can lead to price declines (Hyatt). For example, in 2021, the Canadian real estate market experienced a surge in demand, which sent home prices soaring (Wong). This was due to a combination of factors, including low interest rates, population growth, and looser credit conditions (Wong). Additionally, as mentioned before, understanding the supply side of housing markets is essential, as limited supply can contribute to high prices (Gyourko). For instance, in 2022, the Canadian housing market experienced a surplus of housing available in some markets, leading to homeowners lowering their prices due to less demand (Wong). Another factor driving up real estate prices is immigration (Dallaire). In late 2022, the federal government announced a plan to welcome 500,000 immigrants to Canada each year for the next three years. A recent Desjardins report says we would have to increase the amount of new housing being built by 50% nationally through 2024 to “offset the price gains from the increase in federal immigration" (Dallaire).


It is also worth mentioning that real estate prices in Canada can vary significantly across different areas. According to a Bank of Canada staff analytical note, different types of homebuyers have contributed to the dynamics of housing markets in Canada, with investor activity varying across major cities. For instance, investors have made 14% of home purchases in Winnipeg, compared with 21% in Toronto over the same period (Khan and Xu).



Figure 1.3 (National statistics)


Creative Solutions for Homebuyers in a High-Cost Market:

With the continuous increase in home prices, numerous homebuyers face challenges in finding affordable options that cater to their requirements. Nevertheless, some individuals are becoming inventive and discovering game-changing solutions to maneuver the expensive real estate market. One of the solutions is laneway housing. Laneway houses, also referred to as coach houses or granny flats, are additional small living spaces constructed in the backyards of existing properties. These tiny homes offer an affordable housing alternative and can generate rental income to help reduce mortgage expenses (Murray). These structures can vary from refurbished garages to recently constructed buildings in the backyard (Murray). Typically, they are accessible from a rear lane, which is why they are referred to as such (Murray). This type of housing is particularly renowned in Vancouver, British Columbia, with a report stating that homes with laneway houses now account for 4% of all sales in Vancouver, up from 1% five years ago (Bula). Laneway housing in Vancouver has become increasingly popular due to its affordability, flexibility, and potential for rental income. With the demand for affordable housing on the rise, laneway housing offers a practical solution for both homeowners and renters.


Another strategy homebuyers are using to keep mortgage costs low is exploring co-ownership arrangements, where multiple parties combine their financial resources to buy a property together (Murray). This approach helps to distribute the mortgage burden and makes homeownership more accessible (Murray). Key, a real estate technology company based in Toronto, offers a co-ownership model that enables buyers to co-own a house by paying a lower initial investment (Shakil). This is usually around 2.5% of the property's value, as opposed to the standard 20% down payment requirement. This lower initial investment reduces the upfront costs and makes homeownership more accessible. The company has additionally said it will cover the remaining costs of a house through the co-ownership model (Shakil). It will also collaborate with property owners, investors, and governments to acquire condominium apartments in buildings and will soon provide single-family homes (Shakil).


Lastly, the popularity of tiny homes is increasing in Canada due to their affordability. These compact and self-sufficient dwellings provide a minimalist way of living and reduce mortgage costs (Rogers). Tiny homes have a size range of 60 to 600 square feet, which makes them eco-friendly. You can design and construct your own, purchase a used home, or even buy a kit and assemble it yourself (Rogers). They are in various locations across Canada, such as Sunshine Tiny Homes in Gibsons, British Columbia, and Teacup Tiny Homes in Lethbridge, Alberta ("Canada Tiny House Builders Guide"). Canada's first village of tiny homes was built in Calgary, Alberta, as a collaborative effort to help rehabilitate the city's homeless veteran population (Kabir). As the need for affordable housing in Canada increases, tiny homes offer a one-of-a-kind and inventive solution for potential homebuyers.




Figure 1.4 (Corbley)

The Canadian real estate market has experienced ups and downs in recent years. In March 2022, the market began to experience a downturn, with sales dropping 24% since the previous year (Armstrong). However, the market appears to be on the road to recovery, with booming immigration and low inventories fueling demand (Santarelli). Prices will level out eventually, provided the Bank of Canada does not continue to raise interest rates. Overall, the Canadian real estate market is structurally sound and will recuperate in the medium term and beyond. In the meantime, prospective homebuyers are encouraged to wait patiently or find alternative solutions to their housing needs.





Works Cited:

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Armstrong, Peter. “Analysis | Canadian Households Have Lost Billions in Real Estate Cool-down | CBC News.” CBCnews, CBC/Radio Canada, 16 Sept. 2022, www.cbc.ca/news/business/armstrong-housing-real-estate-1.6584400.


Arsenault, Chris. “Want to Buy a House? So Do Some of the Biggest Investing Firms in North America | CBC News.” CBCnews, CBC/Radio Canada, 3 Aug. 2022, www.cbc.ca/news/business/real-estate-investment-firms-financialization-housing-1.6538087.


Bahney, Anna. “Middle-Income Buyers Face the Most Severe Housing Shortage | CNN Business.” CNN, Cable News Network, 8 June 2023, www.cnn.com/2023/06/08/homes/affordable-homes-nar/index.html.


Bula, Frances. “Laneway Houses Can Affect Some Home Values in Vancouver, but Only in the West Side, UBC Study Finds.” The Globe and Mail, 20 Dec. 2021, www.theglobeandmail.com/canada/british-columbia/article-laneway-houses-can-affect-some-home-values-in-vancouver-but-only-in/.


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