No, Canadian House Prices Aren’t Coming Down Anytime Soon

As part of the millennial cohort that rents their primary residence, it pained me to type that title. However, the reality of the situation we’ve been facing over the last two years needs to be faced, and faced frankly. This is a (very) quick and dirty summation of why I don’t think that we’re going to see housing prices here in Canada come down to earth anytime in the near future.

Over the past 2 years, you’ve watched with either jubilation or horror as prices all over Canada skyrocketed, depending on whether you own a home or not. Pandemic-driven demand for larger living spaces with room for home offices drove an exodus from major urban centres towards suburbs and smaller surrounding cities and towns. Teleworking now no longer tied workers to a particular location — and buyers cashed in. People who were sitting on millions of dollars in home equity from having bought in Vancouver or Toronto 20–25 years ago sold for huge profits, and took their money to secondary markets and other provinces (notably the Maritimes), outbidding locals with ease and driving up prices in those areas.

Canada’s real estate practices, such as blind bidding, enabled people to compete fiercely for a small supply of homes, and encouraged by realtors salivating at the thought of commission dollars regularly bid six figures over asking. Material costs increased due to supply chain disruptions, slowing down construction of new homes, which wasn’t even near enough to support our current population pre-pandemic, much less our projected population as immigration returns to normal levels. Those houses that were still being built were now increasing with every new allotment. I have a friend who bought a new build townhouse for about $600k, and the next release down the street a month or two later were going for $40k more. That same friend told me about one of her friends who purchased a detached home for around the $600k mark, and later that year the same model in the same neighbourhood was being sold for $1M.

The Bank of Canada’s key policy rate has remained near zero this whole time at 0.25%, with Canada’s central bank reluctant to raise rates for fear of hurting an economy battered by COVID-19. This cheap money has helped businesses and investors snap up real estate at accelerated paces — in Ontario approximately 1 in 5 buyers of real estate are investors. In Toronto, it’s about 1 in 4. All of the above have come together in a perfect storm to push prices to historic highs, and completely sever them from any sort of valuation supported by fundamentals and logic.

There’s no single answer, no silver bullet to solve Canada’s housing problem. Interest rate hikes won’t solve the problem, as new buyers who put less than 20% down must pass a stress test (currently at 5.25%) to make sure that they could support a much higher interest rate than we currently have. Plus, for those who already owned a house, they can leverage their existing home equity to buy another property, and it gets exponentially easier to do the more real estate you own.

Likewise, densifying will not be a viable solution in the short term, as zoning is governed by the municipalities, and the current byzantine regulations favour single family detached dwellings in major urban centres, which take up huge amounts of space (relatively speaking) at the expense of density and ultimately affordability. New construction is often hamstrung by NIMBY (Not In My Back Yard) movements which seek to preserve the ‘character’ of their neighbourhoods (and by ‘character’, they mean property values) by deterring densification.

Supply is a major factor in Canada’s housing crisis. We have the least amount of housing per capita out of all the G7 countries (424 homes per 1000 residents), and are 1.8 million homes short of just catching up to the G7 average. New construction can’t keep up with the enormous demand, and so long as said demand remains, housing prices aren’t going anywhere.

That’s not to say that they will never come down. But it would require major changes in the market (demand and supply) and a coordinated effort by all levels of government to address, things which are not likely to happen anytime soon. In my opinion, it would take a major negative shift in global opinion of Canada as an attractive market both for immigration and investment (I won’t even start on ‘snow washing’, as the large amount of money laundering through our real estate market is called) for the demand to even start to slow. Anecdotally, I have seen increasing sentiment on forums and social media from immigrants to Canada who have been disillusioned by the idea they had versus the reality here.

Canada’s real estate market now makes up too large a portion of its GDP, and is valued at about 300% of said measure— that’s 3 times the total output of the Canadian economy. This means that the federal government and central bank in many ways cannot afford to let housing crash, or even significantly correct, due to the economic repercussions on both the country as a whole and its citizens.

It’s a house of cards, and we who do not own our homes are the jokers.



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