For both housing bulls and the reformed shorts whose bearish bets have failed, Canada’s unusual capacity to absorb immigrants often tops the list for why the housing market hasn’t, and won’t, collapse.
Before the pandemic, the country was welcoming more than 300,000 newcomers a year, almost singlehandedly driving the fastest population growth among Group of Seven industrialized nations. These aggressive immigration targets enjoy popular support, but all these newcomers need a place to live, and in the major cities where they arrive they’re met by the other pillar of Canada’s residential real estate boom: a shortage of housing supply.
Toronto and Vancouver have long contended with some of the lowest rental vacancy rates in North America as slow re-zoning processes meant the addition of new apartment stock perennially lagged demand. And when it comes to ground-level homes, the constraints get even tighter. The cities are hemmed in by large bodies of water on one side, and regulations limit urban sprawl.
In Canada’s metropolises, Tony Soprano’s advice to buy land “cause God ain’t making any more of it” may be even truer than in northern New Jersey, thanks to local regulators. It’s this dearth of housing supply combined with the plunging interest rates caused by the pandemic—the average rate on a common fixed-rate mortgage in Canada was 1.97% at the end of 2020—that has propelled home prices to new heights, even with immigration falling.
“In Canada, you have zoning rules that limit development around the major metropolitan areas and that will keep a lid on supply,” said Rod Bolger, chief financial officer of Royal Bank of Canada, the country’s largest mortgage lender, whose internal base case assumes another 25% rise in prices over the next five years. “Then on the demand side, once immigration resumes, those two factors in combination should continue to lead to traditional economics putting upward inflation over the long term on housing in Canada.”
That has concern starting to shift from the market crashing to it rising too fast. Things are starting to get a bit loony: in Toronto a detached garage—sans the home—was recently listed for sale for C$729,000. In Woodstock, Ontario, a city of about 40,000 southwest of Toronto, the average increase in home values last year was greater than most residents’ annual income.
Speculation may also be on the rise: In January 6% of all houses listed for sale in Toronto’s suburbs had been bought in the previous 12 months, up from 4% a year earlier, according to brokerage Realosophy.
All this has caused people’s ability to afford a place to live to deteriorate rapidly. This year, Demographia named Vancouver the second-least affordable city in the world, trailing only Hong Kong. Back in 2006, the city ranked 15th on the list. Toronto’s ranking went from 37th to fifth.
And thanks to the pandemic, the two cities are now exporting their housing problems to small towns across the country as urban-dwellers, now free to work remotely, move further afield in search of larger homes, bidding up prices beyond what locals can afford.
These problems are starting to cause an outcry. Canadian policy makers from Prime Minister Justin Trudeau to Toronto Mayor John Tory have signaled they’re considering implementing new taxes in an effort to make homes more affordable. And economists at the country’s major banks have begun warning that the market risks being overtaken by a speculative frenzy if the government doesn’t act.
But Canada’s long housing boom has seen policy tweaks before, from changes to down payment rules to taxes on foreign buying and ownership. In the end, these measures just proved to be speed bumps in the long ascent of Canadian home values. And with housing inventory across the country at the lowest level on record and the Trudeau government ratcheting up immigration targets to make up for last year’s lull, there’s every reason to think the trend will continue.
“Everybody has an interest in keeping this going, that’s the part that I didn’t realize,” said Jared Dillian, an investor, financial newsletter writer, and contributor to Bloomberg Opinion who had initiated his own bet against the housing market back in 2013. He pulled the plug on it last year. “There were a lot of people who said that Canada is different and there’s lots of immigration and all kinds of reasons why the Canadian housing market is different. They ended up being right.”
This article was provided by Bloomberg News.