Real Estate Update: The Canadian Conundrum

As a member of the Global Alliances Committee at the National Association of REALTORS®, I recently gave this short presentation at their Midyear Conference, May 16, 2012 in Washington D.C..

Here is a quick update of the Canadian Real Estate Market:

We have had a very different experience than the one here in the United States.

In March, the average sale price of a home in Canada was 75 per cent higher than in the United States. Please keep in mind that the cost of building is also higher due to weather
issues.

Through the first four months of 2012, housing starts have been trending at levels not experienced during the same period since 2008. In urban areas, approximately two-thirds of new home starts have been multiple family units, including condominium apartments.

There is a condominium building boom in large centres like Toronto, Vancouver and Montreal. As a matter of fact, in the Greater Toronto Area there were 181 high-rise projects under construction in April. Put another way, this amounted to 49,822 units.

There is a shortage of listings of single-family homes in major centres, leading to bidding wars and talk of a bubble.

Canadian housing topped the Economist’s global list showing an increase of 7 per cent. It stated that Canadian homes are 54 per cent overvalued relative to an undervaluation in the United States of 19 per cent.

So what is driving Canada’s market and what differentiates us?

Canada does not allow deductibility of mortgage interest and there is no Capital Gains Tax on personal residences.

Canadians cannot walk away from their mortgages without major financial repercussions that affects their personal covenant. According to the most recent statistics, slightly more than one-third of one per cent of mortgages is in default in Canada.

Mortgage rules at Canadian banks are much more conservative, generally allowing a Gross Debt Service Ratio of not more than 35 per cent. Even with today’s lower interest rates, applicants can only be approved when they also qualify at higher rates as well.

Major centres are experiencing condo booms but are they really based on demographics? Baby boomers are migrating to condos from larger single-family homes. First-time buyers and young families are moving to the condo market to be centrally located, as well as new Canadians and investors.

Seventy per cent of new immigrants are moving to Toronto, Vancouver or Montreal and they want to be close to their jobs, their communities and resources. Whether true or not, there is a perception amongst immigrants that immigration to Canada is easier to achieve than immigration to the United States.

Offshore Investors:

Toronto and Vancouver have become the centres that offshore investors are flocking to in order to establish financial footholds. They are schooling their children and moving assets offshore to Canadian centres. They are not always looking for the same metrics that North American investors will look for and are not always renting out their purchases, instead leaving them empty while paying taxes and maintenance fees. Many of these offshore buyers come from countries without the strong property rights that we have in North America. How much of the market they comprise is only a guess as there is no means of monitoring them.

This conundrum in the Canadian real estate market has led to pundits on either side making claims of a bubble. My guess: the market will go up and the market will go down…when and why is purely speculation.

Thank you.

Leave a Reply

Your email address will not be published. Required fields are marked *