Canadian property bubble

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 real estate bubble. The Dallas Federal Reserve rated Canadian real estate as "exuberant" beginning in 2003. From 2003 to 2018, Canada saw an increase in home and property prices of up to 337% in some cities. In 2016, the OECD warned that Canada's financial stability was at risk due to elevated housing prices, investment and household debt. By 2018, home-owning costs were above 1990 levels when Canada saw its last housing bubble burst. Bloomberg Economics ranked Canada as the second largest housing bubble across the OECD in 2019 and 2021. Toronto scored the highest in the world in Swiss bank UBS' real estate bubble index in 2022, with Vancouver also scoring among the 10 riskiest cities in the world. The Royal Bank of Canada analysis showed that Canadian housing had become the least affordable that it had ever been. By 2023 Canada’s nonfinancial debt exceeded 300% of GDP and household debt surpassed 100% of GDP, both higher than the levels seen in the United States before the 2008 global financial crisis. Canada's housing investment as a percentage of GDP ratio peaked at 8.9% in 2022, whereas the US at the peak of the housing bubble only reached 7% in 2006.

Background factors
Canada's last housing busts happened during the early 1990s recession, when Canada was facing low commodity prices, a large national debt and deficit that was weakening the value of the Canadian dollar, the possibility of Quebec independence, and a recession in Canada's main trading partner, the United States. Average house prices declined by over 27% in Greater Toronto from 1989 to 1996. Vancouver’s first housing bubble burst in 1981, the second declined gradually in 1994. Otherwise, Canadian housing prices from 1980 to 2001 stayed within a steady and narrow range of 3 to 4 times provincial annual median income, with little effect anywhere outside of these two cities.

The 2000s commodities boom (caused by rising demand from emerging-market economies such as China) boosted economic activity, particularly business investment, which generated job growth in Canada. During this time, significant rural-to-urban migration and immigration to Canada likely contributed to the pressure on house prices. By 2010, Canada began experiencing, for the first time since 1980, a synchronized housing bubble across the six largest residential real estate markets in Canada, which represent approximately 40% of all real estate sales in Canada.

Attempts to slow growth 2016 - 2017
In March 2017, the cost of owning a single-family house in the Greater Toronto Area had grown 33% in 12 months. In response to these trends, the provincial and federal governments attempted to slow the growth of the real estate market and gradually bring down prices, 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. In 2017, Ontario followed suit. In addition, the province of Ontario's Fair Housing Plan set in place stricter rent controls. In October 2016, Finance Canada introduced a stress test for insured mortgages, to ensure that buyers would continue to afford their mortgage in the event that interest rates rose. Ontario created a Fair Housing Plan consisting of 16 measures to help combat the growth of the real estate market. These small remedies can account for a slight dip in housing prices in 2017 which some believed was the beginning of a housing crash.

2018 and 2019
Despite prices easing, The Canadian Mortgage and Housing Corporation noted that the housing market remained vulnerable and cited overbuilding (high rental vacancy or inventory of unsold new-builds) as an indicator of the country's housing bubble risk.

Other signs of financial risk included:


 * 1) Canadian private sector debt-to-GDP ratio rose to 218% in 2018
 * 2) The amount of household debt in Canada surpassing national GDP
 * 3) In Alberta, despite a recession and high unemployment, real estate prices in Calgary dropped less than 5%.

The OSFI revised and expanded the mortgage stress test in 2018, although CREA decried this action in 2020 due to its impact on declining sales.

In their April 2019, the Bank of Canada concluded that Canada's housing market is "currently in uncharted territory" as they monitored the impact of the new mortgage rules. While the report does not use the word "bubble," it instead uses the term "froth," to describe "resales exceeding fundamentals" in Vancouver and Toronto in 2015-2016 and "extrapolative expectations." House prices did not drop significantly during this time, but rather stagnated through 2019.

March 2020 to 2021
The housing market experienced a brief slowdown during the onset of the pandemic, especially for condos in larger cities. In response to the pandemic, the Bank of Canada slashed interest rates three times in one month and reduced the mortgage "stress test" rate, which enabled buyers to qualify for slightly larger mortgages. 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.

This defied many predictions, including those by the CMHC, which had forecasted prices falling by 9–18%. 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. Condominiums accounted for the bulk of new housing in BC (54%) and Ontario (59%), and investors constituted an increasing share of the buyers of these units (41% in Ontario).

