Why is Real Estate So Expensive in Canada?

38 Replies

I am 100% uneducated on this subject, but I find it interesting. In my mind I see a country with a vast amount of land, but a relatively small population. Are there rules or factors involved that make building extremely expensive or difficult? Is it much harder or easierto obtain loans or financing? Are people in Canada just that much wealthier overall than in the US?

@Anthony Gayden  Great question! 

Income per capita are approximately equal both sides of the border.  

I believe it's been driven by years of ridiculously low interest rates, a huge and prolonged commodities boom/bubble along with foreign investor speculators.  Another factor is the follow the herd mentality - people just think the RE prices will continue to rise in perpetuity.

As we all know, increasing RE prices cannot be sustained and will eventually revert to their mean.  

it also depends on where in Canada - where do you mean?

I read someone bought an entire town for $1 - that is a bargain - sort of!

Originally posted by @Anthony Gayden :

I am 100% uneducated on this subject, but I find it interesting. In my mind I see a country with a vast amount of land, but a relatively small population. Are there rules or factors involved that make building extremely expensive or difficult? Is it much harder or easierto obtain loans or financing? Are people in Canada just that much wealthier overall than in the US?

Anthony:

While we are the second largest country in the world geographically, our population is ~1/9th that of the U.S.A. and 85 - 90% of that population lives within 200 miles of the Canada / U.S.A. border.   Much of the country is remote and sparsely inhabited.

Canadians are not wealthier, monetarily.  In fact, average salaries here have been stagnant for almost a generation and a families real purchasing power has declined.

Real estate valuations - home prices in particular - have been rising steadily since before the turn of the millennium - we did not experience a correction in 2008/2009.  Home prices are nationally running at ~5.7 times family income - Toronto (7 times) and Vancouver (up to 11 times) are responsible for much of the runaway house pricing.  The present situation has given Canada the distinction of landing in the top five list of countries where housing is least affordable.  There are places in the east (Maritimes) where housing costs are a little more grounded.

The continuing rise in real estate prices has been {partially} fuelled by historically low interest rates (BoC overnight is 0.5%; Bank prime is 2.7%).


@Kara Haney

That story of purchasing of a town for $1 might have come from a television sitcom here (Schitt's Creek).

SoCiAlism!

Canada got a slightly later start and did not expand as fast as the US market.  The government did not force banks to give out bad loans, therefore they didn't crash the way we did.  That being said, I have family and friends in the GTO that think that Canada managed to find the secret sauce for real estate and prices will continue to go up forever.   They are absolutely convinced that a correction could not happen.  I've seen Canadian investors on BP,  ones I have a great deal of respect for, explain why Canadian markets may appear over priced but will keep going up (forever apparently).  That sounds a lot like the US in 2005-2006 to me.

@Roy N probably said it best, but from my limited time in Canada (Toronto, Ottawa) it seems to be booming much like major metros in the States.  The banking system was much healthier and avoided the downturn that we had.  However, the condo projects in Toronto remind me of Miami circa 2006.  Is job creation really filling those units? Hard to say.

The other wildcard is the looser immigration policies that Canada has.  Toronto is a very international city, with a huge influx of foreign money.  Vancouver is a magnet for Chinese money, and has a very nice climate (one Canadian described it as the California of Canada).  Prices in Vancouver would rival what we're seeing in the Bay Area, but main difference is that it isn't driven by tech job growth.

Originally posted by @Account Closed is absolutely correct that the ongoing trend in real estate prices is not sustainable - it's been defying the underlying economic fundamentals for some time.  With the oil soaked Loonie reaching a 9-year low against the USD and other marker currencies this month, the Canadian economy is stalled and may even be heading for a bit of a recession.   With the low currency - which could drop another $0.05 to $0.08 before stabilizing - the purchasing power of Canadian families has further shrunk.   A taste of inflation should change the trajectory of real estate prices - what remains to be seen is how quickly and by how much.

