by Umar Farooq
Canada is a G7 country with a varied economy. As one of the US’ largest trading partners, what happens in the Canadian economy can have consequences for the rest of the world. One issue in Canada that has nervous bankers, investors, homeowners and the government is the sharp spike in real estate prices over the last few years. This phenomenon is particularly evident in the largest metropolitan area of Canada, the Greater Toronto region. There is a growing fear that with the real estate prices at an all-time high, a crash is not only inevitable but imminent. Therefore, there is increasing pressure on the federal and provincial government to intervene and prevent a crisis.
“According to the IMF, Canada’s $1.5 trillion mortgage market has helped sustain consumer spending, but has left more than a few households grappling with massive mortgages—especially in Toronto (and the overall GTA) and Vancouver. The housing market has also, as many Mississauga residents no doubt know, alienated prospective first-time buyers who can’t afford to purchase $400,000+ one-bedroom condos, let alone $1 million detached houses”. To compound the issue, credit ratings of Canada’s six largest banks were lowered recently, reflecting concern that high household debt and the rapid appreciation of house prices could weaken asset quality in the future. Housing issues are—and have been for some time—top of mind for all levels of government. The CMHC has steadily tightened lending practices, while the provincial government has moved to implement a 15 per cent foreign buyer’s tax to help cool speculative investing”. Insauga
“The Toronto and Vancouver housing markets are on the brink of a “severe downturn” that could hurt the country’s GDP and drag home prices down by up to 40 per cent, a Capital Economics economist says. “I see a correction between 20-40 per cent in the Canadian housing market in five years,” David Madani, senior Canadian economist at Capital Economics, told Business News Network on Monday. He suggests there will be a slight dip in Toronto housing prices before the end of the year, but that’s all it will take to scare many homeowners into cashing out of the market.” Once prices stop going up, the whole reason for speculating in the market disappears,” he told BNN. “Sales have slumped. Usually, prices follow sales.” ctvnews
“The biggest driver of rising real estate prices in Canada is the fact that there are just not enough residential dwellings. The number of new houses is certainly not enough to meet the increasing demand. Similarly, the provincial government has, for many years now, encouraged high-rise development in the form of condominium buildings and discouraged single detached homes. So, while one sees huge stretches of undeveloped land in the region, there are not enough houses for people to live. The government’s policy to keep the vast stretches of land undeveloped has not only failed, it has also created a crisis. The demand for housing in Toronto is increasing because of both immigration as well as people moving to Toronto from within Canada. It is well known that Canada is an immigration-friendly country that welcomes people from around the world. Due to the diversity of the Toronto region, a significant number of immigrants and refugees decide to settle there. On the other hand, people are moving to Toronto from other parts of Canada due to increased job opportunities in the region, whereas other parts of the country are suffering from the aftermath of depressed oil prices”. Themarketmogul
The bottom-line is that the possibility of an imminent major crash in the Canadian real estate market, and even a major correction is doubtful. This is because there are real reasons that are driving up the prices. It is not only assumptions that are leading the trend. Also, the three tiers of government, federal, provincial, and municipal are on high alert and have vowed to take steps to cool down the market to try to avoid a full-blown crash. In the recently announced budget, the provincial Liberal government of Premier Kathleen Wynn has proposed legislation to impose a tax on foreign buyers as well as announce rent control laws. These are only baby steps and are unlikely to make a significant dent on the price increases. They will, however, cause a plateau in the rate at which real estate prices are increasing. However, there is almost zero chance that these measures will actually bring the prices down in any significant way. The reality is that the Canadian government, as well as global investors, will strive to ensure that the prices are sustained at the current levels because anything otherwise would be disastrous both domestically and globally.
by Umar Farooq