Housing Bubble in Canada?

By Daniel Tortis

Houses in Canada carried hefty price tags before the COVID-19 pandemic started. Now prices are even higher and unaffordable for many Canadians across the country. The national average selling price hit an all-time high at $678,091, which was 25 percent higher than 2020.

This trend over the past year is not only affecting the big urban centers like Toronto and Vancouver. In these markets, high prices for homes are not unexpected. However, even in suburban regions of Ottawa, Perth, Hamilton, and its outlying areas, bidding wars have taken place with houses selling for over $100,000 over the asking price. Cottage country houses have even seen prices rising over 30 percent in the past year in some regions.

One of the main factors that have allowed for these record prices to occur is the Bank of Canada slashing interest rates to near zero percent. Initially, this low rate was introduced in order to stimulate the economy during the COVID-19 pandemic, but with the lending rate so low it has become very cheap to take out a mortgage. As a result, those that are still working are able to buy into the market, and those that want to sell and take advantage, while few in number, are able to command higher prices in an extremely tight real estate market across Canada.

The supply and demand for housing is always an interesting reflection of what is going on in the economy. The pandemic has impacted our lives in every way and it has also impacted the real estate market. Today, the demand for housing within the GTA and other regions of Canada has remained strong especially with people wanting to upsize their homes since they have been forced to work from home.

However, there has definitely been a supply shortage. COVID restrictions have definitely slowed down the construction process. Houses cannot be built as quickly, as you can only have one trade on a site at a time in order to follow social distancing protocols. Approvals for housing developments- which are usually a long process- have also been delayed due to COVID. Total new home remaining inventory across the GTA fell to 13,171 units in December, according to data compiled for BILD by Altus Group. That is the lowest it has been since March 2018.

Some economists have said that in the coming years if the interest rate rises to even 5.5 percent that houses could fall around 40 percent in price. There are many economic factors that would contribute to interest rates getting higher nonetheless the Bank of Canada has stated they will continue to keep rates artificially low for the coming years.

With housing prices so high some have called for the government to start taking action.

Analysts believe that many purchase decisions have been based on buyers’ fear of missing out.

“The action needed today is one that immediately breaks market psychology and the belief that prices will only rise further,” one economist writes.

Some different policies proposed would be to change the capital gains tax and implement a nationwide speculation tax. This would discourage buyers from purchasing property only to flip it after a short period and pocket the gain from rapid appreciation. These two policies definitely have their critics, although they would definitely have their intended effect to cool the market.

One thing remains true. Homeownership, the dream of most people, may become very elusive in the coming years if the real estate market continues in this direction and the average price of a home continues to soar higher and higher. 

Photo by todd kent on Unsplash

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