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, saying: "We need the growth." While other countries were attempting to cool their overheated markets, Canada was not, citing concerns about the economic recovery. The Bank indicated that it would continue to hold firm on low interest rates until likely 2023, resisting calls from investors and economists 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.

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: "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."

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".

2022 peak and 2023 bounce
On 26 January 2022, the Bank of Canada announced their expectation that "interest rates will need to increase." Once average home prices peaked in February 2022, they began to decline rapidly. The Bank of Canada began hiking interest rates on March 2 2022.

Later that same month, 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 was to be expected.

The average and median prices for detached houses had declined by almost $400,000 in the Greater Toronto Area by September 2022. The Teranet-National Bank House Price Index dropped 10% by mid-January 2023, the “largest contraction in the index ever recorded” since it began in 1999. Contractions in CREA's MLS house price index from the peak to January 2023 met the criterion for a crash ( > 20% drop in value) in London (-26%), Cambridge (-25%), Kitchener-Waterloo (-25%), Brantford (-24%), Hamilton (-23%), the Niagara region (-20%) and Barrie (-20%).

The Bank of Canada hiked the overnight interest rate 10 times between March 2022 and July 2023 bringing the target interest rate from 0% to 5% to combat inflation.

The IMF concluded that "Canada runs the highest risk of mortgage defaults among advanced economies" in their June 2023 report comparing 38 countries.

By October 2023, housing sales had slowed (-17% compared to pre-pandemic) while prices stabilized. Regional disparities were very noticeable with annual benchmark prices up in more affordable markets such as Calgary (+9.4%), Halifax (>+9%) and Moncton (+12%), to the highest or near-highest levels on record.

Investor/speculator impact
Although representing only a minority of real estate investors in Canada (less than 5%), targeting them has proven politically popular and a temporary ban on foreign buyers was put into effect from Jan 1, 2023 until 2025. There is debate on which group of investors, overseas or domestic, play a bigger role in driving rising prices.

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, accounted for around 20% of all home purchases in Canada between 2018 and 2019. StatsCan's Canadian Housing Statistic Program estimated in a 2019 report that one third of the Toronto condo market is owned by people who do not personally live in the units but rent them out or leave them empty.

Foreign buyers may have a disproportionate impact on the housing market, as Reports by CMHC and IMF concluded that rising prices in Toronto and Vancouver cannot be entirely explained by credit conditions (interest rates and mortgage regulations are similar from coast to coast), income growth, or demographic factors. This leaves either a chronic lack of supply or non-resident buying and financial speculation as primary variables to consider.

Ways in which foreign buyers man have disproportionately impacted house prices:

Setting prices at high levels. In Vancouver, the single-detached homes owned by non-residents were assessed at $707,000 more than local owners on average. In Toronto, the difference is about $100,000. Non-resident buyers may be pulling up the price on all ‘comparable’ properties. By pulling up prices in one segment of the market, households who are priced out of luxury units may start to bid up prices elsewhere, generating a ripple effect ‘downmarket’.

Foreign buyers don’t include:


 * Non-resident students attending Canadian universities
 * New immigrants who arrive with substantial amounts of wealth earned abroad
 * Residents who live in a ‘satellite’ family where the primary breadwinner lives abroad
 * Foreign money that is laundered in local real estate through shell companies.

Regional differences
Some commentators have stated that Canada as whole did not have a real estate bubble; only Toronto and Vancouver really have had one. As is typical in all countries, prices vary widely between urban and rural areas, between regions, and between cities within a region. However, as Canadian regions have very different economic bases, the impact of the price increases of the twenty-first century have been almost diametrically opposed in two types of cities: metropolitan regions based on financial services, manufacturing, international trade, services and tourism (the Golden Horseshoe, the Lower Mainland, Southwestern Ontario) have tended to move up most strongly when cities based around resource extraction (e.g. the Calgary-Edmonton Corridor) are flat or declining. Conversely, resource-dependent cities have had periods of stronger growth than services-focused cities during periods of resource price spikes.

Economic growth, migration rates, and therefore housing prices in Alberta, Saskatchewan, and Newfoundland and Labrador are tied to oil and gas prices, and therefore experienced their strongest growth during and immediately following the oil price spikes of 2003–2008 and 2009–2014. Growth slowed or reversed during and after the oil price drops of 2008–2009 and 2014–2016. The impact of the short-lived 2020 price crash was limited: average housing prices in Alberta overall did not drop year-to-year from 2019 to 2020 as many had predicted, but did drop slightly in Calgary.

