Why Is Canadian Housing So Expensive?

Housing costs in Canada are some of the highest in the world, and a lethal mix of several supply- and demand-side factors are to blame.

By Josh Sherman | 7 minute read

Canada’s high cost of housing is becoming part of the country’s national identity for better or for worse.

Canada is known on the international stage for the politeness of its population, popular cultural exports such as poutine and hockey, and it was even recently ranked one of the happiest nations in the world.

Unfortunately, the Great White North has also earned a less-savoury reputation: it’s become infamous for having some of the most expensive housing in the world, placing high in ranking after international ranking of the priciest property markets.

So why is Canadian housing so expensive? Fundamentally, experts suggest, it boils down to an imbalance between supply and demand. Challenges on both the demand and supply sides are contributing to what many say has reached crisis levels, and may also be the single-largest threat to the future health of the country’s economy.

Wahi spoke to housing experts to break down what’s fueling demand, what’s limiting supply, and how the interplay between the two has made Canadian housing so expensive when compared to many other countries.

The Demand-Side Factors Making Canadian Housing So Expensive

Strong demand has helped push the cost of Canadian housing higher in recent decades. Between January 2014 and January 2024 the benchmark price of a home in Canada increased from $381,600 to $708,700, according to the Canadian Real Estate Association. That’s a jaw-dropping increase of 85.7% in a decade.

On the demand side, several key factors are juicing the Canadian housing market:

• Population Growth: Canada’s population surged by more than 1.2 million in 2023 — the largest annual increase since 1957 — according to Statistics Canada, with international immigration accounting for a whopping 97.6% of the growth. “The fact of the matter is we’re not building houses at a rate that can keep up with population growth, and that has created strains on affordability,” Sal Guatieri, BMO Economics senior economist and director at BMO Capital Markets, tells Wahi.

“The natural solution is you either have to build a lot more houses — which is basically impossible to do when you have shortages of construction workers, for example — or you need to slow population growth to a much more sustainable rate,” Guatieri continues.

While population growth is a significant demand driver of home prices, Moshe Lander, senior economics lecturer at Concordia University, cautions against too-stringent limitations on immigration. Doing so could have unintended consequences, he notes, since immigrants make important contributions to overall economic productivity, the greatest predictor of a country’s wealth. “In order for an immigrant to rise up the ladder, they have to outdo the incumbent,” he tells Wahi, explaining why newcomers tend to become disproportionately productive economically.

• Age Demographics: It’s not just the overall number of people vying for homes that’s making Canadian housing so expensive — it’s also their age makeup. “You have two demographic factors supporting the housing market, at least demand,” says Guatieri. “One is strong population growth, but the other is your prime first-time homebuying age bracket,” he explains. Typically encompassing those aged 25 to 39, this cohort has been rapidly expanding at a clip of 5% annually in recent years, notes Guatieri. “That [group] tends to be a driver of housing demand and to some extent prices as well, and that cohort has been growing.”

• Canadian Culture: Another reason Canadian housing is so expensive is “cultural”, says Lander. The idea of home ownership is embedded in Canadian culture. Generations of Canadians, including Lander himself, have been told that it’s a major life milestone to aspire to, stoking long-term demand. “We don’t see it in Europe — the drive for ownership — the way that we do in North America.” While Canada’s home ownership rate peaked in 2011 at 69%, it has been steadily falling since then, according to Statistics Canada, and now sits at 66.5%. However, with two-thirds of Canadians remaining homeowners, the cultural influence remains strong.

• Tax Policy Since the early 1970s, Canadian tax policy has encouraged home ownership as an investment. Through what’s known as the principal residence exemption (PRE) on capital gains taxes, home owners pay no tax when selling the home they live in. One critic has gone so far as to call this an “ownership tax shelter,” which can make housing a more attractive investment than, say, stocks. In 2023, Paul Kershaw, founder of housing-affordability advocacy group Generation Squeeze, told Wahi that, through this policy, “we’ve normalized in Canadian culture that, as a homeowner, I should want home prices to rise, and rise, and rise.” While Lander, the economics lecturer at Concordia, acknowledges the principal residence exemption could contribute to demand, he says its impact on affordability is marginal.

