To help put things in perspective, we put six bubble-inspired questions to four influential decision makers in Canada’s real estate space:
- Christopher Alexander, chief strategy officer at Re/Max Integra, arguably Canada’s most ubiquitous real estate brand.
- Chris Turcotte, president and chief operating officer of Centum Financial, one of the largest mortgage broker networks in the country.
- Paul Taylor, president and CEO of Mortgage Professionals Canada, the mortgage industry’s national trade organization.
- Brendon Ogmundson, chief economist at the British Columbia Real Estate Association, which assists real estate agents servicing one of Canada’s hottest provincial housing markets.
Their responses have been edited for length and clarity.
1. Has the Canadian housing market ever been in a true real estate bubble?
Christopher Alexander, Re/Max Integra: The last time there was a bubble in Canada that ended up bursting was 1989 and 1990. Prices were doubling year-over-year, and there weren't strong market fundamentals to support that growth. There was a huge price run-up in a very short period of time, and then interest rates crept way up. They got as high as 18%, and that was when the bubble burst.
Paul Taylor, Mortgage Professionals Canada: Definitely towards the end of 2016-2017, we were seeing people purchasing homes quite specifically for what they thought was going to be the investment upside, and that’s probably when stress tests took a bit of the air out of the tires.
Chris Turcotte, Centum Canada: I don’t know if there’s been a true real estate bubble. Obviously, in the 1980s we saw a bit of a correction. We saw it after 2008. I don’t think I’d call any of it a true housing bubble like we’ve seen with our friends down south.
2. What are the signs of a real estate bubble? Is Canada in one now?
Turcotte: That’s tough to answer, because nothing makes sense right now. A lot smarter minds than mine have tried to weigh in on this and failed.
Canada Mortgage Housing Corporation tried to predict this a year ago, and look what happened. Evan [Siddall, CMHC’s CEO,] was so far off that it was actually comical — "Uh-oh, the pandemic’s here. The market is going to go down by 18%." And we all know what happened there.
Brendon Ogmundson, BCREA: A housing bubble is generally defined as a market in which there is a self-reinforcing loop of rising price expectations fuelling speculative activity. The current situation doesn’t quite fit that definition.
Moreover, while interest rates are very low, buyers have to clear a significant hurdle in the mortgage rate stress test which, as of now, is set at 5.25%. As a result, the market is currently tilted toward buyers with very high credit scores, significant equity and solid monthly incomes.
Taylor: I don’t think we’re in one now, but because of the very low interest rates, we are susceptible to an interest-rate spike shock. I would characterize it that way, much more than I would say it’s a bubble.
With a shortage of supply, and people finding themselves living and working and schooling their kids [at home], they’ve basically been forced to buy bigger houses, if you think about it that way. There’s no surprise that prices have gone up.
Alexander: I think it’s showing signs on the surface, but you peel back the onion and you can see the fundamentals of what's happening right now are very strong.
3. If the market isn’t a bubble set to pop, what will bring down housing prices?
Taylor: We definitely have had some bubbles, but interest rate spikes are the pin that bursts them.
Five-year fixed terms are 2% now. So if the five-year fixed goes up to 3% or 3.5% in the next three years — I don’t think it’s going to move in the next 18 months — that’s not going to be calamitous. Most people who purchased their first homes during this period are young, middle-class Canadians that are at the very bottom end of their income trajectory. They have the highest propensity for income growth. I’m sure the vast majority of people will be fine.
Ogmundson: The market is already starting to calm, and we anticipate that trend will continue over the next 12 to 18 months. That should help price growth return to balance in the medium term. The one scenario that could accelerate a slowdown is a sustained increase in Canadian inflation that prompts the Bank of Canada to raise its policy rate sooner and more aggressively than expected. However, that is a very low-probability scenario.
Turcotte: When prices ultimately go down -- and they have to go down -- and the media starts saying it’s a crash and that the end is near, I would argue that it will be a correction. When you’re at all-time highs and prices go down, that does not mean the sky’s falling. That means there’s a correction. The higher the real estate market goes up, it’s not asinine to think that that correction is going to be sizeable. But a correction, in my mind, is a return to normal.
