Dear Valued Clients,

Views on the Canadian Residential Real Estate Market

Key Takeaways of the Analysis:

• Canada’s real house prices since 2000 have significantly diverged from those of other G-7 countries.
• Contribution of the exceptional increase in Canadian real estate assets to the change in household net worth.
• Is there a housing bubble in Canada and how vulnerable is the Canadian economy to the housing sector?
• The importance of demographic factors on homeownership.
• Canada: 5-year mortgage rate rising from all-time lows.
• The four most likely scenarios for the next 2-3 years.

The Incredible Rise of Canadian Housing Prices

Canada’s housing market has been a focal point of attention both domestically and globally for most of the past two decades.

For example, The Economist regularly reminds us that Canada’s real house prices have significantly diverged from those of other G-7 countries.

Housing prices have soared in a parabolic fashion since early 2020, fueling economic growth and a massive wealth effect, providing crucial support for the economy during the COVID recovery.

According to the Bank of Canada, the wealth of the average Canadian household ballooned by $250,000 during the pandemic, with about $150,000 from housing alone.

But extreme housing price increases also come with heightened stability risks. As the table below shows, whether we are looking at the house prices-to-income ratio, the house prices-to-rent ratio, or growth in private sector credit, Canada more often than not ranks at the top of the list. The signal the below table sends is clear: over the last seven years, Canada’s housing prices have been on a cyclical upswing stronger than most comparable countries.

With multiple metrics raising alarm bells, there are ample reasons to be concerned about the state of Canadian housing.

The big question is: are we in bubble territory? The answer is crucial because bubbles eventually pop, and when they do, it can be very painful.

Source: The Economist, June 11, 2022. Data sourced from the Federal Reserve Bank of Dallas.

The Importance of Housing in Canada

Canada’s economy is particularly exposed to a slump in the housing sector.

Residential investment as a share of Canada’s GDP has reached over 10% in the last year – the highest in the G-7 and amounting to close to $250 billion in 2021 alone. This is about twice the relative size of the equivalent U.S. figure.

An important piece of the puzzle is that housing is about more than construction and renovation.

Ownership transfer costs – including realtor fees, land transfer taxes, and other transaction costs – also add up, accounting for about 2.5% of Canada’s GDP in 2021. These components are likely to be the most sensitive to any contraction in housing activity and could create an economic headwind even if construction and renovation activity remain resilient.

As housing-related activities have gained importance, Canada’s economy has become quite sensitive to interest rates, meaning that cyclical forces could be detrimental to Canada’s financial stability.

Beyond these purely economic considerations, housing also has social implications. Housing affordability creates demographic inequalities, with the younger population facing steep price-to-income ratios, making ownership merely a dream for many Canadian households. As inequality is detrimental not only to a country’s long-term prosperity but also to its social well-being, understanding the underlying drivers of the housing market is of vital importance for more than purely economic reasons.

Housing is Not in Bubble Territory

While the housing market has reached frothy levels more than a few times in past decades, our view is that we are not currently in bubble territory, nor have we been at any time since 2010, contrary to what some have argued.

This is not to suggest that the housing market will not face tough times ahead. In fact, the risk of a correction – and the resulting headwinds for Canadian growth – is currently quite elevated.

As we navigate these uncertain times, remember that informed decisions are the cornerstone of successful investing. We're here to provide guidance and support every step of the way.

Warm Regards,