Supply-Side Factors Making Canadian Housing So Expensive

Demand compromises affordability when supply can’t keep up, as is the case in Canada, where the pace of homebuilding isn’t meeting current — or future — needs. In fact, research from TD Economics suggests that the country may have a shortfall of 300,000 units over the next three years. The following factors are constraining the production of housing in Canada:

• NIMBYism: When homeowners oppose the construction of new housing near them, it’s known as NIMBYism, based on an acronym for “not in my backyard.” This anti-housing attitude remains prevalent in Canada, suggests Lander. Homeowners, whose property is commonly their largest investment, don’t want to see a glut of supply that they perceive would harm their returns.
  “Most people implicitly understand that if there’s a large-scale amount of housing that’s brought online, this would push down housing prices,” he says. He notes that home owners sometimes express support for more density — just not in their backyards. According to a 2024 national survey from Pollara, 60% of Canadians are in favour of higher housing density in cities. But when asked if they support a single-family home on their block being redeveloped into a triplex, just 20% considered it a “good thing.”

• Zoning Restrictions: “Zoning laws are very, very restrictive,” says Mosher. These rules, determined by municipalities as well as provincial governments, often limit potential density. In some cases, they encourage suburban sprawl, which comes with its own additional costs. “Most cities will grow out rather than up” because of zoning rules, Lander says. “When you bring a new neighbourhood on board, think of all the costs,” he adds, noting all the new and expensive infrastructure that’s required, from sewers and roads to schools and hospitals.
• Labour shortages: Canada was home to a record 650,000 construction workers last year, according to the Canada Mortgage and Housing Corporation. However, analysis from RBC Economics suggests that’s not enough. To build all the housing that’s needed through 2030, Canada could require north of 500,000 additional construction workers. Even if Canada is able to squeeze more productivity out of its existing workforce, new headwinds are emerging, suggests CMHC Deputy Chief Economist Kevin Hughes, in a separate report. “The retirement of the baby-boomer cohort from the labour force is a major concern,” he writes. “In the construction sector, approximately 25% of those currently employed… [are] expected to retire in the next 10 years,” he adds.
• Development Charges: High fees on housing development in Canadian municipalities a) hold back the construction of new housing or b) result in costs passed on to homebuyers, suggests Lander. “The red tape that goes into homebuilding is discouraging the development of homes,” he says. For example, earlier this year in Toronto —  the country’s largest housing market and already one of its most unaffordable — development charges soared 20.7%. That translates to $44,774 for a typical studio or one-bedroom unit, up from $37,081.
  

  
  Canadian Housing Is Expensive — But Some Local Markets Remain Affordable

   

  Many of Canada’s largest cities are facing housing-affordability challenges, and these have spilled over into smaller urban centres and towns as well. However, the national numbers mask local trends.

   

  Those who are willing to relocate are finding that Canadian housing is less expensive in certain places outside of Ontario and B.C.
  
  “People are moving to provinces where affordability is still pretty decent,” says Guatieri of BMO, citing New Brunswick, Alberta, and Saskatchewan in particular. “In some ways, Canadians are taking affordability into their own hands,” he notes.
  
  As a general rule of thumb, homebuyers shouldn’t spend more than a third of their income on housing costs, and a recent report from National Bank suggests real estate in a handful of cities still falls into this sweet spot.
  
  As of the first quarter of 2024, in three out of 10 select cities carrying costs on a median-priced home worked out to less than 33% of household incomes, National Bank’s Housing Affordability Monitor suggests. These cities were Edmonton (32.2%), Quebec City (32.7%), Winnipeg (31.7%).
  
  Meanwhile, Guatieri sees reason to believe Canadian housing affordability will improve overall in the coming years. The federal government, for example, is aiming to trim the share of temporary residents in Canada from 6.2% of the population to 5%. Lower interest rates are expected to provide some relief as well, and some Canadians will benefit from inheritances from the country’s aging population. “Wealth is being transferred down from older generations to younger ones that’s helping people get into the housing market,” he says.

   

  The changes, though, won’t happen overnight, says Guatieri: “It’s going to take a while.”