Is Canada in a Housing Bubble This Time?
Move Smartly Article - Is Canada in a Housing Bubble This Time? by John Pasalis
Why a change who's behind the demand for homes makes all the difference.
With home prices continuing to surge across the country, many are starting to wonder if the rational explanation we’ve been hearing for Canada’s housing boom — an urban exodus and surge of end-users buying homes due to the Covid-19 pandemic —- no longer applies.
In last month’s report, I discussed how the housing market on the ground in the Toronto area appears to have turned; while much of the demand in 2020 was driven by end users rushing into the market post-Covid lockdowns, 2021 has seen a surge in demand from investors looking to capitalize on rapidly rising home prices.
My observations turned out to be prescient as later that same month the Bank of Canada’s Deputy Governor Paul Beaudry highlighted many of the same risks in his speech titled, “Financial stability through the pandemic and beyond.”
Here are a few notable comments:
A particularly worrisome development is that price expectations in some areas may have become extrapolative. This happens when people think house prices will be even higher in the future, and it can lead them to rush into the market to buy.
At the same time, our analysis finds that many Canadians are buying homes as investment properties—that is, in addition to their principal residence—and the importance of this phenomenon has grown. Expectations of a capital gain can make homes a very attractive asset for investors.
A sudden influx of investors in the housing market likely contributed to the rapid price increases we saw earlier this year. In such a case, expectations of future price increases can become self-fulfilling, at least for a while. That can expose the market to a higher chance of a correction. And, if one occurs, the damage can spread far beyond the investors. That’s because, for many households, their wealth and access to low-cost credit are tied to the value of their home.
The Bank of Canada’s research found that home purchases by investors outpaced demand from first-time and repeat home buyers.
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