Vancouver has experienced more direct foreign investment than other Canadian cities since the 1990s, as well as strong immigration 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.

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 commuter belt of major cities (the 905 region of Ontario or the Fraser Valley in British Columbia) as well as those known as retirement communities, such as Sidney, British Columbia and Charlottetown, Prince Edward Island, as well as in resort towns like Whistler or Kelowna.

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.

The economic impact of the COVID-19 pandemic in Canada included a rapid increase in prices in already-desirable suburban and exurban areas. Presumably, this is due to people leaving urban condos because they expect to be spending more time at home (either because of remote work or because they do not feel comfortable spending their off-work hours in crowded urban amenities like restaurants and theatres) and want the space to add a home office or a larger backyard for staycations. However, some urban areas have seen strong growth as well, as people simple trade up for more space but still in a city: often a smaller city near their existing family and work connections, notably smaller cities nearby (but outside of) Greater Toronto. According to a report by the agency Re/max, the strongest growth in the main markets (excluding Quebec) during 2020 was in middle-sized Ontario cities, notably: Windsor (+21%), the Muskokas (+20.3%), and Ottawa (+19.4%). The only declines in a major market were seen in former foreign investment hubs West Vancouver (–1%), and North Vancouver (–0.02%), while nearly-flat prices were seen in oil-exposed markets such as Calgary (+0.02%), Edmonton (+1%) and Regina (+2%). Real estate brokerage firm Royal LePage forecasts (July 2021) that housing prices in Canada will rise to $771,500 by the end of the 2021, 16 per cent above the year-end 2020 level. The largest year-over-year gains are forecast for Greater Montreal at 17.5 per cent, followed by Ottawa and Greater Vancouver.

Money laundering
A suspected contributor to Canada's real estate price growth is "The Vancouver Model" of money laundering. Stephen Schneider, criminology professor at St. Mary's University in Halifax stated "I've never seen such a big operation … that is so geographically confined." in his contribution to the Cullen Commission, which is an ongoing public inquiry into money laundering in British Columbia, led by B.C. Supreme Court Justice Austin Cullen. The Cullen Commission 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%.

"The Vancouver Model" is a way for Chinese organized crime to launder revenue generated primarily by fentanyl sales through casinos.

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.

Transparency International Canada also studied corporate ownership of Greater Toronto residential real estate and found that between 2008 and 2018, $20 billion of purchases were made using over 50,000 corporations with no checks and balances to determine the beneficial owners or source of funds. Roughly $9.8 Billion (49%) of those purchases were "all cash buys," i.e. no mortgage debt was used for the purchases. In addition, roughly $10 Billion (50%) of the same corporate purchases used mortgages from private unregulated lenders. In contrast, only 11% of households purchase real estate with "all cash" and 3% use private lenders.

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.

In 2018, the BC government convened an Expert Panel on Money Laundering in B.C. Real Estate. The resulting report 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 which led to the launching of the Land Owner Transparency Registry of BC on November 30, 2020. The registry opened to public search on April 30, 2021.

Supply
Demand-supply imbalance in the housing market is an oft-cited cause for increased housing prices, with proposed solutions most often focused on increasing supply.

Analyses suggesting that housing supply does not keep pace with population growth may be failing to account for household size.

Similarly, when comparing annual Canadian Census population estimates to housing completions from 2001 to 2022, the number of housing completions exceeded household formation in 19 of the 22 years measured (accounting for household size decreasing from 2.6 in 2001 to 2.4 in 2021).

The Fraser Institute emphasized the spike in population growth outpacing housing completions by 2022 in particular. 2023 data not available yet. The proportion of investors purchasing homes began outpacing first-time and repeat homebuyers in 2021 along with a spike in immigration.

Risks
Canada is a nation heavily dependent on the real estate industry which accounted for roughly 14% of its GDP in 2020 and over 20% in 2023. There is a high risk that if investor sentiment changes, buyer demand may drop significantly, triggering a vicious cycle of prices declines that snowball. Canadians are increasingly holding large amounts of mortgage related debt, reaching almost $2 trillion of total housing debt in June 2021.

Short-term fixed-rate mortgages are dominant in Canada, 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. A July 2017 report noted that uninsured mortgages represent the greatest risk to the financial industry. A decreasing number of Canadian mortgages are backed by insurance, from over 60% in 2012 to less than 22% in 2022. Drops in home prices could cause homeowners to owe more on their mortgages than the house is currently valued, which is known as negative equity.