Canadian property bubble

The Canadian property bubble refers to a significant rise in Canadian real estate prices from 2003 to present (partial correction occurred in mid 2017) and ongoing that officially has been named a real estate bubble. Over this period Canada has seen an increase in home and property prices of up to 337% in some cities, leading to a large real estate bubble.[1]

By 2018, home-owning costs were above the levels that they were in 1990 when Canada saw its last housing bubble burst.[2]

History

Starting in the late 2010s, foreign investment and speculative activity in many of the major cities in Canada caused a boom in the real estate market that lead to a drastic increase in the price of owning and renting a home. A steady drop in interest rates coupled with a steady rise in home prices since the 1990s signaled to consumers that the real estate market had become the perfect option for stable, long-term investments. The feeling that there was a limited supply of homes on the market brought new consumers hastily into the market. Owning a home is also a very sought-after ideal for young adults in Canada. These social pressures along with increasing opportunities for profit were driving the growth of the market, causing first time home buyers to struggle to find a place to live at a reasonable price.[3]

In March 2017, the cost of owning a home in the Greater Toronto Area had grown 33% in just one year's time, with 19% of that growth occurring in just the two most recent months. Even the less desirable, semi-detached homes have surpassed $1 million in value. Suburbs have seen large price increases as well. Homes that have not seen upgrades in decades are being sold well over asking price. Condominium prices are seeing consistent growth with each passing year, even with a large number of units under construction.[4] Economists are quick to compare the situation to many other historical real estate crises.

Attempts to Slow the Growth

In response to these realizations, the Canadian government decided to step in and attempt to slow the growth and bring down prices naturally. The hope was to bring down prices to aid first time home buyers in a way that would cause the bubble to shrink slowly, rather than burst. In April 2017 Canada Federal Finance Minister, Bill Morneau, met with Charles Sousa and John Tory, to attempt to find a solution. As a result of this, a foreign buyer tax and speculation tax were levied.[5] In addition, the provincial Fair Housing Plan set in place stricter rent controls. Uninsured buyers are now required to pass a stress test in order to see if they can handle a rise in rates.[6] These small remedies can account for the recent slight dip in housing prices that has occurred since.[7] Ontario has created a Fair Housing Plan made up of 16 points to help combat the growth and make homes more affordable.[8] The 16 points are summarized below.[9]

  1. Non-resident speculation tax
  2. Rent is only allowed to rise at rates posted in annual provincial rental increase guideline
  3. Develop standard leases that would further help protect tenants and ensure landlords
  4. Create program to balance the value of surplus land assets
  5. Put a vacant properties tax into place
  6. Tax to make sure new apartment complexes is similar to other current complex properties
  7. Introduce a 5-year program to facilitate the building of more rental apartments
  8. Make it easier to use property taxes to generate more development opportunity
  9. Create Housing Supply team to help uncover and fix barriers to housing development
  10. Work to fight tax avoidance practices
  11. Reassess rules involving customer representation in real estate transactions
  12. Creation of housing group to advise the government about the state of the housing market
  13. More education for consumers about their real estate rates
  14. Create more through reporting requirements for real estate sales
  15. Improve reliability of elevators in Ontario buildings
  16. Updating the Growth Plan for the Greater Golden Horseshoe

Current Situation

As of the most recent information, Canada's price-to-rent ratio has surpassed the levels of the US housing bubble in 2006. Their private sector debt-to-GDP ratio has also risen to 218% causing the IMF to warn them that at this bad of a ratio they are extremely vulnerable to economic shocks.[10] The Count Swiss Bank UBS Global Real Estate Bubble Index ranks Toronto and Vancouver as the third and fourth most at risk cities for housing bubble crises. The situation is getting riskier as home prices have recently fallen in half in these two cities. After many attempts to remedy the price increases, the Vancouver market still grows. In Alberta, despite a recession and high unemployment, prices still remained high.[11]

Mortgage rates have begun to increase sharply and owning a home has started to consume over 50% of the average household's monthly budget.[12] The Home Capital Group just bought back millions of dollars in mortgages due to borrowers falsifying their incomes. This problem also occurred during the US housing bubble.[13]

The Canadian Mortgage and Housing Corporation cites overbuilding as the main source of the countries housing bubble risk.[14] The amount of household debt in Canada is now almost equal to their national GDP.[15]

In April 2019, the Bank of Canada released a report entitled "Disentangling the Factors Driving Housing Resales" in which they stated that Canada's housing market is "currently in uncharted territory." [16] While the report does not use the word "bubble," instead using the term "froth," to describe the current state of housing market, it states the rapid increase in pricing in certain markets can be attributed to an unexpectedly robust labour market and fear on the part of buyers of being priced out of the market inflated the market: "Much of the previous strength in resale activity was influenced by extrapolative expectations." [16] The report concludes that with increases in household debt, stagnant wages, and expected rises in interest rates, a snap-back may be inevitable.

