The Bank of Canada’s ominous warning Thursday cut no corners: skyrocketing housing prices in Vancouver and Toronto are not sustainable.
While some are being shut out of the market, those who jumped in are financially stretched. Should there be a correction, a lot of people could be in serious trouble, the report warned.
So what can be done to control sky high real estate prices in Canada’s hot spots?
The foreign ownership question
Foreign ownership of Canadian real estate increasingly gets the blame for pushing up prices, especially in Vancouver. But put down the pitchforks: the hard data to prove it just isn’t there.
“We don’t really know about foreign ownership as much as we would like to,” said professor William Strange from the University of Toronto’s Rotman School of Management, adding that it’s largely folktales painting a picture of empty downtown highrises, bought and paid for with foreign money.
“And that can matter in a lot of ways.”
Strange says the first thing we need to do is figure out how many foreigners are truly sitting on property, and base any tax changes on basic principles of fairness.
“If it’s just, ‘these darn foreigners are changing our world,’ I don’t think that’s what Canada is about,” said Strange.
He says one change could be to assess if foreign owners are paying their share of the costs of public services.
“But just objecting because it’s foreigners who are buying it seems not to be in our interest.”
The province of B.C. is starting to track citizenship of real estate owners, as housing affordability reaches crisis levels.
“We think it’s time to start collecting again.”
Cameron Muir, chief economist with the British Columbia Real Estate Association says he’s eager to see the results, so the “extent and depth” of foreign ownership can truly be examined. But he doesn’t expect it to be a game-changer.
“I think the data to date certainly suggests it’s a factor, but not a sufficient factor to cause the kinds of housing demand that we’re seeing today.”
The Canada Mortgage and Housing Corp. (CMHC) says rates of foreign ownership sit around 3.3 per cent in Toronto and 3.5 per cent in Vancouver when it comes to condos.
Muir says the bulk of B.C. buyers live and work in their communities.
Prime Minister Justin Trudeau has said we need better data on foreign ownership of Canadian real estate, but said we must be wary of imposing hostile measures.
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“We have to be very, very cautious about restricting foreign investment in our country,” Trudeau told Global News last December.
Ultimately, Strange said, we should be happy the rest of the world sees Canada as a place to park its money.
“I think that if we tell foreigners that they’re not welcome to invest in Canada we’re going to find there’s lots of consequences for Canadian businesses,” Strange said.
The single detached home: the unicorn of real estate
Sorry, first-time home buyers: a single detached home is likely out of your league. There is simply not enough of the prized real estate to go around.
“Single detached homes… comprise just five per cent of the Metro Vancouver housing stock,” said Muir, calling them “a luxury product.”
Both Toronto and Vancouver lack more land to build more.
“There is no building out,” said Muir. “There really is no ability to sprawl anymore than has already occurred.”
Strange says in Toronto there is simply not enough supply for everyone to have a nice big house on their own lot.
“That’s just not going to work. There’s no way we can accommodate all the growth that’s projected for Toronto. There has to be higher-density development to fit people in.”
Condos, townhouses and other multi-housing structures are becoming the norm, especially for the first-time home buyer.
Even with a shortage of supply, B.C. is seeing a buying frenzy.
“We’re experiencing record consumer demand,” said Muir. “Home sales in the province this year are going to be at all-time record levels.”
It’s not just Metro Vancouver; Victoria and Kelowna are posting housing demand records as well.
“That of course has drawn down inventories,” Muir said, adding there are supply lows not seen in decades in some areas.
“That’s caused quite an imbalance between supply and demand, and causing prices right now to accelerate.”
The possible solutions
Vancouver should see respite in the coming years thanks to a building boom currently underway.
“We’re in a housing cycle that happens every several years in which consumers decide they’re going to buy. And that’s really leading to the record levels,” said Muir.
That’s where the Vancouver market is now: at high tide. And when the demand is great, builders react.
“The lag between getting that signal in the marketplace — supplies get drawn down. It takes a number of years for all these housing units to be completed, to be added into the marketplace,” said Muir.
“In between that, we tend to see rising prices. So we get this ramp up in prices and then a plateau. And that’s quite common in the Vancouver housing market.”
There are a record number of homes under construction in Metro Vancouver, Muir says. But he doesn’t expect real estate prices to ever bottom out.
“Collapse is a pretty charged word.”
He agrees with the Bank of Canada’s comments; growth of 20 per cent year after year is not sustainable. But there will always be people who want to buy real estate in and around Vancouver.
“The regional housing market has many points of growth in which housing demand is very strong.”
More can be done by governments to relax restrictions on Toronto’s housing supply, Strange says.
“This is a competitive market. It’s partly us doing this to ourselves, getting carried away in our enthusiasm,” said Strange.
“And the government does make it a bit harder by regulating supply strictly, and probably needs to find ways to reduce it at least in some parts of the city.”
There are also plenty of places in Canada with plentiful and reasonably priced real estate, but the communities might lack jobs or desirability. Unless that changes, people will flock to the country’s hubs for employment, which tend to be the priciest areas.
“Handling the scale at which Canada has changed is a challenge. And we’re going to need to be at the top of our game to address it,” Strange said.