Canadian property bubble
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The Canadian property bubble refers to a significant rise in Canadian real estate prices from 2002 to present (with short periods of falling prices in 2008, 2017, and 2022) which some observers have called a
History
Background factors
Canada's last housing busts happened during the
The
Although representing only a minority of real estate investors in Canada (less than 5%),[18] foreign investors are often blamed for the housing crisis by the public. Targeting them has proven politically popular[19] and a temporary ban on foreign buyers was put into effect from Jan 1, 2023 until 2025.[20]
This influx of
In March 2017, the cost of owning a single-family house in the Greater Toronto Area had grown 33% in 12 months.[23] Even less desirable semi-detached homes had surpassed C$1 million in value. Suburban areas had seen large price increases as well. Homes that had not seen upgrades in decades were being sold well over the asking price. Condominium prices were consistently growing each year, even though a large number of units were under construction.[22]
Attempts to slow growth 2016 - 2017
In response to these trends, the provincial governments attempted to slow the growth of the real estate market and gradually bring down prices, in order to aid first-time home buyers in a way that would cause the bubble to shrink slowly rather than burst. In 2016 British Columbia instituted a 15% foreign buyer's tax, termed the National resident Speculation tax.
- Non-resident speculation tax
- Rent is only allowed to rise at rates posted in annual provincial rental increase guideline
- Develop standard leases that would further help protect tenants and insure landlords
- Create a program to balance the value of surplus land assets
- Put a vacant properties tax into place
- Tax to ensure new apartment complexes are similar to current complex properties
- Introduce a 5-year program to facilitate the building of more rental apartments
- Make it easier to use property taxes to generate more development opportunity
- Create Housing Supply team to help uncover and fix barriers to housing development
- Work to fight tax avoidance practices
- Reassess rules involving customer representation in real estate transactions
- Creating a housing group to advise the government about the state of the housing market
- More education for consumers about their real estate rates
- Create more thorough reporting requirements for real estate sales
- Improve reliability of elevators in Ontario buildings
- Updating the Growth Plan for the Greater Golden Horseshoe
These measures have failed to mitigate the property bubble.
2018 and 2019
Canada's
The
In April 2019, the Bank of Canada released a report entitled "Disentangling the Factors Driving Housing Resales" in which they stated Canada's housing market is "currently in uncharted territory."[clarification needed][31] 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. The report states, "Much of the previous strength in resale activity was influenced by extrapolative expectations."[31] The report concludes that with increases in household debt, stagnant wages and expected rises in interest rates, a snap-back may be inevitable.
The Bank of Canada estimates that investors, defined as owners who borrow to buy a secondary property while maintaining a mortgage for a primary property, account for around 20% of all home purchases in Canada between 2018 and 2019.
March 2020 to February 2022
The housing market experienced a brief slowdown during the onset of the pandemic, especially for condos in larger cities.[33] In response to the pandemic, the Bank of Canada slashed interest rates three times in one month[34] and reduced the mortgage "stress test" rate, which enabled buyers to qualify for slightly larger mortgages.[35] Prices soon rebounded. By June 2020, detached home prices had increased in 95% of Toronto districts, with double-digit increases in most (55%) of them.[36]
This defied many predictions, including those by the CMHC, which had forecasted prices falling by 9–18%.[37] Instead, by the end of 2021, the Canadian Real Estate Association's House Price Index had risen by 26.6%, the fastest annual pace on record.[38]
On Feb 23, 2021, Bank of Canada Governor Tiff Macklem said the Bank was only starting to see "early" signs of "excessive exuberance". In a Q&A, he said the Bank was not considering any additional measures to cool the market,[39] saying, "We need the growth."[40] While other countries were attempting to cool their overheated markets, Canada was not, citing concerns about the economic recovery.[41] The Bank indicated that it would continue to hold firm on low interest rates until likely 2023,[42] resisting calls from investors and economists[43] that higher rates were needed to cool the market. However, by mid-June, with fiscal spending booming and households flush with cash from stimulus, investors expected the Bank of Canada to begin raising rates in 2022.[44]
In early 2021, Maclean's reported that zoom towns, popular with remote workers, were experiencing population growth at the expense of major urban centres. Notably:
Statistics Canada data on population movement shows that from July 1, 2019 to July 1, 2020, Toronto and Montreal posted record population losses, while Halifax grew the second-fastest of any major urban area, and Moncton also grew faster than average. Housing prices have soared as people across Canada buy property in the Maritimes sight unseen through virtual tours, with Fredericton’s U-Haul dealer struggling to keep up with all the people renting moving trucks in Ontario and Quebec and trying to drop them off at its lot.[45]
During the COVID-19 pandemic in Canada statistics showed that the housing sector grew but much of the rest of the Canadian economy did not. Jeremy Kronick, associate director of research at the C.D. Howe Institute specified that "data from Statistics Canada show that, for the first time on record, investment in the housing market is now greater than 50 per cent of all investment in the Canadian economy".[46]
In March 2022, Oxford Economics forecasted a 24% drop in Canadian home prices by mid-2024, unless higher interest rates and anti-speculation policies fail. Were home prices to rise further (in this latter scenario), a crash of 40% and a financial crisis is to be expected.[47] Housing became the least affordable in Canadian history according to the Royal Bank of Canada's housing affordability index in early 2022, and has worsened since.[48]
