Canadian real estate prices are one of the biggest threats to the country, said a global agency. The IMF recently completed its regularly scheduled staff report on Canada. Staff found real estate prices present one of the biggest threats to the country. The agency shared the detailed numbers produced by their valuation models with us. As you might expect, some markets are fairly valued, and some are — gasp, undervalued. Toronto and Hamilton real estate are not two of those markets. The Southern Ontario cities have valuations so stretched, they make Vancouver look reasonable.
Greater Toronto Real Estate Needs A 28% Drop To Be Fairly Valued
Greater Toronto residential real estate is massively overvalued, according to the global agency. The observed price of a home in the region reached $934,793 in Q2 2020. The attainable value for the same period only measures $671,154. In case you missed the gap between the two, it’s huge.
Toronto Real Estate Prices Vs Estimated Value
The observed price of a typical home in the Greater Toronto Area, and the estimated attainable value.
Source: Statistics Canada; CREA; RPS Real Property Solution; IMFnet; Haver Analytics; IMF staff calculations; Better Dwelling.Greater Toronto home prices would require a massive correction to become attainable. The observed price is 39.28% above what’s attainable. A 28.2% drop in observed prices is what would be needed to bring things in line with fundamentals. In an ideal situation, incomes rise and prices fall — meeting in the middle.
Greater Vancouver Real Estate Is 15% Overvalued
Greater Vancouver real estate prices are much higher, but the gap between the two isn’t nearly as large. The observed price for the region was $1,051,847 in Q2 2020. The attainable value for the same quarter comes in at $911,560. Some people in Vancouver are more than likely to be surprised by those numbers.
Vancouver Real Estate Prices Vs Estimated Value
The observed price of a typical home in the Greater Vancouver Area, and the estimated attainable value.
Source: Statistics Canada; CREA; RPS Real Property Solution; IMFnet; Haver Analytics; IMF staff calculations; Better Dwelling.Greater Vancouver’s gap between the observed and attainable price is still very large. Home prices are currently 15.4% higher than attainable through fundamentals. A 13.3% correction would be required to fix that. This is a very large gap still, Toronto’s epic gap just makes it look tiny in contrast.
Greater Montreal Real Estate Is… Fairly Valued
Montreal real estate shows not all Canadian markets are totally unaffordable. The observed price for the region came in at $461,157 in Q2 2020. The attainable value was actually $465,576 for the quarter. Yes, the attainable value is actually higher than the observed price value. Although that spread was likely wiped out by today.
Montreal Real Estate Prices Vs Estimated Value
The observed price of a typical home in the Greater Montreal Area, and the estimated attainable value.
Source: Statistics Canada; CREA; RPS Real Property Solution; IMFnet; Haver Analytics; IMF staff calculations; Better Dwelling.Greater Montreal home prices moved in line with fundamentals, looking at the gap. Prices were 1% undervalued, according to their model. They had room to rise 1% before reaching the ideal value. Once again, prices have increased substantially since these numbers were crunched. Disposable income also slid lower. I don’t suspect these numbers are totally disconnected just a few months later, but they are worse.
Hamilton Real Estate Is The Most Overvalued Market In Canada
The Greater Hamilton Region did it. They caught the attention of the international community, just not for a good reason. The observed price of homes in the region reached $593,877 in Q2 2020. The attainable value was a much lower $418,042 for the same period. Hamilton used to be considered an affordable commuter city for Toronto. Now it’s valuations are even more disconnected from Canada’s largest city.
Hamilton Real Estate Prices Vs Estimated Value
The observed price of a typical home in the Greater Hamilton Area, and the estimated attainable value.
Source: Statistics Canada; CREA; RPS Real Property Solution; IMFnet; Haver Analytics; IMF staff calculations; Better Dwelling.Hamilton real estate prices are increasing at a much faster pace than fundamentals. Home prices are 42.1% overvalued according to their model. That would require a 29.6% drop in home prices to correct. More recent pricing data shows Hamilton experienced a sharp price increase since Q2. The next report is likely to show valuations have stretched even further.
The IMF numbers may be generous due to the pandemic’s skew of disposable income. CERB benefits in Q2 2020 temporarily skewed disposable income much higher, having replaced twice the income lost. As CERB benefits were phased out, disposable income began falling back to reality. Canadian disposable income is now the fastest falling of any G7 country. The means the attainable estimates are higher than usual. In the future attainable prices are likely to fall.
Much like all analysis on asset pricing, the IMF isn’t capable of telling when, or if, prices will correct. Markets are only as rational as its participants. However, the agency is far from alone in sounding alarms on Canadian real estate prices.
Canada’s largest bank warned high home prices now risk destabilizing the economy. Preserving prices isn’t the solution many think would work either. One of the country’s top personal finance experts recently said not even a real estate price crash can save Toronto and Vancouver. Instead, Gen Z and Millennials should be realistic about their options, and explore other cities.
