5 Minutes for Business - Is Canada in a real estate bubble?
After years of experts - including the IMF, Bank of Canada, the OECD and Canada's biggest banks warning that Canadian real estate is overvalued and cruising for a bruising, is your city heading for trouble?
Canada has effectively three housing markets in Vancouver, Toronto and the rest of the country. With Toronto and Vancouver's housing growth soaring to 16% annum, affordability is plummeting.
Cities like Ottawa, Quebec, Regina and Montreal are considered "boring" middle tier of cities (though Montreal is becoming a little hotter). These cities have had mostly stable housing prices over the past 5 years, with growth steadily rising by 1.5-3%.
Home prices have declined in part of Alberta and Newfoundland. The extreme divergence shows up in the Price-to-Household income ratio, where figures of 3-4 are considered normal. What this means is, if the household income is $50,000, the homebuyer(s) should be purchasing a home no more than $150,000 to $200,000. Once this ratio reaches 6-7 (or higher), we begin to enter a real estate bubble scenario. Not surprisingly, Toronto and Vancouver are the only cities currently in this red zone.
Foreign funds are one of the causes for pushing the real estate market skyward in these two cities. Another factor is that Toronto and Vancouver have accounted for almost all of Canada's job creation over the past year, bringing in more people to cities which drive the need for housing.
Multiple times the government has imposed tighter mortgage regulations in order to cool off the market, but it hasn't solved the problem.
Click here to read The Canadian Chamber of Commerce's article and graph.