Woodstock, Ontario, population 42,000, is a nice enough small city in a part of Canada full of small cities. It straddles a couple of important transportation links and is reasonably central to a handful of universities. By North American standards, Woodstock is not too far from the capital Toronto, a one-and-a-half-hour drive away.
Even here, an hour and a half from Toronto, home prices have skyrocketed. The local real-estate board says average home prices jumped 45% between January 2020 and 2021. And Woodstock is hardly alone.
The upswing in Canada’s real-estate market is now a quarter-century old, with a blip during the global financial crisis in 2008. The pandemic supercharged it, with prices surging by roughly 21% when it started.
Past its peak
More Canadian real estate changed hands in March 2021 than any other month ever, with 76,000 properties sold, 14,000 more than the previous record set in July 2020. That seems to have been the peak. Sales have dropped about 25% since then, but that hardly represents a correction, more like slowing from a sprint into a fast run.
Sleepy communities such as Woodstock are now marked by bidding wars for properties that, in Canada, are relatively par for the course: three or four bedrooms, two or three bathrooms, a basement, a garage and a yard of some kind. The average home price in Canada is now CA$688,000 (US$545,000), up by about a third on last year.
The past two years have seen something of a boom in riskier loans that could damage the solid financial foundations of Canada’s real-estate bull market
The frothy market is leading to talk of a bubble and the dangers for the economy, which are not so much related to high prices but the unaffordability of mortgages. Salaries have not kept pace.
One fear is that younger people and those in lower-income categories may be blocked from home ownership forever because the carrying costs or down-payments of 20% are simply too high. While this factor is not good for social equality or access to housing, it is not going to bring down the market.
Risk overloading
What could have an impact is that many of these buyers are willing to take out loans to cover down-payments. Should there be a downturn, they could easily end up owing more than what their homes are worth. Zero-down mortgages (ie 100% mortgages) remain unusual, but they are now less rare than they once were.
The past two years have seen something of a boom in riskier loans that could damage the solid financial foundations of Canada’s real-estate bull market.
In its annual financial system review in May, the Bank of Canada highlighted the risks by noting that the percentage of borrowers with high loan-to-income ratios of 4.5 times their annual income rose from 6.5% two years ago to 17% in the fourth quarter of 2020.
Another fear is that inflation and rising interest rates will put too much stress on the market. People who stretched their monthly budgets to cover mortgage payments for expensive homes at current interest rates may not be able to afford the payments when rates go up. This fear is real but may be a little overblown. Rates are not likely to begin going up until next year and, even then, only slowly.
Correction, not crash
On the other side of the coin, household savings are at a record high – about CA$240bn as of the end of the first quarter. The latest Bank of Canada survey of consumer expectations suggests that up to 10% of that could go towards down-payments for homes.
Canada’s real-estate market may look like a scary bubble but, by most measures, it is based on solid regulatory foundations and driven by that most basic of drivers, more demand than supply. A crash does not seem likely, although a correction of some kind is bound to happen sooner or later.