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30% drop still means half the city can’t afford it. That’s the important thing.
No one’s making the argument everyone needs to own a home. They’re arguing the government made it extremely cheap for a small group of buyers. This isn’t enough for the amount of liquidity required for a liquid market. Demand pull forward is a market dynamic people don’t understand, and don’t want to discuss.
I don’t think people realize this is the issue. My 12 beanie babies could be worth a million dollars each, but if I can’t sell all 12, the value is only inferred for the purposes of balance sheet.
I’m not sure I would say extremely cheap we are leading the G7 in home price growth which would imply it’s anything but. Pretty sure when the dust settles we will find that houses were bought with borrowed down payments or mortgage fraud.
Toronto is in a serious bubble for sure.
That is due to two dynamics at play here.
1. All over the world, similar to post 2008 financial crisis. Governments printed extraordinary amount of money. And like after 2008 much of that will go into real estate. So it is normal for real estate prices to rise.
2. Investors understand point 1 will look for real estate to invest in because historically thats a sure bet to counter inflation.
I think the real problem with Toronto real estate market is the price is already too high. We are near the point where even the top 10% family income cant even afford to buy a home if they didn’t already have a old property to sell.
I believe Toronto will eventually have a huge drop, but the dynamic with printed money will still exists. So what will happen, second tier markets will see significant increase in prices at a rate faster than Toronto.
For example Ottawa is a city with over a million and high average family income plus recession proof government sector. After the pandemic Ottawa will be the obvious value investment epicenter.
Hamilton will be another market too ses prices increase as second tier cities will be the new investment destination. At this point Toronto has be come too expensive even for investors. Its just locals who are selling their current home who are driving these prices. But once they realize they can buy a second home in second tier cities for the same amount of their up size cost, thats when even local speculation will stop.
Why are you talking about investments in real estate when we are all talking about a bubble.
Are you engaging in damage control or are you an agent selling to 3rd parties?
Please share your motives with us.
“Hamilton will be another market too ses prices increase as second tier cities will be the new investment destination.”
Hamilton….?….What is this….2009?
How about Brantford, Stratford, London?……or Sarnia?….heck, Halifax, Sidney….all over Nova Scotia, New Brunswick……
We used to be “hewers of wood” with our resources….now we’re selling our land and properties…..
Okay, but Vancouver is still not affordable if prices drop only drop 15%. Did they model locals all move away, and we attract only luxury homebuyers from abroad?
I know it’s not cool, but they probably did factor in replacement income. The wages in Toronto are lower than Vancouver, but not that much lower.
The average income differential between Toronto and Vancouver is statistically insignificant. It’s only about $1000/year difference.
Probably nothing. The important thing is my house that I bought for $400,000 is now worth $2.4 million in a few years. A totally sustainable trend that will last forever. At least that’s what the government thinks. m
PS, BMO sent out a breakdown of cooling measures and risk assessments, that looked suspiciously like the one you sent out a couple weeks ago. No joke, you’re way ahead of the banks on research and modeling. Amazing job.
Did people expect the finance minister who needed her dad to co-sign for her mortgage at 40 would look after the general public? (not private information. Her team confirmed it to the Ottawa Citizen a few years ago).
Haha it’s true it’s on Chrystia Freeland’s Wikipedia page and the Ottawa Citizen page is 404 now. You can’t make this stuff up.
(October 11, 2013). “Slumming in Summerhill: LPC candidate Freeland now a Toronto homeowner”. Ottawa Citizen. Retrieved October 15, 2013. “The Liberal Party’s star Toronto candidate, who has promised to advocate for the interests of Canada’s middle class, had to get her parents to co-sign a mortgage on a $1.3-million home in an affluent Toronto neighbourhood. ”
This F.U.-got-mine attitude of these tools in politics needs to stop. A smart person realizes that impoverishing more of the population to housing costs will just come back to bite them in the end. It’s in everyone’s self interest, even rich people ultimately, to make housing as cheap and affordable as possible. Canada needs to get back to productive investment as soon as possible, housing has been draining our country’s GDP into deader than dead-money for far too long.
When C-19 began the supply of N95 masks and other PPE was manipulated by speculators buying inventory in bulk and driving up pricing for others to their advantage. In effect, hasn’t the same thing been happening in Canadian real estate for years now, which, when coupled with ultra low cost credit, left us with this epic mess? What am I missing?
House-hoarding by baby boomers is a real thing. So much so even a slight change in sentiment will completely implode the market. We need to have some tough legislation drafted surrounding productive land use to avoid more bubbles in the future.
Canada became Real Estate Boiler Room Bubble of epic proportions. https://en.wikipedia.org/wiki/Boiler_room_(business).