Roy 

this is not a fantasy story - the abandoned town was sold by the Canadian government for 1CAD to a private investor - this is a fact - it was an abandoned town that had been in permafrost until climate warming freed it.

a great deal of the appreciation in local markets is due foreign investors - who come for their financail safety and/or who need to invest a large X amt of dollars to be get the investor visa/residency to stay in Canada - the flight of HK Chinese had started pushing up values in Vancouver as early as the 90s, the influx of Mainland Chinese hasnt stopped.

you might take a look at this survey on affordability-

http://www.demographia.com/dhi.pdf

Socialism generally increases taxes and thus puts presure on sales prices, IIRC - would appreciate an explanation of what you think Socialism does to increase sales prices of RE - NY RE owners would love to know, since they spend a lot of money to the anti-socialism lobbies!

i don't think a town can be trapped by permafrost. There are towns in the arctic that function just fine.

@Anthony Gayden There are cheap houses in Canada if you know where to look:

http://www.realtor.ca/Residential/Single-Family/15...

Of course, finding a tenant or buyer for them is another story!

Originally posted by @Doug Pretorius :

@Anthony Gayden There are cheap houses in Canada if you know where to look:

http://www.realtor.ca/Residential/Single-Family/15...

Of course, finding a tenant or buyer for them is another story!

 So true Doug!

There are plenty of cheap houses in the Maritimes ... but the economy of the smaller places may make them a challenge to fill as well ;)

@Anthony Gayden

  if your curious about values... also check out Australia  its ever higher than Canada and has the same circumstances.. huge land and mineral wealth.. much of the land is uninhabitable and 90% of the population lives within 50 miles of the Oceans.

From my personal perspective.. I went up to Kelowna on a golf trip and to look at ski in ski out condo's in 2000.. at that time exchange rate was crazy good for US dollar and the market had not risen.. I ended up buying a home on a golf course and 2 condo's on that trip... and of course I hit the run up.. :)... although I had to pay 25% cap gain tax ( which was OK)..

I know for BC much of the run up started with the Hong Kong 1997 or 1998 conversion.

However though for my experience given the tax burden the average Canadian lives pretty frugally.. But they get free or near free Medical.

This post has been removed.

Originally posted by @Kara Haney :

you might take a look at this survey on affordability-

http://www.demographia.com/dhi.pdf

Socialism generally increases taxes and thus puts presure on sales prices, IIRC - would appreciate an explanation of what you think Socialism does to increase sales prices of RE - NY RE owners would love to know, since they spend a lot of money to the anti-socialism lobbies!

The Demographia report, along with one from the Economist and other sources were discussed on a thread here back in May.

I am at a loss with respect to your socialism argument as I made not statements about socialism and housing prices.  I did provide a curt response to a post above where the stereotypical, incorrect labelling of Canada as practicing socialism was offered-up.

I would be interested in the town you saw which was sold by the {Federal?} Government for $1.  There have been times in the past when "company {mining} towns" in the north have been abandoned on the population and governments have cut deals with companies to get the mines re-opened.   The most recent one with which I am familiar was the BC Government offering up the abandoned mining town, Bradian, BC for around $1,000,000 a year or two ago.

Roy and Chad have touched on a number of the reasons. The other input I would like to add is immigration level and its concentration.

Canada adds approx. 0.7% population growth per year through immigration vs. 0.3% for the US. Canada's plan for 2015 is to bring in 285,000 immigrants or a population roughly the size of St. Paul, MN.

In 2006, 94.9% of Canada's foreign-born population and 97.2% of recent immigrants lived in either a census metropolitan area or a census agglomeration, i.e., urban community.

Toronto, Montréal and Vancouver attracted 68.9% (765,000) of the new immigrants who came between 2001 and 2006. Another 28.3% spread across the remaining urban areas, while only 2.8% chose to live in a rural area.

Unlike growth due to having children, this growth through immigration causes an immediate requirement for new housing.

Once again, it comes down to supply and demand. Valuations away from the big 3 metropolitan areas are much better.

At some point I do foresee a correction in these markets, however I don't anticipate a full collapse at the moment

Originally posted by @Darryl Young :

Roy and Chad have touched on a number of the reasons. The other input I would like to add is immigration level and its concentration.

Canada adds approx. 0.7% population growth per year through immigration vs. 0.3% for the US. Canada's plan for 2015 is to bring in 285,000 immigrants or a population roughly the size of St. Paul, MN.

