Compass Money: Canada’s Worsening Housing Bubble Raises Concerns
Prime Minister Trudeau has promised to address Canadians’ housing concerns. (Wikimedia Commons)
The rapid rise of Canadian housing prices has put homeownership out of reach for many hopeful buyers. The aggregate price of a home in Canada increased by 21.4 percent in the past year—from $617,800 to $749,800. This trend has continued for more than two decades, with the National Post reporting a 375 percent increase since 2000. The change is even greater in urban areas including Toronto and Vancouver, which have seen increases by 450 and 490 percent respectively throughout the same period of time.
Unequal effects of the COVID-19 pandemic are partly responsible for Canada’s housing spike. The burden from lockdowns and unemployment has disproportionately fallen on low-income individuals, who are more likely to work in-person service jobs. In contrast, higher-income people were able to more smoothly transition to remote work. Travel and shopping restrictions also meant high-income demographics spent less and saved more. Canada’s low interest rates on mortgages combined with pent-up demand and greater savings encouraged wealthy Canadians to invest in real estate.
In addition to Canadian investors, foreign buyers also add to demand that drives prices up. A study by the National Bank of Canada found that Chinese buyers in Vancouver accounted for one-third of real estate sales volume in 2016. Chinese interest has been driven by the unreliability of China’s stock markets and the desire for residency in Canada, which has a large and growing immigrant population. On the other hand, the pandemic has made many Chinese less keen on investing in Vancouver housing. Some are prevented from entering Canada thanks to COVID border closures, and others are choosing cheaper properties in cities like Montreal over Vancouver. Despite these trends, Vancouver’s markets have not cooled down—11 percent of condos in its metro area are still owned by non-residents, for instance.
Consequently, foreign ownership of homes is a hot-button issue in Canadian politics. In his campaign leading up to the September 2021 federal election, Canadian Prime Minister Justin Trudeau promised a 2-year ban on new foreign housing purchases. Trudeau also pledged to prohibit flipping homes as part of a broader “Homebuyer’s Bill of Rights.” Opposition parties employ similar rhetoric. For instance, the leader of the left-wing New Democratic Party, Jagmeet Singh, proposed a tax on buyers who are not citizens or permanent residents of Canada.
The extent to which Canada should pass legislation barring foreign investment remains debated. However, one area where many clearly agree is that recent housing prices are unsustainable. Some experts even fear a crash as disposable income and home prices decouple even further. David Doyle, head of North American Strategy & Economics at Macquarie Group, predicts, “By 2023, things start to get iffy. I’m more concerned after 2024, at that point the Bank of Canada will be hiking rates and housing will be impacted.”
Other experts are skeptical about the possibility of a crash. They argue that Canadian real estate has historically avoided the extreme price fluctuations of other housing markets, like the United States in 2008. Scotiabank Vice-President Derek Holt predicted that housing may remain volatile but “not a crash scenario by any means.” Even so, this is little consolation for the many young Canadians who worry that, absent a major change, their dream of owning a home will slip away permanently.