The explosive growth of the Canadian housing market in the last decade may finally be coming to an end.
Interestingly there is good logic on both sides of the debate and it is anyone’s guess where markets go in the short term:
The reasons for it to continue growing:
- Foreign buyers remain very active despite a slowdown in Vancouver due to the new 15% BC foreign buyers tax. This has however likely boosted Toronto sales.
- Three decades of low interest rates.
- Job growth in the major centres outpaces the national average, particularly Toronto and Vancouver, which collectively accounted for all of Canada’s increases in 2016
- Demographics reflect that there are more people aged 25 to 40 in these two cities and they have grown faster relative to other age groups. This segment is also in their prime home buying and child producing years, further stimulating home sales.
- The number of single detached homes built in Toronto in 2015 was the lowest since 1979 according to a BMO report. This imbalance in supply and demand is a big reason prices for single-family houses are experiencing double-digit price jumps. In May 2016 the average detached home price jumped 18.9%, while condos only saw a 5.9% increase.
- Housing market speculators flipping properties are very much part of this process although hard data on this activity is sparse.
- A continued weak Canadian dollar is stimulative to the housing market. Since 2011, the Loonie has lost 27% of its value against the greenback, while Canadian homes appreciated by 26%.
- If houses were priced in U.S. dollars, a very different perspective emerges. Canadian home prices aren’t appreciating, but show a decline of about 9% against the average benchmark price. The same trend is evident when pricing Canadian homes in Chinese yuan. This is worrisome because Canadians are actually being devalued on a global scale.
Among reasons for the long boom to end:
- Steven Poloz, head of the Bank of Canada says the Canadian housing boom is unsustainable for a number of reasons including overall household financial stresses and climbing debt.
- The anticipated interest rate trend, changing from the past three decade decline to a rising rate environment, appears to have already started in the U.S.
- Continued weakness in the price of oil as is anticipated by many given slow global growth and excess oil supply.
- Asset prices inevitably revert to their historical mean, which is overdue in Canadian housing prices.
- Buyers believing the real estate market is different this time. Canada’s housing market dropped about 15% in 1957 over six years and a whopping 25% in the early ‘90’s so maybe this market needs to digest some of the recent gains, which are more than double our long-term averages.
The correction may already have begun. Consider that the Teranet-National Bank index of house prices in Canada’s 11 largest metropolitan regions rose 6.1% in November, yet only four cities—Toronto, Hamilton, Vancouver and Victoria actually posted gains. Values in the other seven cities contracted, suggesting that a correction is well underway.
Here are two recent articles that provide more food for thought on our real estate market:
The first article from Maclean’s suggests that population growth isn’t driving Toronto house prices as many have claimed.
The second article from MoneySense magazine, takes a broader approach and provides the Canadian Real Estate Associations (CREA) perspective.