Why housing market affordability may come at a cost to investors

The Canadian government was looking to cool the housing market by introducing demand and supply measures. This included reducing the number of temporary residents by over 200,000 annually for three years and doubling new home construction to 3.87 million units by 2031. We subsequently witnessed a 35% reduction in foreign study permits to 364,000 last year. On the supply side, 2024 housing starts were up 1.9% Year-over-Year (Y-Y) — that’s 28.6% above the historic average. 

At the end of last year, a number of mortgage reform measures were introduced to further increase the prospect of home ownership in Canada. These measures included increasing the price cap for insured mortgages by 50% to $1.5 million and lowering the downpayment for some property types. This should ultimately result in larger buyer and renter pools — making home ownership and long-term rentals a possibility for more Canadians. These measures appear to have a positive effect on housing market affordability.

In February 2025, Canada-wide average rental prices declined 4.4% compared to a year ago. In urban areas we’re seeing greater softness, with asking 1-bedroom apartment rents down 6.0% in Vancouver, 6.3% in Toronto and 5.6% Y-Y in Calgary. For buyers, average home prices, which had been increasing over 6% annually from 2003 to 2023, took a step back over the last two years. 

While the housing market may look more positive from a homebuyer or renter’s perspective, what does it look like for investors? As of February 25, 2025, real estate index returns were lagging the TSX Composite Index by low-single digits Year-to-Date (YTD) — and 18% on a 1-year basis. Why the underperformance in an environment of lower interest rates that typically bodes well for homebuyers? The answer is potentially softer economic growth in Canada, spurred by both potential tariffs and lower population growth.

We’ve seen a significant pull back in the share prices of companies that specialize in multi-family properties — down over 15% on a 1-year basis as of February 25, 2025. The good news is that valuations seem to be plateauing and discounts to net asset values are at trough levels — presenting a buying opportunity for medium to longer term investors. We’re also seeing strength in retail real estate investment trusts — up mid-single digits YTD — which presents an investment opportunity.