4. People have predicted the collapse for the Canadian housing market for years. Are you more concerned now?
Ogmundson: There is never a shortage of dire predictions for the Canadian housing market. However, if we step back and look at recent history, what is revealed is an extraordinarily resilient housing market. One that has, in the past 15 years thrived despite a global financial crisis, several rounds of tightening mortgage regulations, a litany of new housing demand-focused taxes, and now a global pandemic which prompted one of the deepest recession in Canadian history.
Moreover, household balance sheets have not only held up during the pandemic/recession but have strengthened as households dramatically increased savings. Given a recovering economy, strong demographic fundamentals and population growth, and persistent low mortgage rates, I see no reason to put any stock in the latest round of housing crash prognostications.
Alexander: The thing I get concerned about is that there’s no strategy to take the pressure off the supply source. There is no national housing strategy to find how we’re going to accommodate not only our current residents, but all of those who are going to continue to come into this country.
Turcotte: I’m not concerned for the state of the market whatsoever. The pandemic didn’t stop it. If anything, it poured gas on the fire.
I just don’t see [a collapse]. I think what people need to be mindful of, though, is that if you are buying at the height of this market, you might have to brace yourself for staying in that home a while when that correction happens. When there’s a correction, you could be upside down.
5. Within months, average home prices could hit $1 million in Toronto and Vancouver. Is that not a colossal problem?
Taylor: I think it’s a huge problem. Honestly, that is probably the largest scenario concern we’ve been posing to the federal government since I started working at Mortgage Professionals Canada about four and a half years ago.
Outside of the million-dollar cap (on homes not requiring a 20% down payment), which is definitely going to create a problem in Toronto and Vancouver, the stress test, even in regions where the prices are lower and you can still qualify for an insured mortgage, is making it much more difficult for those would-be aspiring homeowners to get into the market.
We really are tilting the playing field in the name of fiscal prudence and responsibility. We are managing the risk portfolio levels for the lenders, but very much to the detriment of the marketplace in general.
Alexander: It is a very serious challenge that I’m hoping policymakers and all levels of government can come together to figure out. We’re already starting to see some signs that things have calmed down, especially in the last month, but it’s still competitive. Prices are creeping up, they’re just not in double-digit territory.
Ogmundson: Affordability remains a significant challenge in Canadian housing markets and is currently being exacerbated by low supply. Policymakers have tried to dampen demand by employing more than a dozen policies over the last decade, from taxes to mortgage restrictions, with limited success. What the market needs is supply, and we hope to see policies designed to encourage supply aimed especially at the missing middle of the market.
6. Have you encountered any feasible outside-the-box solutions for Canada’s housing crisis?
Ogmundson: There’s no reason for out-of-the box solutions when an obvious solution is at hand. We need to get new supply to the market faster and in greater magnitude to match strong future demand arising from the wave of millennials aging into their household forming years over the next decade. Without addressing the supply side, the housing stock will continue to be under enormous pressure.
Alexander: We need to really look at how other major urban centres accommodate single-family residences from an outside-the-box perspective. Berlin has been on a building spree, and they pride themselves on being one of the least expensive major cities in the world. I believe we have to look to cities like that, and to countries that have a big emphasis on having affordable housing, and figure out how we can implement some of those ideas over here.
Taylor: Everything I’ve heard sort of skirts the periphery of the issue: In the absence of being able to add the supply, let’s look at ways we can get people to spend less on their homes.
Changing the bidding process on purchase and sale, putting in cooling-off periods, additional down payments for foreign purchases, additional down payments for other than primary residences -- I think some of these things are philosophically the right thing to do. We should definitely be creating housing policy that gives some kind of advantage to the would-be owner-occupiers of property. But all we would really be doing is shuffling around fiscal policy. The prices aren’t going to go down. The competition level for those residences is going to be the same.
Turcotte: I gave up on it. My approach is ‘observe, absorb and pivot.’ The market's going to change. The market’s going to do its thing.