Canadian real estate prices are rising, but investors are quietly pulling back. In fact, they’re withdrawing their capital at one of the fastest rates in history. Statistics Canada (Stat Can) data shows residential investment dropped sharply in Q3 2021. This is the component of GDP that covers real estate’s most direct economic output. The GDP component recently printed a record, but falling home sales and delayed projects have it spiraling lower.
Canada Spends More Than A Third Of Its Investment Capital On New Housing
Canada’s investment in residential structures showed one of the sharpest declines in history. Seasonally adjusted investment fell to $231.2 billion in Q3 2021, down 7.1% ($17.7 billion) from the previous quarter. That second quarter had been the record high for investment in dollar terms.
The (sorta) good news is fixed capital formation, a measure of total GDP investment, didn’t fall as fast. Residential investment is 39.8% of gross fixed capital formation in Q3 2021. This is a decline of 2.4 points from the previous quarter, underperforming the economy. It peaked in Q1 2021, and the share is now 2.9 points lower from that peak. Canada’s dependence on real estate is starting to loosen, though it’s still very high.
Residential Investment Has 3 Major Subcomponents
Let’s go over where this weakness is coming from by looking at the three big subcomponents. Renovation, the biggest of the subcomponents, is the capital spent on major home renos. New construction is the second biggest and shows the amount of capital sunk into new housing. Ownership transfer costs are the smallest and represent costs associated with trading homes. This is primarily realtor commissions, known as broker revenues. All three segments showed weakness in the most recent data.
Investment For New Housing Made The Sharpest Drop Since 2009
New housing investment is the largest share of residential investment, and it slipped. The segment fell to a seasonally adjusted $102.7 billion in Q3 2021, down 2.6% ($2.8 billion) from the previous quarter. This would be the most significant drop since the beginning of public health measures.
Stat Can made a special note about this segment in regards to the size of its drop. When adjusted for inflation, investment in new housing construction fell 5.7% in Q3. Their analysis shows this is the largest drop for the segment since 2009 — the Great Recession. It really emphasizes the enormous role inflation is playing in this environment…read more.
Canadian housing is far outpacing the growth of its economy, shows government stats. That’s what 2020 home assessment values show, provided to us by Statistics Canada (Stat Can). Home prices added billions in value last year, as you might have guessed. What you may not know is Canadian homes have added so much value it’s now worth 3x the output of Canada’s economy.
Canadian Residential Real Estate Is Now Worth $6.1 Trillion
Canadian residential real estate prices have hit an obscene valuation, even when sandbagged. National assessment value hit $6.1 trillion in 2020, up 2.5% ($146.0 billion) from a year before. It’s not quite the growth rate you’d probably assume from monthly home sale reports. However, it is a mind-blowing amount considering this is a conservative estimate. The Queen should totally take out a HELOC on the country and buy herself a nice hot tub.
The Value Of Canada’s Homes Is 3x The Output Of Its Economy
Numbers this large are hard to appreciate without context, so let’s give it some. Canada’s housing is valued at more than 300% of the country’s gross domestic product (GDP). In contrast, US housing was worth just 170% of its GDP over the same period. As pricey as American real estate is, the value of home prices relative to its economy is almost half that of Canada…read more.
The Canadian real-estate market is heating back up, posting the strongest increase in sales since the beginning of the pandemic housing boom.
Home sales surged 8.6 per cent in October from the month before, the biggest increase since July 2020 when the country was emerging from its first pandemic lockdown and the housing market was getting started on its record run, according to data released Monday by the Canadian Real Estate Association.
It was the second best October on record for sales. Benchmark prices surged 2.7 per cent on the month, the data show.
“After a summer where it looked like housing markets might be calming down a bit, October’s numbers suggest we might be moving back towards what we saw this spring, with regards to current market demand and supply conditions,” Cliff Stevenson, chair of the real estate board, said in a press release accompanying the report.
In Canada, the surge in demand for bigger living spaces driven by the pandemic has met a historic dearth of supply, helping make its housing market one of the hottest in the world and deteriorating affordability a top political issue. Though Prime Minister Justin Trudeau’s government has made addressing the supply shortage a priority after being re-elected in September, much of the power over housing policy lies with local governments, limiting the speed with which the issue can be addressed…read more.
Canadian real estate is very overvalued, according to a massive credit rating agency. Moody’s Analytics released its Canadian real estate model this week. The firm’s model shows markets are overvalued by up to 91% across the country. As disastrous as that sounds, the firm isn’t expecting a big housing crash. The baseline model shows low to no price growth, as mortgage rates rise.
Higher Mortgage Rates Will Drag Canadian Home Prices
Canadian residential real estate prices are massively overvalued but aren’t expected to fall. The firm’s latest models show urban markets have deviated 22.59% above the trend as of Q2 2021. This is a huge overvaluation, but the firm doesn’t expect home prices to fall at the national level. At least in nominal terms, and with a few regional exceptions.
Higher mortgage rates are expected to grind growth down to a standstill. Urban prices are forecast to grow 2.62% over the next year (from Q4 2021 to Q3 2022). Another 1.38% growth is forecast to follow in the 12 months after. Not the end of the world, but interest rates are forecast to be higher than price growth in the last year. In the baseline, they are essentially concluding a lot of future growth was just borrowed. Markets will grow into their valuations.
Toronto Real Estate Is 40% Overvalued
Toronto real estate is massively overvalued at these levels, but no crash is forecast. Home prices are 39.5% above the trend as of Q2 2021, almost double the national numbers. Over the next year, prices are forecast to grow just 0.86%, followed by an 0.05% decline in the year after. No, you read that right. It was a strangely precise forecast of virtually no drop in that last year. When do we start the bailouts?
Vancouver Real Estate Is 23% Overvalued
Vancouver real estate is overvalued, but not to the same extent as Toronto. Home prices are 22.95% above the trend as of Q2 2021, nearly half the rate of the country’s largest market. Slow price growth is forecast at 1.17% over the next year, and 1.32% in the following year.
It may surprise some to see Vancouver is less overvalued than Toronto. Especially considering the city is so much more expensive. The conclusion is consistent with findings from the CMHC and IMF. That is, it’s still overvalued — just not as overvalued…read more.
Here’s an example of how zoning for more density increases land value.
On July 28, 2016, Vancouver city council approved the Grandview-Woodland Community Plan.
The plan provides direction for residential and other developments in the area bounded by Clark Drive, Nanaimo Street, East 12th Avenue, and Burrard Inlet.
At the southern end of the community is a sub-area called the Commercial-Broadway Station Precinct.
One of the properties in that precinct is 1985 East Broadway, a two-storey detached home built around 1932.
It is located on a block that the Grandview-Woodland Community Plan designated for six-storey residential projects with commercial uses on the ground floor.
Soon after council approved the community plan, the 1985 East Broadway property came on the market on September 21, 2016.
It had a listing price of $2.8 million, which was more than three times its assessed value in 2016.
For 2016, it had an assessed value of $914,400…read more.