Royal Bank economists recently published an update on the Canadian housing market. The findings are remarkable, considering the country is still mired in an epic health crisis, and there is much uncertainty about the economic path ahead.

Through early March, housing market activity was surging in Canadian metropolitan areas, with year-over-year resales in many cities running at least 50% higher. Prices are also on a tear – especially for single family homes. In February, annualized composite Multiple Listing Service home prices posted double-digit year-over-year gains in Toronto, Montreal and the Fraser Valley, with smaller increases reported in many other markets. A shortfall in listings has played a role in driving prices higher.

The Vancouver area provides a good example of the national froth. In the combined Metro Vancouver/Abbotsford-Mission region, home sales in January-February were 78% above year-ago levels.

Looking at 2020 as a whole, housing sales across B.C. jumped by 21%, while average selling prices were up almost 12%. New starts, however, dropped, underscoring the problem of inadequate supply and the sluggish pace at which homebuilding tends to respond to increased demand in a number of B.C. metro regions.

How to explain the strength of Canadian housing in 2020, a year when life was upended by a frightening global pandemic? In recent years, much has been made of the impact of “foreign” or “non-resident” demand in some urban regions, including Metro Vancouver. To be sure, sizable foreign capital inflows pushed up prices and aggravated the “affordability” crisis that developed in the Lower Mainland after 2010. In a region with severely stretched affordability metrics, there is no reason to welcome extra housing “demand” from non-residents who don’t work or pay taxes here. But foreign demand no longer appears to be a major force in the Metro Vancouver market. Only a tiny share of all housing transactions now involves foreign buyers.

Still, it’s worth noting that foreigners own roughly 3% of residential properties in B.C. and bought 13.6% all condominium units built in Metro Vancouver between 2016 and 2019. It makes sense for policymakers to keep a close eye on the magnitude and consequences of foreign demand for housing in B.C. That said, the current hot Lower Mainland housing market is not a story of unwanted foreign demand lifting prices. Instead, it speaks to the more fundamental forces that shape demand and supply.

Today, by far the most important of these is the rocket fuel being supplied by record-low borrowing costs and rock-bottom mortgage rates. As of early March, five-year fixed mortgages could be had for as little as 1.6%, according to ratehub.ca. With inflation expectations in Canada firmly anchored around 2%, this means many borrowers can secure credit to acquire a property at a cost amounting to “zero” after accounting for inflation. Free money is a powerful elixir in any market, and certainly in one where leverage has long been king and asset prices have inexorably risen over time. As long as federal policymakers and the Bank of Canada keep interest rates pinned to the floor, the demand for housing is likely to remain elevated.

Looking past the financial environment, Metro Vancouver’s housing market has been strongly influenced by demographics. In particular, steady population growth and household formation, largely fed by international migration, has been a key demand-side factor for many years. With the Trudeau government planning to ramp up Canada’s intake of permanent immigrants while also continuing to admit large numbers of “temporary” foreign students and workers, the Lower Mainland is on track for substantial in-migration in the next several years. Since every newcomer needs shelter, this will put upward pressure on land values and property prices, even though international in-migration will be partially offset by more Lower Mainland residents decamping for less expensive lifestyle options elsewhere.

Jock Finlayson is the Business Council of British Columbia’s Senior Policy Advisor; Ken Peacock is the Council’s Senior Vice President and Chief Economist.

As published in Business in Vancouver.