Years of rock-bottom interest rates and rising prices have created some problematic conditions.
After years of boom times, Canada’s housing markets are at a turning point. Rising interest rates and tough new mortgage rules have taken some steam out of the market. But job growth is strong and wages are rising steadily, suggesting there will be homebuyers around to keep the market humming.
So which way are things going? That’s really anyone’s guess. But one thing is clear: After years of — let’s face it — unsustainable growth, things in Canada’s housing markets are looking a little messy when it comes to things like prices and mortgages.
Below are 10 charts illustrating just how out of whack things have become. Vancouver’s housing market is looking especially WTF these days, which is why it gets a bit more attention in these charts than other places.
Canadians have never had to shell out more of their income to own a home
This chart, which uses data from The Economist magazine, shows the ratio of house prices to incomes in Canada over the past four decades. Never have house prices been so disproportionately high when compared to what people are earning. Only years of rock-bottom interest have made this situation “affordable” for homeowners. Which is why rising interest rates should be — and are — a major concern among Canada’s policymakers.
Condo construction is at an all-time high …
Construction of condos in Canada is at record highs, which for some experts is a warning of falling house prices ahead, though others disagree, given Canada’s suddenly accelerating population growth. Meanwhile, single-family home construction is in the dumps, driven in part by a near-total collapse of detached home construction around Toronto. Canadians in the largest cities are moving into condos, whether they like it or not.
… But young families don’t want to live in them
And apparently they don’t like it. In a survey of “young urban families” last year, Sotheby’s International Realty Canada found that 83 per cent of this group would prefer to live in a detached home, if money were no object. Only five per cent would choose to live in a condo. But with detached homes in Canada the least affordable they’ve ever been, 43 per cent of this group have given up on ever owning a detached home, the survey found.
You need to be a one-percenter to own an “average” Vancouver home
There’s nothing “average” about buying an average-priced home in Vancouver these days. According to estimates from National Bank Financial, it now requires an income of $238,000 to qualify for a conventional 20-per-cent down mortgage on average Vancouver home. That’s not much less than the $246,000 you would have to earn to be in the top one per cent of earners in the city.
Despite the slowdown in the market, prices remain very high, and now rising interest rates and the new mortgage “stress test” have further pushed up the amount of income a household needs to qualify for a mortgage.
… Because Vancouver homes are comically overpriced
This chart from Royal Bank of Canada shows that the cost of home ownership in Vancouver, as a share of income, is the highest ever. For detached homes (the top line), costs are far beyond any previous historical precedent. But condo costs (bottom line) — while elevated compared to historic norms — are not actually outside their normal historic range.
Vancouver’s new distinction: Worst housing market
Vancouver used to dominate the lists of world’s hottest housing markets like few other cities in recent memory, but those days are history. Global real estate agency Knight Frank’s most recent real estate index ranked Vancouver at rock bottom among 43 world cities. How the mighty have fallen.
There aren’t enough new residents to prop up Vancouver’s market
Demographic shifts are about to give Vancouver real estate a bit of a kick in the pants. The region’s population of homebuyers — meaning adults — is currently growing at a much slower pace than has been the historic norm. Combine this with the above-mentioned record-setting levels of condo construction and the also above-mentioned unreasonably high prices, and it looks like Vancouver’s housing correction could go on for a while yet.
… But Toronto has as much as it can handle
Toronto’s housing market is in an uneven slump, with some parts of the market sliding (detached homes) while others keep performing strongly (condos). But the experts are saying don’t expect a major decrease in house prices, because the city is seeing accelerated growth in its adult population. Growth is now near a 15-year high, which ought to put a floor under any price declines in this era of mortgage stress tests and rising interest rates.
Mortgage growth is at historic lows
Those mortgage stress tests sure have had an impact. The value of mortgages on Canadian lenders’ books rises year after year no matter what, through recessions and boom times alike. Last year, that growth fell to its lowest level since the 1990s.
Investment condos often lose money
Buying an investment condo has become the national pastime for Canadians with cash, but with prices at these levels, they’re no guarantee of profit.
A study by CIBC and Urbanation last year found that 44 per cent of the condos taken possession of in 2017 in Toronto would rent out for less than the cost of ownership (assuming a 20-per-cent down mortgage). CMHC looked at the high-rise condo towers in Montreal’s downtown core and concluded the same is true for 75 per cent of them.
We weren’t able to find estimates for Vancouver, but given how realtors there are busy trying convince people negative cash flow can be a good thing, we’re guessing it’s pretty much the same there.
Investors can still turn a profit if the resale value rises. But house prices have stopped rising. Buyer beware.
Watch: The extreme measures Canadians go through to buy a home