Canadian REal Estate Bubble MARKETS

No one wants to hear the term housing bubble. It has an ominous feel. Ever since the global financial crisis in 2008, housing bubble has become synonymous with economic ruin. Let’s cover the Canadian Real Estate Bubble Markets

But is a housing bubble a warning of an economy on the brink? Not really. The term refers to a rapid increase in home prices not driven by the usual organic factors of high employment and low interest rates.

A good example of a nonorganic factor is investors scooping up properties with the intention of selling them for a profit when the market peaks. If those properties all flood the market at once, a housing bubble bursts.

A bubble that bursts can send home prices spiraling down and leave homeowners that want to sell with large mortgages on overpriced houses. Home supply can outpace demand and result in homeowners unable to recoup their investment.

It isn’t hard to understand why there is fear that the Canadian real estate market is in a housing bubble. Demand for homes during the pandemic has driven prices skyward in every market in the country.

The demand has been so great that cities across the nation have homes that are overvalued, in some areas by over 90%. Though the pandemic buying surge highlighted such overvaluing, Canadian real estate has been heading in this direction for years.

Over the last 20 years, home prices in Canada have increased by a whopping 375%. While the rate of increase in the past two years has been surprising, the trend was already there.

A recent report from Swiss financial institution UBS puts two major Canadian cities in housing bubbles: Toronto and Vancouver. The recent surge in prices, on top of the previous growth, leads UBS economists to warn that the cities are sitting on an overpriced market.

It is unlikely that residents or homebuyers moving to Canada are terribly surprised by that assessment. Housing prices in these large metropolitan areas have been high and rising for years.

But UBS is not the only group pointing to potential bubbles in the Canadian real estate market. A recent report from Moody’s Analytics highlighted areas with substantially overvalued home prices. The top five markets are all in Ontario. They range from London at 61.77% to Niagara-St. Catherine’s at 90.8%.

Toronto’s market was noted as being overvalued by 39.53% and Vancouver’s by 22.95%.

There are some encouraging signs that the housing market is beginning to moderate. Reports indicated that prices did not increase (month-over-month) in October 2021. For the first time since the beginning of the pandemic buying surge, prices remained steady. 

November 2021 saw a 0.6% increase in prices month-over-month, but a 0.7% decrease from the previous year. The moderation is likely a result of weary homebuyers and the increased mortgage stress test.

A mortgage stress test limits the amount of money a homebuyer can borrow. It was designed to help homeowners be financially resilient by limiting their potential debt.

An increased stress test can sideline some buyers. Combined with two years of major price increases, it’s enough to shift the market towards moderation.

OTtawa and the Canadian Real Estate Bubble Markets

So what can people moving to Ottawa expect from this national market leveling? As one of the most popular destinations for people moving to Canada and interprovincial migration, the Ottawa area still has eager homebuyers.

The Ottawa real estate market, however, is stressed by a low supply of available homes. In October 2021 there were 1,677 homes sold in Ottawa. While a slight increase from September, this number represented a massive decrease of 21% from October of 2020.

This is one indication of the market moderation seen at a national level. The October 2021 home sales are in line with the five year national average. Prices through 2021 continued to reflect the tight housing supply.

Ottawa real estate saw a year-to-date price increase in October 2021 of 24% for detached homes and 16% for condos compared to 2020. But October also saw an average condo price of $404,760, a lower 10% increase from October 2020.

This may be the first sign of prices starting to moderate for people moving to Ottawa.

What do these trends and figures mean for homebuyers and sellers in Ottawa in 2022? While there are positive indications for an easing market for buyers across the nation, Ottawa remains a difficult market due to low supply.

Of particular concern is a lack of adequate supply for first time homebuyers. It is these buyers who fuel the rest of the market, allowing others to buy up and downsize. If there is not enough inventory for them to find a home, prices will continue to rise, and movement in the market will remain difficult.

Living in Ottawa comes with a lot of benefits, but an abundant supply of affordable homes is not currently among them. As we move into 2022 we’ll need to see more properties moving into the Ottawa real estate market through new construction and more sellers.

The national decrease in pandemic driven demand could have positive results for people moving to Ottawa. The increased mortgage stress test and rumored interest rate hikes could ease demand enough to give the Ottawa market a little breathing room.

So what do we make of housing bubbles in Canada and Ottawa in 2022? The decades-long issue of low supply makes it difficult to fit Canadian real estate in many areas into a traditional definition of a housing bubble.

High prices are mainly organic, driven by demand, low interest rates, and low inventory. The way to moderate prices and ease off that solidly built bubble is to get more affordable housing units onto the market.

Decreasing immediate demand through higher interest rates and mortgage stress tests may allow new construction and eager sellers to help improve the supply for first time homebuyers. That, in turn, will keep the market moving and continue strong growth without pricing first time homebuyers out of the market.

As the world edges off of the pandemic precipice we will hopefully see housing prices moderate. Housing bubbles aren’t necessarily a harbinger of global doom, but Canadian real estate will breathe a sigh of relief when fewer of its homes are massively overvalued.