2022 dip and 2023 recovery
Starting in February 2022, average Canadian home prices started to decline rapidly.[49] The Bank of Canada began hiking interest rates on March 2 2022.[50] Prices for detached houses had declined by almost $400,000 in the Greater Toronto Area by September 2022.[51] As the Bank of Canada hiked the overnight interest rate above 4% to combat inflation, mortgage rates rose above 5.5% putting pressure on borrowers. Inflation accelerated due to the energy crisis; at the time there no end in sight in how high interest rates will go to bring down inflation.[52] The Teranet-National Bank House Price Index peaked in May 2022 and had dropped 10% by mid-January 2023, the “largest contraction in the index ever recorded” since it began in 1999. Contractions from the peak to January 2023 were notable in London (-26%), Cambridge (-25%), Kitchener-Waterloo (-25%), Brantford (-24%), Hamilton (-23%), the Niagara region (-20%) and Barrie (-20%).[53]
However, by October 2023, prices were no longer falling and were even rising in many cities and provinces, surprising forecasters. The average price was up marginally month over month and, 1.8% year over year.[54] "Benchmarks" which adjust for house sizes and seasonal trends, were not as strongly up as averages, but regional disparities were very noticeable with benchmark prices in Calgary haven risen by 9.4 per cent in the previous year, to its highest level on record.[54]
2023 Foreign ownership ban
On January 1, 2023, Canada enacted a law prohibiting foreigners, except for immigrants and permanent residents, from acquiring residential areas in the country for two years in response to a real-estate bubble.[55]
Regional differences
This section needs additional citations for verification. (May 2021) |
Some commentators have stated that Canada as whole did not have a real estate bubble, only Toronto and Vancouver really did.
Economic growth,
Vancouver has experienced more direct foreign investment than other Canadian cities since the 1990s, as well as strong in-migration and has therefore increased faster than the rest of the country. High prices in Vancouver have pushed middle class buyers out to other parts of British Columbia.
Much like in British Columbia, in Ontario the fastest rising prices have been in the main urban centre, Toronto, which, like Vancouver is a major hub for foreign investment and immigration. Rising prices elsewhere in Ontario may be a ripple effect radiating out from Toronto.
Until 2020, Quebec and the Maritime provinces had not seen as dramatic growth in prices as the rest of the country, as their economic growth and population growth is generally much slower.
Immigration to Canada since the mid 2010s has been concentrated largely in Ontario and British Columbia, which has forced prices in those provinces to rise much faster than in other provinces.[56][57]
People displaced from the major cities by high prices have bid up prices in a limited number of popular smaller cities, creating secondary bubbles in those places, but not in smaller cities and towns generally, which are significantly cheaper in proportion to cities than they were a generation before. The numerically few smaller cities which have grown rapidly are those within the
.In January 2021, the Vancouver Sun reported that $500,000 in Killarney Road, New Brunswick (a commuter town near the provincial capital, Fredericton) could buy a five-bedroom, four-bathroom detached home, whereas in Vancouver the same money would only buy a 495-square-foot one-bedroom condo in Vancouver's Kitsilano neighbourhood.[58]
The
Money laundering
According to Stephen Schneider, criminology professor at St. Mary's University in Halifax, "We've never seen anything like this in Canada and you probably won't see anything like this any time soon." Schneider has also said, "I've never seen such a big operation … that is so geographically confined." His comments were part of the Cullen Commission, which is an ongoing public inquiry into money laundering in British Columbia, led by B.C. Supreme Court Justice Austin Cullen.[62] The Cullen Commission has estimated that in 2019 alone, $5.3 Billion of illicit funds was laundered through the Vancouver real estate market, which increased housing prices by 5%.[62]
Experts refer to "The Vancouver Model" as a way for Chinese organized crime to launder revenue generated primarily by fentanyl sales through casinos.[63]
In 2016, Transparency International Canada found that 33% of the most valuable residential real estate in Vancouver was owned by shell companies and at least 11% have a nominee listed on their title.[64]
Transparency International Canada also studied corporate ownership of
Transparency International Canada has highlighted that part of the problem is lack of data. They reported that availability of real estate ownership data varies by province and was hidden behind a paywall.[64]
In 2018, the BC government convened an Expert Panel on Money Laundering in B.C. Real Estate. The resulting report[66] recommended the disclosure of beneficial ownership, among other steps the government could take to address money laundering in the province. In May 2019, the BC government passed an Act[67] which led to the launching of the Land Owner Transparency Registry of BC[68] on November 30, 2020, which opened to public search on April 30, 2021.[69]
Risks
Canada is a nation heavily dependent on the real estate industry which accounts for roughly 14% of its GDP in 2021.[70] There is a high risk that if sentiments begin to change and investors feel the market is about to take a turn for the worse, there will be a mass of people selling their properties, causing prices to drop and potentially snowball.[22] Canadians are increasingly holding large amounts of mortgage related debt, reaching almost $2 trillion dollars of total housing debt in June 2021.[71]
Short-term fixed-rate mortgages are dominant in Canada,[72] typically with the interest rate locked in for five years. This contrasts with the United States, where most homeowners hold long-term fixed-rate mortgage contracts. If the reset rate in five, ten, or fifteen years 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 and private mortgage insurers. 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.[26][22]
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