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Canada’s Largest Real Estate Markets More Bubble-Prone than U.S.’s

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Canada’s Largest Real Estate Markets More Bubble-Prone than U.S.’s
4 min. read

Image: Evgeny Pylayev/Shutterstock.com

Remember the financial crisis of 2007–2008? It was precipitated by the US real estate industry, and falling property prices were one aspect that hit many home owners badly. But prices have generally risen considerably since then and there is talk of housing bubbles once again. The Canadian real estate market has its own, quite dramatic story.

Canadian Real Estate Market Not Like U.S.’s

The inflated U.S. property prices before the crash—known as the ‘subprime bubble’—fell to their lowest point in 2012, a level that had not been seen for almost 10 years. But prices rose again and were back to their 2006 peak and beyond about 10 years later—another bubble, some would say.

Property prices in Canada didn’t have the same trajectory, however. After a small dip following 2008 they were rising again very soon. Canadian home owners may have felt good about this, but the reality was that the bubble just kept growing. But now there may be a time of reckoning. Wolf Richter, founder of the Wolf Street website, has made a comparison of the biggest Canadian real estate markets with the U.S.’s most notoriously overvalued market, that of the five-county San Francisco Bay Area, and revealed the dramatic differences. He says that:

“The bubbliest Canadian markets only had a little-bitty dip, and within months were back on track to what would be an 18-year housing boom that is now coming undone.”

Canada’s Major Markets All Different but All Overheated

The first potential Canadian housing bubble that comes to mind is the Vancouver real estate market. The National Bank House Price Index for Rain City rose by an unprecedented 316% (i.e. more than quadrupled) from January 2002 to its highest point in July 2018. By comparison, the San Francisco Bay Area—having properly been through the slump—managed a maximum increase of 121% since 2002.

The Toronto real estate market didn’t show the same extreme figures as Vancouver but nevertheless the National Bank House Price Index registered a 218% rise since January 2002 (i.e. it more than tripled), still easily beating the Bay Area’s 121%. Real estate in Montreal appears to be a special case, having scarcely suffered a dip during the crisis, registering a 158% increase since 2002, and still looking vigorous. The Calgary real estate market, meanwhile, has an economy all of its own, partially dictated by oil prices, and this has ensured that its price increases are more on a par with the San Francisco Bay Area’s.

Real Estate MarketNational Bank House Price Index
increase from 2002 to peak
San Francisco Bay Area121%
Vancouver316%
Toronto218%
Montreal158%
Calgary124%

Will the Bubble Burst?

But the cracks have been showing for a year or two, with declining sales and pricing in many markets in Canada. The National Bank House Price Index has declined 3.9% in Vancouver since its peak in July 2018 and by 4.0% in Toronto since its peak in August 2017, and declines were also registered from January 2019 to February 2019. These decreases admittedly have something to do with rising interest rates, the mortgage stress test and the foreign buyer taxes and that were implemented in both these places—Montreal doesn’t have such a tax and its prices are still going up—but declines do tend to ring alarm bells.

Home buying in Canada is now pricier than when the country last saw a housing bubble burst, back in 1990. In September 2018, Toronto and Vancouver were ranked third and fourth on the UBS Global Real Estate Bubble Index of the most at risk cities. Many hope that prices will stabilize on their own, avoiding both busts and further booms, but the risk remains that confidence in the market will fail and people will be anxious to sell, rapidly driving down prices—that’s when a bubble can burst.

Better News

But the forecast is not entirely bleak. Indeed, toward the end of last year some predictions were that the Canadian housing market might avoid both boom and bust. And at the beginning of 2019, TD senior economist Roshi Sodhi commented that:

“Barring a shock to household incomes or employment…. an improvement in market conditions by mid-year remains a reasonable bet.”

Canadian home owners can only hope that, despite the jitters, this prediction proves to be true. The real estate market accounts for a sizable part of Canada’s economy these days, and steady-as-she-goes would probably be a welcome scenario.

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