Canadian Housing Market: Insane Toronto Housing Bubble Set to Pop

Canadian Housing MarketToronto Housing Bubble Set to Burst

The Canadian housing market is insanely overvalued, particularly the Vancouver and Toronto housing bubbles.

Nationally, sales activity and average price sales hit another record in April. This comes at a time when the country is on its way to another recession. The drastic increase in housing prices in Canada is unsustainable and 2016 could very well be the year the overstretched Canadian housing bubble bursts. Canadians could be left with an underwater mortgage, drowning in debt.

Canadian Housing Market

The Canadian real estate market and the broader economy pretty much avoided the catastrophic fate that sent the U.S. economy into a recession and the real estate market crashing down—but that was in 2008 and 2009. A lot has changed since then.

The U.S. economy has rebounded to some degree. It’s not exactly on fire, but it is showing a slight heartbeat, even after abysmal first-quarter gross domestic product (GDP) growth of just 0.5%.


In fact, the U.S. housing market is showing signs of sustainable growth, too.

According to the S&P/Case-Shiller U.S. National Home Price Index, between 2007 and 2012, housing prices plunged more than 30%. And while U.S. housing prices are still nine percent below 2007 levels, there is a definite trend to the upside.

Since the beginning of 2012, the median sales price for U.S. existing homes has increased 50% from $154,600 to $232,500 this past April. This makes sense. U.S. real estate tanked in 2008 but has since rebounded as the economy improves. (Source: “Existing-Home Sales Rise in April for Second Straight Month,” National Association of Realtors, May 20, 2016.)

The same cannot be said for Canada. Again, Canada rebounded much more quickly from the 2009 recession that swept the planet, but the country’s economy hasn’t exactly been on fire either since then.
House Price Chart

Over the last five years, the country’s GDP has hobbled along at an average pace of about 1.3%. But Canadian housing prices have done anything but hobble along. While the Canadian and U.S. housing market followed each other fairly closely over the years, the price gap has widened to record levels since the U.S. housing bubble popped.

Today, the average price of a home in Canada is a record $508,097. Even with the exchange rate factored in, the Canadian housing market is still around 50% more expensive than the U.S.

Canadian Housing Bubble

One of the only so-called bright spots in the Canadian economy over the last number of years has been the real estate market. The Canadian housing market has been defying the odds makers, climbing higher and higher, reaching new sales and price records month after month.

A little history: Between 1980 and 2012, Canadian residential home prices grew by an average 5.4% per year. That sounds reasonable. Over the last number of years though, that reasonable annual price appreciation has been blown out of the water, defying logic and expectations. (Source: “Long Run Rate of Return for Canadian Home Prices,” TD Bank, March 11, 2013.)

Even the Canadian Real Estate Association (CREA) is out of touch. After years of strong growth, it predicted housing prices would rise by 2.1% to $370,900 in 2013. By the end of 2013, housing prices had increased 10.4% to $389,119. (Sources: “CREA Updates Resale Housing Forecast,” The Canadian Real Estate Association, last accessed May 27, 2016; “Average Canadian house price up 10% to $389,119,” CBC News, January 15, 2014.)

What about 2014? The CREA predicted a modest 1.8% increase in 2014. In reality, the average price of a Canadian home increased by just 3.8%. The slight annual increase was, analysts thought, a precursor to what was to come on the heels of cooling energy prices in oil-dependent Canada. It didn’t last. (Source: “Canadian Existing Home Sales Decline in December,” The Wall Street Journal, January 15, 2015.)

In 2015, the Canadian Real Estate Association predicted the average national price for the existing residential market would rise just 0.9%. Instead, Canadian housing prices roared ahead 12% to an average of $454,342. (Source: “Average Canadian house price up another 12% to $454,342,” CBC News, January 15, 2016.)

Many predicted the Canadian housing market would slow down come 2016. That hasn’t happened—and isn’t likely to. In January, house prices were up 17%; in February, they were up 16.4%; and in March, they were up 15.7%. This past April, the average sale price increased more than 13% year-over-year to a record $508,097. (Source: “Canadian home sales set record in April,” The Canadian Real Estate Association, May 16, 2016.)

Even if the Canadian economy was doing fabulously, the housing market cannot continue to climb at this insane pace. Monthly double-digit price growth raises the risk of a deeper correction. A correction might be defined as a drop in value of at least 10%. I think the Canadian housing market will be lucky to escape with that kind of modest drop.

Toronto Housing Market

Toronto is the third-largest city in North America, behind New York City and Los Angeles, but it’s No. 1 for real estate investment. That said, the record-setting streak over the last number of years (and 20-year bull run) has many waiting for the inevitable price correction.

Why? Because if something sounds too good to be true…it probably is.

Until then, though, Torontonians are enjoying their newfound wealth. As you’ll see later on, they have been using their properties as bank machines—and the banks will need to eventually be paid back.

