If you thought the U.S. housing market was on fire, Canada's housing market has been scorching. That nation's home prices rose 26% year over year in 2021, the highest level on record, while certain provinces like Ontario have seen home prices jump on average as much as 50% this past year.
But this spring season, while the snow is melting, the housing market is cooling. With our proximity and similar housing markets, will the U.S. be next?
A snapshot of Canada's housing market
Canada's housing market shares a lot of similarities with the U.S. Like the U.S., Canada is battling a housing shortage combined with unprecedented demand. It's been in a low interest-rate environment that has steadily fallen to record lows over the past 10 years. It's also dealing with rising interest rates that reduce the purchasing power of buyers due to higher monthly payments.
To try to cool the market, Prime Minister Justin Trudeau has banned foreign investors from purchasing property in Canada for two years. This news came just one month after Toronto saw home prices drop 2.6% in March from the prior month.
Roughly one-third of Canadian markets are considered balanced while the remaining two-thirds are considered sellers' markets, so not every city is cooling. Some experts believe the decline in home prices is due to less interest from buyers after the first mortgage spike, but there are no definitive answers on what the cause could be or if this trend is here to stay.
Is Canada one step ahead?
Month-over-month data can be a great way to gauge where the market is headed, but it can also be deceiving as to whether there are anomalies over the long term. Rather than thinking the U.S. market is next in line for the cooling trend, it's more important to look at what factors could trigger a market cooling to begin with.
The U.S. housing market is still severely undersupplied, particularly in entry-level homes and affordable housing -- something that isn't necessarily being alleviated with new construction starts. Multifamily vacancy rates remain at record lows while rental demand isn't faltering. Sales activity has dipped on a national average as well, but like Canada, it seems that the hot U.S. markets are very much still hot. Rents are rising just as fast as home prices, if not faster, making owning a home and being locked into a long-term mortgage pretty appealing.
Interest rates are definitely a growing concern, as is inflation. But it's not known if these factors alone are enough to cause a shift in home demand or home price appreciation. Exorbitant inflation like we saw in the 1980s could eventually lead to a tipping point for the market, but that could take several years, if it gets there at all.
There's no doubt there is room for the market to relax the rate of growth. Two years of double-digit percentage increases in rents and home prices isn't sustainable. But Canada's cooling market isn't necessarily a sign we're next. In fact, it's not even a sign Canada is truly cooling.
The next few months will give a better indication of where the market is headed for both countries. For now, prospective buyers should be ready to compete in what is still very much a sellers' market.