Risks

Despite the warning signs, the local population believe it is just a boom in the market that will eventually slow on its own. Canada is a nation that is heavily dependent on the real estate industry, as it accounts for around 12% of their GDP. There is a high risk that if sentiments begin to change and investors feel that the market is about to take a turn for the worse, that there will be a mass of people selling their properties, causing prices to drop, and potentially snowball.[17]

If the reset rate for the year is higher than in the past, there will be a large risk of default for Canadians with high amounts of debt. Since two-thirds of Canadian mortgages are backed by insurance, a rise in defaults will leave the debts on the hands of the Canadian government. Any drops in home prices could also cause homeowners to owe more on their mortgages than the house is currently valued, which is known as negative equity.[18][19]

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References
  1. Haber, Bob. "Canadian Real Estate Bubble Blowing Up North." Forbes, Forbes Magazine, 3 Apr. 2018, www.forbes.com/sites/bobhaber/2018/04/02/canadian-real-estate-bubble-blowing-up-north/#1b74d3871d5e.
  2. Tencer, Daniel (3 October 2018). Canada At Risk As 'First Cracks' Appear In Global Housing Bubbles: UBS., HuffPost (Canada edition)
  3. Castaldo, Joe. "How Canada's Real Estate Market Went Completely Insane." Canadian Business - Your Source For Business News, 10 July 2017, www.canadianbusiness.com/economy/how-canadas-real-estate-market-went-completely-insane/.
  4. Castaldo, Joe. "How Canada's Real Estate Market Went Completely Insane." Canadian Business - Your Source For Business News, 10 July 2017, www.canadianbusiness.com/economy/how-canadas-real-estate-market-went-completely-insane/.
  5. Castaldo, Joe. "How Canada's Real Estate Market Went Completely Insane." Canadian Business - Your Source For Business News, 10 July 2017, www.canadianbusiness.com/economy/how-canadas-real-estate-market-went-completely-insane/.
  6. Andrews, Jeff. "Canada's Housing Bubble Is Starting to Burst." Curbed, Curbed, 7 Mar. 2018, www.curbed.com/2018/3/7/17085794/canada-housing-market-collapse.
  7. Tencer, Daniel. "Canada At Risk As 'First Cracks' Appear In Global Housing Bubbles: UBS." HuffPost Canada, HuffPost Canada, 3 Oct. 2018, www.huffingtonpost.ca/2018/09/29/toronto-vancouver-have-world-s-3rd-and-4th-largest-housing-bubbles-ubs_a_23544956/.
  8. Andrews, Jeff. "Canada's Housing Bubble Is Starting to Burst." Curbed, Curbed, 7 Mar. 2018, www.curbed.com/2018/3/7/17085794/canada-housing-market-collapse.
  9. "Ontario's Fair Housing Plan." News.ontario.ca, news.ontario.ca/mof/en/2017/04/ontarios-fair-housing-plan.html.
  10. Haber, Bob. "Canadian Real Estate Bubble Blowing Up North." Forbes, Forbes Magazine, 3 Apr. 2018, www.forbes.com/sites/bobhaber/2018/04/02/canadian-real-estate-bubble-blowing-up-north/#1b74d3871d5e.
  11. Castaldo, Joe. "How Canada's Real Estate Market Went Completely Insane." Canadian Business - Your Source For Business News, 10 July 2017, www.canadianbusiness.com/economy/how-canadas-real-estate-market-went-completely-insane/.
  12. Tencer, Daniel. "Canada At Risk As 'First Cracks' Appear In Global Housing Bubbles: UBS." HuffPost Canada, HuffPost Canada, 3 Oct. 2018, www.huffingtonpost.ca/2018/09/29/toronto-vancouver-have-world-s-3rd-and-4th-largest-housing-bubbles-ubs_a_23544956/.
  13. Andrews, Jeff. "Canada's Housing Bubble Is Starting to Burst." Curbed, Curbed, 7 Mar. 2018, www.curbed.com/2018/3/7/17085794/canada-housing-market-collapse.
  14. "Canada's Housing Market Still 'Highly Vulnerable' despite Easing Prices, CMHC Warns." Financial Post, 25 Oct. 2018, business.financialpost.com/real-estate/prices-easing-but-canadas-housing-market-still-highly-vulnerable-cmhc.
  15. Alini, Erica. "Will It Crash? Here's What to Expect from the Canadian Housing Market in 2019." Global News, Global News, 2 Dec. 2018, globalnews.ca/news/4688308/canada-housing-market-outlook-2019/.
  16. Khan, Mikael (April 2019). "Disentangling the Factors Driving Housing Resales" (PDF). Bank of Canada. p. 8. Retrieved 13 May 2019.
  17. Castaldo, Joe. "How Canada's Real Estate Market Went Completely Insane." Canadian Business - Your Source For Business News, 10 July 2017, www.canadianbusiness.com/economy/how-canadas-real-estate-market-went-completely-insane/.
  18. Andrews, Jeff. "Canada's Housing Bubble Is Starting to Burst." Curbed, Curbed, 7 Mar. 2018, www.curbed.com/2018/3/7/17085794/canada-housing-market-collapse.
  19. Castaldo, Joe. "How Canada's Real Estate Market Went Completely Insane." Canadian Business - Your Source For Business News, 10 July 2017, www.canadianbusiness.com/economy/how-canadas-real-estate-market-went-completely-insane/.
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