First things first, though, remember that numbers don’t lie. Toronto’s housing market is escalating at an unsustainable pace. Across the province of Ontario, of which Toronto is the capital, property values have increased 18.5% between 2012 and 2016. That’s an increase of 4.5% annually. (Source: “Ontario property values jump on Toronto’s surging market,” The Globe and Mail, May 27, 2016.)

Locally, however, Toronto and the surrounding regions have been soaring much higher. Home values in Richmond Hill have climbed 47% since 2012, or roughly 12% annually. In neighboring Markham, property values have jumped 44%. These two communities are even outstripping property values in Toronto, where homes have appreciated 30% since 2012.

In April, the average price for a property (all types) was up 16.1% year-over-year at $739,082; that’s more than $100,000 higher than the $636,094 average in April 2015. (Source: “GTA Realtors Release Monthly Resale Housing Figures,” Toronto Real Estate Board, May 4, 2016.)

The growth can be attributed in large part to the strong demand and short supply of detached homes. However, keep in mind that’s the average increase for all property types—detached homes, townhouses, condos, etc.

If you single out detached homes, the average price of a house in Toronto increased 18.9% to $1.25 million.

Oddly enough, that wasn’t the biggest increase. The average price of a townhome in Toronto increased 23.8% to $901,159.

Condo prices may not have climbed at the same rate as detached homes and townhouses, but there is still a condo bubble in Toronto. Across the city of Toronto, property values for condos are up 12% since 2012 at $363,000.

In 2016, the average price of a condo has been climbing aggressively. In February, the average price of a condo popped more than 17%. In April, the competition for a condo in Toronto heated up as condo sales increased 15% across the region. The average price of a condo climbed just seven percent. Even the cooling down period is faster than most North American markets when they’re on fire. (Source: “GTA Realtors Release Monthly Resale Housing Figures,” Toronto Real Estate Board, March 3, 2016.)

Vancouver Housing Market

Then there’s Vancouver. With the Pacific Ocean to the west and mountains to the east, the city is nestled between beautiful surroundings. This geography also prevents the city from really growing, creating one of the continent’s fiercest housing markets and real estate bubbles.

In April, the price of a home (all types) in Greater Vancouver soared 25.3% year-over-year to an eye-watering $884,800. If you want to buy a detached home in Vancouver, it’ll set you back $1.4 million. (Source: “Vancouver area benchmark house price now $1.4M, up 30% in 1 year,” CBC News, May 3, 2016.)

Even that’s a little deceivingly on the optimistic side. The benchmark price varies depending on where you are in the city. The highest benchmark price for a detached home is Vancouver’s west side, at $3.2 million. Prices there have increased 28.4% over the last year and 172% over the last 10 years. (Source: “Home sales remain at record levels across Metro Vancouver,” Real Estate Board of Greater Vancouver, May 3, 2016.)

Over the last year alone, prices are up a whopping 28.4%. At that rate, the benchmark price for a home on the west side will be more than $6.0 million in just a few years.

That’s hardly sustainable, but it’s all about location. The 86-year-old fixer-upper on the west side in Vancouver hit the market at $2.4 million—and sold for the asking price.

Don’t get the west side of Vancouver mixed up with West Vancouver, though. The benchmark price for a detached home in West Vancouver is just $2.93 million. That’s a one-year increase of 31.6% and a 10-year increase of 130%.

A lot can happen in a year if you live in Vancouver.

In 2015…

Property Values for Single Family Home

In 2016…

Property Values For Single Family Home,2016

To put that into proper context, the median family income in metropolitan Vancouver is $73,390. That’s lower than the Canadian average. (Source: “Median total income, by family type, by census metropolitan area,” Statistics Canada, last accessed May 27, 2016.)

If you’re a first-time home buyer in Vancouver, you can expect to work for 23 years just to save up for a down payment on the average home in Metro Vancouver. Graduate from university at 20 years old, live with your parents, and then move into your own home with your partner and kids when you’re 43 years old. (Source: “Code Red: Rethinking Canadian Housing Policy,” Generation Squeeze, May 25, 2016.)

Consider that in 1976, it took six years for a full-time worker to save a 20% down payment for an average-priced home in Metro Vancouver. That’s 17 fewer years of saving to pay for just 20%.

Some (real estate agents) call it a housing boom in Vancouver, but it’s all adding up to a Vancouver housing bubble.

What to Watch for as the Imminent Housing Bubble Pops

Toronto’s hot real estate market is more expensive than New York City’s and the valuation of Vancouver housing prices (compared to median income) is more expensive than San Francisco.

But it’s not as if the Canadian government hasn’t tried to curb the rise in Canada’s red-hot housing market in an effort to avoid a U.S.-style meltdown. The federal government has implemented a number of changes to Canadian mortgage rules to cool down the market, but it hasn’t worked.

