Don’t believe the housing hype

There are plenty of signs that the Canadian housing market is still on some very shaky ground


Don't believe the housing hypeJudging by the latest real estate data, the Canadian housing market could scarcely be better. Average home prices are up more than 16 per cent this year, and in May they hit an all-time monthly high, according to the Canadian Real Estate Association. By those numbers, Canada didn’t just sidestep the housing market crash that continues to plague the United States, it sailed right through it virtually unscathed. And yet, there are plenty of signs that the Canadian housing market is still sitting on some very shaky ground—and even the potential that Canada’s big housing crash is yet to come.

There is one particular statistic that suggests trouble could be brewing. Unlike in the U.S., Britain and most European countries, household debt in Canada is, incredibly, still growing. That rising debt is being driven largely by record-low interest rates. Canadians have been buying homes not so much because they can afford them, but because many believe there’s never been a better time to buy, with lending rates so low. “There is no doubt that record-low mortgage rates have juiced Canada’s housing market,” wrote BMO economist Sal Guatieri, in a recent newsletter. Houses are barely more affordable now than they were during the market peak. And as people keep buying, houses may only become less and less affordable.

Not everyone agrees with the CRE figures that suggest the market has managed such a quick and painless turnaround, either. According to the Teranet-National Bank housing price index, Canada’s housing market is not recovering yet. Home prices have been falling for the past eight months, according to its latest statistics. Vancouver, Calgary and Toronto have each experienced significant price drops compared to last year. This would seem more in line with what one would expect after an unprecedented six-year housing boom in which home prices shot up 80 per cent.

It is, of course, possible that the correction will, ultimately, be modest. Guatieri expects that interest rates will remain low and income growth will remain subdued this year, before picking up next year. That will keep housing prices down, but would likely mean the worst of the correction is behind us.

But if mortgage rates go up sharply then “affordability will get crunched again,” says Guatieri, in an interview. Things could get much, much worse. And that’s not an unthinkable scenario. Some banks have already boosted interest rates twice this year. Then there is the possibility that job losses continue and the economy doesn’t recover quickly, putting further strains on household finances. The low interest rates and continued debt problems mean that Canadians could find them themselves badly over-exposed.

Guatieri isn’t forecasting a housing market crash. But, as he wrote last week, “it’s worth remembering that the further house prices go up and the longer household finances get stretched, the greater the risk of a painful correction. Anyone who doubts that should talk to an American or British homeowner.”

Click below to see what’s available in some of Canada’s largest markets.

150k 350k
500k 1mil


Don’t believe the housing hype

  1. From what I understand, the reality of the recession hit early enough this year for developers to pull back on their new home starts for this season. I'm wondering if the reduced supply on that front explains the relative stability of resale homes prices – in part?

  2. there's no question something is brewing here for those with household debt at 25% of every dollar earn and rising(mostly put on credit cards), mortgage payment taking at least 45% of your NET INCOME, that leave you with 30% of income to pay for home insurence, property taxes(in Saskatchewan it's between $300-400/month on average) then you have utilities, food, car loan? and gas, etc, etc ,etc,,,,good luck to the average Canadians

  3. There are hundreds and HUNDREDS of condominiums just in the downtown Vancouver area (Coal Harbor, West End, Yaletown, etc) with a price tag exceeding a million dollars…MANY are many millions! Are these stratospheric prices to be kept aloft by "Alberta money", "Chinese money"?! What IS keeping this vast array of living options so astonishingly expensive? Do Canadians really have $2-5 MILLION to spend on an apartment?! For that price you can have London or Monaco! The Okanagan Valley is equally as absurdly priced… Will this price 'levitation' continue?! How can it? Based on what I wonder?!
    Take 20-30% off the high end and it's STILL too expensive for what you get… I wish someone could explain it since I doubt the prices relate to normal 'supply and demand' issues…

