The boom in the Canadian housing market has been a remarkable 20-month tale in the wake of the pandemic. From pent-up demand to pent-up savings, immense price growth and sizzling sales activity, the Canadian real estate market has benefited sellers, leaving buyers sitting on the sidelines waiting for some respite.

With the average selling price for a home in Canada north of $700,000 – and more than $1 million in some major urban centres – there is one rather ominous word being tossed around throughout the national media landscape and global financial markets: bubble.

For housing markets such as Toronto and Vancouver, buyers and sellers have become immune to this term because conditions within these heated markets have felt bubble-like since long before the pandemic. However, bubble risks could potentially be a concerning turn of developments for small towns and rural communities that have not witnessed conditions like these before. Whatever the case, the consensus is that the pandemic surge has led to an unsustainable national housing market that could lead to either a minor speed bump in some provinces…or an immense nationwide correction.

Some Canadian Housing Markets Named “Bubble Risks”

UBS, a major Swiss financial institution, has published its latest assessment of 24 major housing markets in North America, Europe and Asia. The bank combs through a wide range of factors, such as local income levels and prices. Once it compiles the data, researchers place these cities into one of five categories:

  • Depressed housing market (a score of -1.5 or lower)
  • Undervalued (-0.5 to -1.5)
  • Fairly valued (-0.5 to +0.5)
  • Overvalued (+0.5 to +1.5)
  • Bubble (1.5 and up)

Of the six cities claimed to be in housing bubbles, two of them were situated in Canada. In what may be no surprise to anyone, these two Canadian cities were Toronto and Vancouver. The former received a score of 2.02, and the latter was given 1.66. Only Frankfurt, Germany (2.16) beat Toronto. Vancouver ranked behind Hong Kong (1.9), Munich (1.84) and Zurich (1.83).

“Real prices increased by almost eight per cent from mid-2020 to mid-2021,” the bank said, adding that these gains have been fuelled by historically low mortgage rates. Should the Bank of Canada (BoC) raise its key benchmark interest rate, this “could lead to an abrupt end to the current housing frenzy.”

UBS added that real estate investment is also in a challenging situation. The report authors noted that investors who purchased properties as a source of rental income would require 28 years in Toronto and 31 years in Vancouver to rent out these investment properties and cover the initial cost. This is why UBS economists think that Canada’s two largest cities are facing “a substantial and sustained mis-pricing of an asset, the existence of which cannot be proved unless it bursts.”

UBS is not the only financial institution to ring the bubble alarm bells.

Moody’s Analytics released its latest report, suggesting that Canada’s housing industry is overvalued by as much as 91 per cent. According to the models, here are the top five cities with overvalued home prices (all located in Ontario):

  • Niagara-St. Catherines: 90.8%
  • Peterborough: 79.65%
  • Windsor: 77.45%:
  • Hamilton: 73.12%
  • London: 61.77%

The top five undervalued cities in the country are:

  • Saskatoon, Saskatchewan: -31.78%
  • Calgary, Alberta: -30.92%
  • Edmonton, Alberta: -29.87%
  • John’s, Newfoundland and Labrador: -21.06%
  • Regina, Saskatchewan: -17.12%

What about the two largest markets? Toronto was overvalued by 39.53 per cent, while Vancouver was overvalued by 22.95 per cent.

Indeed, after home prices skyrocketed 375 per cent nationwide and as much as 490 per cent in Toronto over the last two decades, are these findings and prognostications even shocking anymore?

Is Canadian Real Estate Starting to Moderate?

In October, the Teranet-National Bank House Price Index did not rise month-over-month. This is the first time this has happened in the Canadian real estate market in more than two years. Moreover, according to the Canadian Real Estate Association (CREA), monthly residential sales rose 0.6 per cent month-over-month in November but declined 0.7 per cent year-over-year. But why did this happen?

The increase in the mortgage stress test could be a factor. In June, the Canadian government raised the stress test to 5.25 per cent, limiting the amount borrowers can take out, and reducing the pool of homebuyers.

Industry observers suggest that many prospective homeowners are now taking a wait-and-see approach, meanwhile sellers are keen to take advantage of the sky-high valuations before the Bank of Canada (BoC) potentially raises interest rates in April. Over the next few months, this may help to balance out many markets across the country.

Be it stress tests or rate hikes, one thing is clear: sales activity is beginning to subside in the Canadian housing market. This may not necessarily mean the boom is over, but it does suggest that the country has (finally) reached peak growth.

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