It doesn’t matter if you cut the amortization period from 40 years to 25 years, have a minimum down payment of 20% (you can put down as little as five percent, but you have to pay for mortgage insurance), reduce the minimum amount you can borrow when refinancing, etc. Soaring property values and artificially low interest rates have a way of making people borrow and buy irrationally.

And now, Canadians are getting eerily close to being in the same boat as the U.S. was before the housing bubble burst eight years ago.

At the end of 2015, Canadians had amassed a record-high debt burden. The ratio of household credit-market debt to disposable income clocked in at 165.4% in the final quarter of the year. That means that for every dollar they have, Canadian households hold more than $1.65 in debt. (Source: “National balance sheet and financial flow accounts, fourth quarter 2015,” Statistics Canada, March 11, 2016.)

In 2015, household debt climbed 4.9%, the fastest pace since 2011, to a record $1.92 trillion. That number includes a 6.3% increase in mortgage debt (also the fastest since 2011). Disposable income, on the other hand, inched up three percent.

Sadly, I do not have the ear of Robert Shiller, but I do have access to his data. It’s a couple years old, but even more poignant now than it was then. At the time, Shiller said, “Canada’s success story is uncomfortably similar to the U.S. success story. It might be offensive to Canadians, but we’re like two peas in a pod.”

When it comes to housing prices, Canada’s valuations are getting very close to the levels at which the U.S. housing bubble peaked. This suggests that Canada is not just in a housing bubble, but it’s in a bubble that’s close to popping.

Canada Home Prices

This is the trajectory of America’s housing market over the same period.

Real U.S. Home Prices

But the Canadian housing market is sound! Or so those in the industry want you to think. Buy, buy, buy. Those who find solace in Canada’s soaring housing prices need to keep in mind that they fell by 30% in the 1990s. But things are different this time, right? Sure, just like things were different in the U.S. back in 2008, when stocks were at record levels and owning a house was a sure thing.

There are a large number of reasons why Canadians and those investing in Canadian real estate should be concerned about the stock market bubble bursting.

Rising Interest Rates

The Bank of Canada (BoC) is holding its key lending rate at 0.5%. That’s good news for Canadians who like to borrow and take on debt. And the Canadian economy is doing so poorly, the BoC is expected to keep interest rates low for the foreseeable future.

The U.S. Federal Reserve, though, is a different story. Janet Yellen has signaled she could raise interest rates in June. It’s unlikely, but it’s possible. And even if the Fed doesn’t raise rates this month, they will eventually rise. When they do, it will impact Canadian commercial lending rates, which will hammer those Canadians harboring record debt levels—especially when you consider 25% of Canadians are living paycheck to paycheck and a quarter say they’ll be in debt for the rest of their lives. (Source: “A Quarter Of Indebted Canadians Say They’ll Be That Way For Life,” The Huffington Post Canada, May 26, 2016.)

Oil Prices and Fires

Canada is heavily dependent on oil. Falling oil prices and the recent multi-billion-dollar fire that swept through Fort McMurray (the epicenter of the Canadian oil sands industry) are already having an impact on the country’s GDP and real estate.

It is estimated that the Fort McMurray fires and the shutdown of the oil sands cut production output by an estimated one million barrels a day. The wildfires started on May 1 and continue to rage. Close to $1.0 billion of oil sands production has been lost—that’s $1.0 billion in lost GDP. (Source: “Nearly $1 billion of oil sands production lost due to Fort McMurray fires so far, report estimates,” Financial Post, May 17, 2016.)

According to the Bank of Canada, fire-related destruction and the halt and cut in production will shave off about 1.25 percentage points from the country’s real GDP growth in the second quarter. This will plunge the entire country’s GDP into the red for that quarter. (Source: “Bank of Canada holds benchmark interest rate steady at 0.5% again,” CBC News, May 25, 2016.)

Even before the fires, real estate prices in oil-dependent provinces like Alberta, Saskatchewan, and Newfoundland have been retracing. Canada might have reported record real estate prices in April, but if you cut out British Columbia and Ontario, the average price for a house in Canada falls from $508,567 to $299,591—a year-over-year decrease of one percent.

Economic Recovery?

Higher oil prices have not really translated into economic growth in Canada. Canada’s automotive sector has been doing well, but new manufacturing has not appeared. And with higher oil prices comes a strong Canadian dollar.

The Canadian economy is expected to rebound in the third quarter as oil production resumes, but economists have been predicting a return to normal growth levels since the recession ended in 2009. That hasn’t happened. What Canadians have been left with is persistent, slow growth.

Low interest rates have allowed Canadians to buy homes and rack up debt, but the morbidly slow economic growth has not helped the country’s underlying fundamentals.

Canadians are in debt, wages are flat, and the economy is a lethargic heartbeat away from a recession. But at least they live in million-dollar homes soaring in value daily…that they will soon be unable to pay for.