What to Expect in 2023

In 2022, the housing market experienced a correction phase, with a peak in February and a fairly steep decline from March to July and fairly flat since then. In January, the low inventory in Waterloo Region resulted in a significant rise in the average sale price for all housing types compared to December 2022. The shortage of inventory is propping up the market and leading to more multiple offers. However, there is a potential concern for the spring season, when there is typically an influx of inventory. It remains to be seen if there will be enough demand from buyers to absorb this additional supply, or if it will result in longer days on market and declining prices. While any potential price softening is a concern, it is unlikely to be as severe as the decreases seen from March to July 2022.

Immigration

Canada set a new record in 2022 by accepting 431,645 new permanent residents, surpassing the previous high of 405,000 in 2021. The government has set the highest immigration targets in Canadian history, with the 2023-2025 Immigration Levels Plan aiming to welcome 465,000 new permanent residents in 2023, 485,000 in 2024, and 500,000 in 2025, totalling 1.45 million over the next three years. This increase in immigration will increase demand for housing, creating urgency in the market due to high borrowing costs and a limited supply of new housing. The high costs of development and scarce inventory will result in continued reliance on the rental market, exacerbating existing affordability challenges.

Rental Rates

During a period of declining home prices, rental demand experienced a significant surge, with many properties receiving multiple offers, some exceeding the asking price, and even securing a full year's rent upfront. The asking price for rental properties in the region has continued to escalate, particularly in cities located in Southern Ontario.

In December of the previous year, the average listed rent for all property types witnessed a 12.2% YoY increase, reaching $2,005. The demand is largely driven by a rapidly growing population that faces challenges in obtaining homeownership or finding suitable rental housing.

For 2023, rental prices are projected to continue to rise, though at a slower pace as the economy slows and new rental supply reaches historic highs. On a national level, average rents in Canada are forecasted to increase by approximately 5%, which aligns with the current rate of income growth and the historical average for rent inflation. The region can expect similar trends as the supply of rental housing becomes more plentiful with the completion of several large buildings in 2023.

New Housing Legislation

The upcoming year will witness the implementation of several new federal housing policies. The current government, which took office in September 2021, campaigned partially on a platform aimed at regulating the then-perceived overinflated real estate market and safeguarding Canadian homebuyers from the potential consequences of foreign investment in the residential market. While the justification for these laws may be subject to debate, they are considerable programs that will require both consumers and real estate professionals to navigate effectively in 2023 and beyond. The following is a concise overview of these policies as provided by the Canadian Real Estate Association (CREA).

First-Time Home Buyers’ Tax Credit (HBTC)

Coming into force: 2022 and subsequent taxation years.

Budget 2022 proposes to increase the amount used to calculate the First-Time Home Buyers’ Tax Credit to $10,000 (from $5,000), which would provide a tax credit of up to $1,500 to eligible home buyers. This amendment applies to the 2022 and subsequent taxation years.

Two-year Ban on Non-Canadians Purchasing Residential Property

Coming into force: January 1, 2023.

The two-year ban on non-Canadians purchasing residential property comes into force on January 1, 2023. The federal government released the regulation on December 21, 2022. Regulations includes definitions, exceptions, and enforcement elements to help individuals understand and comply with the law.

Multigenerational Home Renovation Tax Credit

Coming into force: January 1, 2023.

The Multigenerational Home Renovation Tax Credit is a refundable credit that allows families to claim up to $7,500 to build a secondary unit in their home to accommodate seniors or adults with disabilities. Any expenditures to be claimed should be incurred after January 1, 2023.

The home may be owned by the senior (65+) or an adult with a disability, a family member, or a trust. The qualifying individual or their cohabiting spouse or common law partner can claim the credit, and so can a qualifying relation. The secondary unit must be a self-contained housing unit with a private entrance, kitchen, bathroom and sleeping area. It should be inhabited within 12 months of its renovation/construction ending. The credit does not cover recurring repair and maintenance, appliances or housekeeping.

Residential Property Flipping Rule

Coming into force: January 1, 2023.

Budget 2022 proposed to introduce a new rule to ensure profits made from flipping residential real estate are subject to full taxation. Specifically, profits arising from dispositions of a residential property (including a rental property) that was owned for less than 12 months would be deemed to be business income.  Bill C-32 defines ‘flipped property’ as: “a housing unit of a taxpayer located in Canada that was owned by the taxpayer for less than 365 consecutive days (less than a year) prior to the disposition of the property”. The measure would apply in respect of residential properties sold on or after January 1, 2023.

Tax-Free First Home Savings Account (FHSA)

Coming into force: April 1, 2023.

The Tax-Free First Home Savings Account (FHSA) is designed to give first-time home buyers the ability to save $40,000 on a tax-free basis with an annual contribution limit of $8,000. The government is working with financial institutions to have the infrastructure in place for individuals to be able to open an FHSA and start contributing at some point in 2023.  Chartered Professional Accountants of Canada says Canadians can begin contributing to the FHSA in 2023 even though the rules don’t come into effect until April 1, 2023.”