  4. Price does not exist in a vacuum. A major constituent of price for housing is expectation of future direction based on past movement. Those million dollar condos in Vancouver have a lot of hope built into them. The most recent housing boom has all of the elements of the1980 boom, with the added boost of even lower interest rates. Prices post-1981 came down 20 to 25% as interest rates rose and momentum turned. I think we can expect a similar or greater correction this time around. We must recognize that the economic boom of the past 15 years has been based on unprecedented credit expansion in the US which inflated unsustainable levels of activity in our largest (vastly) trading partner. This situation in the process of seriously correcting. US housing prices and construction will not bottom until after the Option ARMs and Commercial building sectors have resolved. Resets of the mortgages for the former will peak in August of 2011. Foreclosures and abandonments will not conclude before 2012 based on the known reset schedule. Before then, it is quite possible that foreign lending to the US will experience debt revulsion. The borrowing needs of the US exceed the capacity of the total sum of global savers to satisfy, and the US will further dilute the purchasing power of its currency by unprecedented money printing (money supply expansion/inflation/"quantitative easing'" or whatever obfuscating terminology chosen). Foreign central banks, sovereign wealth funds, pension funds, insurance funds, etc are already expressing deep concern about debasement of the US$ and are voting with their feet. In cases where US govt securities are still being purchased, there is a sharp trend to shorter maturities. This is a macro-economic background to consider when evaluating prospects for the Canadian housing markets. We will not prosper if we plan on hitching our wagons to a US economic engine that shows such serious indications of fundamental damage and whose repair plans are counterproductive, based as they are on more borrowing and growth of government obligations.

    • Well said DragonLake! A trip down economic history lane proves your point. This mess is just getting rolling people.

    • As an economic "realist", living in Vancouver's real estate market has been a depressing decade, except for the brief period in 2008 when prices slammed down up to 20% in some neighbourhoods (like West Vancouver) after the last fool left the market.

      Despite being proven wrong so many times by the continued effervescence of this bubble, I believe that Vancouver's housing market is headed for a much harder fall than 2008. The only reason that housing prices went up was the absolute shovelling of cash into the economy by the Bank of Canada, and the Feds zealous inflation of the CMHC's balance sheet.

      When the quantitative easing stops (which is inevitable unless the Bank of Canada is supportive of a crash in the loonie and high inflation), and the Feds realize how much CMHC is costing them and/or how much exposure they have to a fall in housing prices, the Vancouver market is toast. In fact, I hear it's already dying. Back in 2008 it took perhaps a month for market sentiment to turn from buoyant to aweful in Vancouver. I expect a repeat – but with no quantitative rescue.

  5. The latest eye opener is "Three Harbor Green", a 30 some story condo tower in Vancouver. The upper half of the building has units of 3000 sq ft priced, sit down everyone, at over $7 MILLION! This works out to $2200/sq ft which blows past anything you can find in Belgravia, Mayfair (Londond) or Monaco, Geneva or Hong Kong! Even $1000/sq ft., a HEFTY price anywhere these days would price them at $3M, NOT $7.5Million! Someone has seriously misread the market of about a year from now when the building will be ready to occupy. If the builders think there is 'Chinese money' breathlessly waiting for such a price gouge, I would offer that the wealthy Chinese did not get that way by foolishly throwing their money around! No one with that kind of money would be willing to put all those eggs in one Vancouver basket! (Just to make the point, a $7M. mortgage with 20% down/ $1.4M/ would be a carrying cost of 'back of the napkin'> $38,000.00/month + $3500/month maintenance + $2000/month property tax = $43,5000.00/month)… There are enough people out there willing to pay THIS much for a Vancouver waterfront apartment? Based on WHAT income stream!? Heads of major corporations aren't this foolish! Get real people! The BEST West Van waterfront homes or mansions in tony hoods there are going for $3-4M tops! Even a 50% price correction wouldn't entice this into anyone's real estate radar!
    A building FULL of drug lords ALL paying cash? I don't think so!
    Even in an era of super low interest rates and 'easy money', these prices wouldn't be paid and we are WAY past that era my friends… The era of $1000/sq ft apartments has past I'm afraid!
    Someone in this building transaction is going to win and someone is going to lose, big time! Is the finance committee all doing coke? I've studied high end global real estate for some time now and I can tell you, this is beyond silly… Good luck guys…!

    • I could not agree 100% more. The real estate market is going to correct itself to what people can afford to buy. I just came back from the Okanagen Valley, and fell in love with the place, but i cant justify paying $400,000for a 600 sf condo in Kelowna. The only real jobs there are low paying retail. The money from Alberta has dried up in the condo market.
      Look under in the Okanagen and it looks like the whole area is for sale. I walked into an open house in the Mission area of Kelowna. The real Estate agent was telling me there is no better time to buy. B.S. Have you ever heard a real estate agent tell you this is not a good time to buy. Of cource not, they would make no commission. What ever happened to the days when the husband worked,the wife raised the kids and they could afford a small house. These days both the husband and wife work to afford a small condo.

