Research Briefing | Oct 19, 2022

Canada housing correction doesn’t derail the case for multi-family

We do not believe the moderate recession forecast this winter and the deepening housing correction completely undermines the medium-term case for investing in Canadian apartments/multi-family commercial real estate. The current headwinds facing the housing market and wider economy will affect multi-family, but we believe this will be largely limited to the short term. Moreover, the interest-rate led pricing correction in commercial real estate is the primary reason near-term returns are set to fall, rather than house price declines. Underlying multi-family demand fundamentals are expected to remain durable, supporting the case for a rebound in sector performance and continued investment over the medium term.

What you will learn:

  • Demand for rental apartments will be supported by a growing single-family housing affordability crisis, rising immigration levels, restrictive policies, and construction costs that are likely to reduce new development of both single- and multi-family properties.
  • However, all isn’t rosy. Economic headwinds are also likely to hit multi-family demand as well, as housing formation growth slows, and real disposable incomes are cut. We anticipate that housing affordability will be restored in the medium term, as home prices are expected to fall 30% from peak-to-trough by mid-2023. House price growth is expected to be subdued thereafter, which will marginally lower demand in the multi-family sector.
  • While we do anticipate that underlying multi-family fundamentals will remain positive over the coming quarters, sector performance is expected to falter as rapid monetary policy tightening drives multi-family yields higher. NOI yields are forecast to rise nearly 100bps by the end of 2023, resulting in cumulative capital depreciation of 10% over the 2022-2023 period.
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