Canadian Real Estate – Understanding How the Market Works

How Does Canadian Real Estate Work?

Before we delve into the Canadian real estate market as a whole, we must point out that the real estate laws and registration systems vary across the country, as each province has the mandate to determine what applies within its territory. Thanks to this, you will find that the laws regarding acquisition, ownership, financing, and the development of real estate vary from one region to another. Take Quebec as an example. While other provinces use Common Law, it relies on the Civil Code, and that has a significant effect on its real estate market. That said, there are many similarities across the regions. A good example would be the move towards land title systems across provinces, which has made real estate ownership much simpler. Given this context, we have created this market guide with a generalized perspective that leans on the average trend across the regions, though some sections may dive into specific regions. So, what can you expect in Canada’s real estate market?

Ownership and Property Types

Generally, there are two ways to own property in Canada – freeholds and leaseholds. Under freeholds, the duration of the property ownership is indefinite, while with leaseholds, property owners enjoy ownership rights for a given duration. These ownership structures vary based on the property types as follows:

🏠 Residential Property

If you are looking to buy or rent a home in Canada, you are in luck, as there are many options available. Let’s take a look at what you get for each type:

Detached houses. These homes, which feature one single dwelling per land parcel, appeal to homeowners and renters who want a lot of space, privacy, and control over the changes they can make to their homes. Typically, these are freeholds where the ownership not only covers the house but also the land.
Semi-detached houses. These homes are designed such that they share one common wall with each other, while the rest of the house remains detached from the neighboring house. This way, the occupants still enjoy lots of space and privacy but do not pay as much as they would for a detached home. Just like with detached houses, these homes are often freeholds where the owners own the land parcel as well as half of the building.
Townhouses. Unlike semi-detached houses, which only share one common wall, these houses share two common walls with each other, such that each house has a neighboring and attached house on each side, save for the houses at the end of the unit. These homes work best for people who want to pay less for homes while still enjoying some privacy. Often, they are freeholds, but they can also be condominiums.
Condominiums. Properties in this category can either be townhouses, as explained above, or apartment units. Given their structures, these homes attract people who want shared amenities, as this cuts back on maintenance needs and costs. What’s more, these homes are often close to urban centers, which makes them ideal for people who want transit convenience. These often have condo ownership where a corporation owns the exterior and common areas while owners own the actual houses.
Plexes. In this category, we have the duplexes, triplexes, and fourplexes. These are essentially buildings with two, three, or four self-contained homes. In most cases, one person owns the entire building under a freehold and rents out the other units, which is why they are common with investors.

Plexes, condos, and townhouses are the most common property types closer to urban centers, while detached and semi-detached houses are common in the suburbs.

🏢 Commercial Property

With commercial real estate, the goal behind property ownership is to generate profits from income-producing activities, and they fall into the categories below:

Office buildings – these are often classified as class A, B, and C, depending on their sizes and the quality of their amenities.
Retail or commercial buildings – these include malls, standalone stores, etc.
Industrial buildings – here you find warehouses, distribution centers, manufacturing facilities, etc.
Multi-family apartment buildings – while these are residential units, they are categorized as commercial real estate, as the goal here is to generate an income.

And just like with residential property, commercial property ownership structures can be freeholds or leaseholds.

Market Regulations

Let’s have a look at how the legal landscape affects property development across the country.

Zoning’s Effect on Property Types

Municipal authorities dictate the land uses within their territories so as to control the nature of development, which plays a significant role in Canadian real estate. Before a developer can put up a building in Canada, they must check the local zoning laws to ensure they are permitted to put up that kind of development. Otherwise, they cannot get a permit to proceed with the development.

So, which zones exist and for what purposes? Residential (R) zones are for housing development, and there are sub-zones under this zoning, such as R1, R2, R4, and so on, which determine the type and density of housing allowed within these zones. As such, a zone may be R but may not permit mid-rise apartments. Commercial (C) zones are for retail stores, offices, and other commercial property types, while industrial (I) zones are for manufacturing, warehousing, and logistics.

Are these zones set in stone? Usually, municipal authorities do not allow developers to change land uses. However, where developers can prove that the zoning laws are impeding an area’s development potential, municipal authorities can rezone the area to encourage development. They have also been known to rezone specific lots in urban areas to pave the way for high-density housing.

Disparities within the Real Estate Markets

As earlier stated, while the core real estate principles come from the federal government, provinces have the right to dictate what applies to their regions. So, how do these distinctions affect the Canadian real estate market? We will use some examples to highlight these differences.