This reality (nightmare) was conceived, funded, nurtured and vigorously defended by successive Federal and Provincial governments and real estate industry in the period spanning longer than several decades. The simple truth is we do not have anything else that would provide needed economic growth in order to sustain lifestyles expected by populace. Thus, federal government currently continues importing of “customers” for the real estate industry on the unprecedented scale (400K per year will soon become 500K or more) in order to keep the pressure (boiler room effect) in the market and provide the floor for the prices. There is always alternative to not import the “customers” and let the chips fall where they may. That actuality would be very bleak and dangerous for the very survival of Canada’s financial system and by the extent the country itself.
Therefore it will never be allowed to happen. If you are parent be prepared to sacrifice your children to the altar of real estate and banking cartel. Kids will never be able to afford meaningful life experiences beyond renting from the bank shoe boxes in the sky with granite countertops. Besides being mobile and seeing the world is overrated right ?
Sad to say but our country = https://youtu.be/BKaQLYPf5hM
Disturbingly accurate. The Boiler room analogy is accurate. We are trapped.
Stephen, I checked on what the estimated attainable price is and the IMF bases this on the maximum mortgage that a household could carry. You’ve made the point before that just because a household can barely afford a mortgage with the current extremely low rates, doesn’t make the price reasonable. Thanks for all the analysis that you’re doing!
Yeah if you charted it against a reasonable price with a normal interest rate the overvaluation would be even worse. Post-pandemic inflation is probably going to be running white-hot, higher rates are all but inevitable at this point, and we all know what that means for the debt-pigs in Canada.
“Attention all Canadians in debt……mortgage, HELOC, credit card, auto…..Monday, May Two-Four is “Cease Payments” day. All Canadians must band together and actively quit paying any and all of their debt payments for a year…..They can’t foreclose all of us…..”
Perhaps the one thing that the government can do to make housing affordable is to put an end to “blind bidding” on housing. Can you imagine bidding on a piece of art at Sotheby’s without having any idea what any of the other bids are? House prices are not being driven up by “bidding wars”, they are being driven up by a con be pulled by real estate agents. Even after you have managed to purchase a house you have no way of finding out what anyone else actually bid. How would you feel if you find out that you bid many thousands more than the next bidder? I can think of no other area where this type of activity is allowed.
I don’t think that would help much. Open auctions on housing in Australia are the norm and their property bubble is almost as big as ours is.
Agreed. But at least it would be a transparent bubble. As a former trader on the floor of the Toronto Stock Exchange, I’ve seen a bubble or two in my day, and they happen even with a transparent bid and offer situation. What pops these bubbles is a change in sentiment – it always happens. With the housing market it is hard for a change of sentiment to come about when there is a distinct lack of information that may affect people’s perception.
Please stop writing articles about housing as it is getting depressing now. As a reader, I would love to read more about BoC liquidity measures and stuff.
We heading into an election by the sounds of things, and basic needs like Housing affordability (for first homes) should be a key issue. The fact that Justin’s liberal’s (who have done nothing but print and spend) have done nothing to address a the bubble, and instead supported it should weigh in. The fact that the have vs have not gap is only increased should be enough to cause a change. Then I suppose it will become and “promise” when they have failed in the past to address it. Bread and circuses.
Many comments are just NOT to the point. Canadian housing market is hot only in Vancouver and Toronto. Why not in other cities? It is because those cities don’t offer equivalent job opportunities and house buyers are voting on their feet.
Why housing price are high in Toronto and Vancouver ? Look at the speed they build up a house / condo! It took them forever to build a thing. These developers would blame how slow it is to get a permit from the government. With more and more new immigrants (from other countries or cities) move into Toronto and Vancouver, demand is surely above the supply. You need to build more than 1000 condos each year in Toronto to meet the needs!
So stop saying buyers are insane they can’t foresee rates going up could affect their affordability. A household with a couple works for a decent job can easily afford a house under $1.5M here. Yeah of course they need to sacrifice their spending on vacations and other things. But that’s their purchase preference. You can’t judge that !
To solve the whole problem, the government needs to balance job opportunities in other cities. They also need to improve their permit granting process and building efficiency. But neither of these can be easily achieved.
Seriously? Not hot in cities other than Toronto and Vancouver you say? LOL. Been reading any real estate news lately?
The bidders could group together to get the price down. Closed bidding is the only way.
As usual the “overheated” and “unsustainable” reports are in two centers and their bedroom communities. The rest of Canada is doing just fine.
I just picked 7 cities in 7 provinces on MLS and averaged the prices of any houses with 2 or more bedrooms. Average of those 7 cities = 365k. Which means that two wage earners making $15/hr could afford to buy there.
Solution: Dont live in TO or Vancouver. The rest of the country has plenty of affordable housing.