  6. @Vanc… I came across a $Million condominium in Kelowna, NOT on the lake but on the top floor of a building downtown. It was called a "Penthouse", ooohhh! One Million dollars! I rest my case people… Get real about pricing and STOP thinking you can flip something to some 'greater fool' and make a boatload of money on each and every transaction! I KNOW everyone thinks the Olympics will juice Vancouver real estate and it was the same story I've heard again and again with Expo… Get a clue…

  7. On strict comparison of the prices in Toronto and Vancouver. I find that Toronto is priced very modestly. Downtown Toronto can be kind of expensive with average price approximately $400k, but In Vanvouer this kind of houses would look like a steal. IF you go out to GTA, prices are even better where 3000sqft detach home selling in 500k ranges. What kind of rise in the mortgage rate would you need, in order to create a housing collapse??? 5% 6% or even higher???

  8. Having lived in West Vancouver and now in Toronto, I feel both areas are outrageously demanding prices from a market that continues to shrink over time. These places depend on new money coming into Canada. Yet, in the more recent times foreigners have come to love suburbia better. Outlying areas of Vancouver and Toronto alike have seen huge housing booms in the past 10 years. This is a trend that will only increase over time. Why would you move to Canada to suck in smog and fight traffic, when you can enjoy more space for less money. The real problem is neither city has the infrastructure to handle a mass exudes of people living outside the city and working downtown. There will never be affordable housing within the city limits, lets face it that was never the case. Do you get what you pay for? Probably not. But you certainly get what you deserve if living in the hub of an urban center suits your lifestyle.

  9. Ummm…I think I will wait a while yet before jumping back into real estate. Anyone flogging real estate now has their own best interests at heart, not yours. I've never heard a real estate agent saying anything but right NOW is the best time in the history of the world to get in before it's too late….bla-bla-bla…for them. There is a massive correction coming, boomers retiring on far less than they ever imagined and their kids and grandkids working at walmart. I expect to pick up a beautiful home in the coming years…cheap…and I have the cash to do so. But I'm not touching anything, anywhere just yet. Cheers.

  10. The prices shown on the example houses get even more shocking when you consider the difference in calculating square footage in various places. In Winnipeg, they don't count basement square footage so that 2000 square foot 2 storey is actually more like 3000 square feet. It appears that in Vancouver, they do count it. I've looked at a bunch of houses that sounded huge on paper (at 2100 sq ft), but when I get there I realize they counted the basement so I'm looking at an equivalent 1400 sq ft by the 'Peg's standards. The examples are not comparing apples to apples.

  11. W Moores is right… The world wide real estate bubble is deflating and prices are correcting everywhere! This is NO temporary phenomenon but one that will take a decade or more to work out… Britain's house prices tripled and the country has gone from 6% financial to finance accounting for 30% of gdp/ NOT sustainable/ Spain's real estate is off 60% and it hasn't done correcting/ The EU banks tapped their central banks for 285 Euros to cope with the coming writedowns/ Iceland!?/ Most Eastern European countries AND Russia are teetering on the edge of default!/ It's all connected and NO economy is coming out unscathed. Especially a resource based economy like Canada's where 40% of the currency is linked to resources…This is global and we are only in the early stages. Adjust your thinking accordingly and don't drink ANY Kool-aid!

  12. you guys think that relestate in your neck of the woods is out of wack , you should see what they want for a slumdewelling one floor appt. converted into a condo in edmonton, its rediculous, between 250 and 300k and you still living in an apt. with one foor in a less than desirable area,thats not free enterprise thats greed caitalism and that folfs is wats going to bring us down, obama or no obama

  13. International Organized crime uses Canada real estate to launder their proceeds of crime. This is the only reason that the real estate market has had any legs. The only thing growing in Canada is crime, unemployment and violence. An open port for gangsters the world over. Third world slum at 5 star prices.

  14. Long time average ratio of median house price to median income is about 3. This was criteria to affordable mortgage few years ago.

    Now for Toronto this is 4.5 and for Vancouver it is 8. I still believe these ratios are higher in reality. Realtors' statistical tricks are hard to beat.

    The highest ratios are in Moscow 33 and Bucharest 35. I know for sure about Moscow why it is so high. It is lack of alternative investments into reliable stock / bond market and too much of income disparity with super rich people are buying 10-20 apartments and whole floors in newly constructed buildings. Then they post commercials saying that 95% were sold out and trying to resell it at double prices.

    The people walk by at the evenings and count how many windows are lit. This way they realize that nobody lives there and this all is fake value.