Ontario and British Columbia. These provinces are known for imposing provincial and municipal taxes and prohibitions to manage the housing demand, such as restricting foreign buyers from buying residential property. These restrictions and fees result in higher transaction costs for buyers and make it harder for foreign investors to dip their toes into this market.
Quebec. Thanks to the use of the Civil Law system, this province differs from other territories, not just in its legal processes but also in its real estate terms. As such, buyers and investors must have notaries in their legal closing processes, and landlords must be up-to-date with the required landlord-tenant relations when drafting leases.
Alberta and Saskatchewan. These real estate markets have been picking up quite a lot over the years due to their high rate of freehold property ownership, low property transfer fees, and few restrictions on foreign investors. With the lower costs and more open market, more people are heading to these provinces, which also offer investment potential in the oil, gas, and agricultural sectors.

These provinces are but a snapshot of the Canadian real estate market landscape. But they highlight just how varied the real estate market is in the country, owing to the provincial regulations.

The Economics

We’ve covered property types, ownership structures, and how real estate laws influence these factors. Now, let’s get into the heart of the market – the pricing and how investors, renters, and homebuyers navigate this system.

🪙 What Drives Property Value Overall?

Regardless of the province, there are three key things that influence a property’s value, as follows:

The infrastructure. A property’s value depends on its proximity to key infrastructure. Take residential property, for example. The closer it is to amenities like schools and hospitals, the more valuable it is to its target market. And for a commercial store, the closer it is to public transit, the more valuable it is, as it enables the tenants to be closer to foot traffic.
The neighborhood. There is a growing trend in Canada and the world where people are actively seeking a higher quality of life. They care about the soft factors such as walkability and access to parks. Even in industrial zones, organizations are looking for facilities that allow their employees to access local amenities with ease. The same goes for residential properties where residents want amenities that improve their daily lives, from parks to cultural centers.
The scarcity. The laws of demand and supply will always be at the forefront in real estate. Let us use Vancouver and Toronto as our examples. These urban centers are in such high demand that the property supply cannot keep up with people’s needs. As a result, the property prices are high, and they keep appreciating. Interestingly enough, these supply and demand dynamics can vary from one property type to another. For example, residential housing demand has been growing in the past few years, while office spaces have had a decline. But with the push for mixed-use developments, developers are hoping to drive balanced growth across all property types.

Keeping these factors in mind can help you determine where to invest as a developer, or where to find a suitable home within your budget as a renter or aspiring homeowner.

How Do People Finance Homes in Canada?

Besides equity, buyers and investors can finance homes through mortgages. So, how does this work?

For the buyer. If you are buying a home that you will occupy rather than use for income generation, you must put down a down payment relative to the price of the house to qualify for a mortgage. Where this down payment is less than 20%, you are also required to take on a mortgage insurance whose cost is then added to the principal amount. In most cases, you can pay off the loan for up to 30 years.
For the investor. If you are buying a home as an investment, lenders consider your purchase to carry a higher risk than if you were to buy the home for self-occupancy. As such, the required down payment is often 20% or more, the repayment periods are often shorter, and the interest rates are often higher than owner-occupier investments. What’s more, the loan amount is often based on the property’s net operating income rather than your own income. It’s important to note, though, that investors can rely on other forms of financing, including private and hard money loans, which have even higher interest rates but fewer qualification requirements.

The mortgage industry is heavily regulated and offers quite fair terms to both buyers and investors, which makes it a convenient financing option for aspiring property owners.

Tips on Navigating the Real Estate Market

Are you eager to rent or buy a home in Canada? We have some tips that will serve you well on this journey.

For the buyer. When looking for a property, keep its long-term value in mind and pay attention to factors such as location, scarcity, and the overall real estate market trends. Knowing what the future holds is the best way to secure a property that will offer you long-term value through appreciation, as this will help you build equity in the property, which can help you finance other properties. That said, you also need to grow your savings account to make it much easier for you to get pre-approved for a loan, skip the mortgage insurance, and get a good interest rate. It also helps to have a good debt-to-income ratio.
For the renter. Since you do not build equity in properties, your focus should be on proximity to the services you need. Also, make sure you look into the provincial tenancy laws and your lease agreement to ensure you are well-protected. If you would like to own property in the future, spending less on rent can help you put money towards your future down payment.

See? Owning real estate in Canada can be a seamless process if you take the time needed to understand the ins and outs of this market.

An In-Depth Introduction to the Canadian Real Estate Market