In 2006, 94.9% of Canada's foreign-born population and 97.2% of recent immigrants lived in either a census metropolitan area or a census agglomeration, i.e., urban community.

Toronto, Montréal and Vancouver attracted 68.9% (765,000) of the new immigrants who came between 2001 and 2006. Another 28.3% spread across the remaining urban areas, while only 2.8% chose to live in a rural area.

Unlike growth due to having children, this growth through immigration causes an immediate requirement for new housing.

Once again, it comes down to supply and demand. Valuations away from the big 3 metropolitan areas are much better.

At some point I do foresee a correction in these markets, however I don't anticipate a full collapse at the moment

 Interesting facts about immigration. Are the majority of immigrants to Canada higher paid, or are there a lot of lower paid immigrants as well? 

Originally posted by @Anthony Gayden :

 Interesting facts about immigration. Are the majority of immigrants to Canada higher paid, or are there a lot of lower paid immigrants as well? 

 The Federal Government has been running and promotion economic immigration programs, which aim to attract high net worth immigrants, for a little over a decade, while simultaneously scaling back on Canada's acceptance and support for refuges.    

It has recently (last year) been published that the economic immigration programs have been a relative failure.  Those high net worth individuals who wanted to come to Canada did so before the programmes and the rate did not really increase.  However, these programs apparently did play a roll in bringing money into {primarily} Vancouver and Toronto which has helped to fuel the ridiculous real estate prices.

  

I'll see if I can find the link to the annual reports on immigration, but I seem to recall a large percentage of immigrants being "pull alongs" who are sponsored by a family member who was already in Canada.    Darryl may have that information more readily at hand.

Originally posted by @Anthony Gayden :

 Interesting facts about immigration. Are the majority of immigrants to Canada higher paid, or are there a lot of lower paid immigrants as well? 

Don't know about Canada as a whole or other parts of the country, but here in Kitchener-Waterloo it's a mix. Nearly our entire population are either immigrants or first-generation Canadians. So you have immigrants working across the board in every industry and vertically through all levels of management.

The Immigrant Investor Program (IIP) and federal Entrepreneur (EN) Program to attract high net worth individuals was eliminated due to the limited economic benefit of the program.

Here are some numbers for immigration for 2013:

Economic Class Immigrants (skilled workers as well as spouses & dependents) - 148,181

Family Class Immigrants - 81,831

Refugees - 24,049

Other - 4,892

Total: 258,953

I saw a chart somewhere recently showing that of the approximately 250,000 immigrants admitted, almost 100,000 were university educated.

It's Mike Holmes and all that minimum coooode nonsense lol

I believe that there is an enormous amount of investment speculation in the Canadian markets especially the GTA market.  Alot of people are taking advantage of their home line of credit to buy multiple investment condos.  They are essentially utilizing the rising equity in their homes to double/triple down on the housing market.  I've seen this strategy encouraged at real estate meetups.  That is one of the reasons Canadians now have a higher debt to income ratio than the US had pre-bust.  

3 things I've heard in sales pitches/real estate seminars for Toronto condos.  Toronto is going to be the next New York City, immigration will help support the housing market and our banks are smart and didn't do NINJA(no income no job or assets) loans or sub-prime.

ARRRRGHHHHH!!!!! I hate when people compare Toronto to New York City.   NYC is about 4 times more populated than Toronto and at least twice as dense.  NYC Metro Area is about the population of all of Canada.   You can't compare them period, not even close.  So much money is produced in NYC, it's annual GDP almost matches the GDP of all of Canada.  

If immigration is going to save/support the Canadian or Greater Toronto Area market than why didn't immigration save the US housing bubble.  Just over 1 million people legally immigrate to the US a year and that did nothing to stop the downturn nor has it been a huge factor in the upturn.

I won't get into the whole bank thing but our banks are not as risk averse as they seem to be.  I've known a few people that were able to get mortgages with sporadic job history.  In general banks seem just as eager to add fuel to the housing bubble by doling out as many mortgages/hloc to as many people as they can.  

Sorry just had to get this off my chest.  I'm not calling for a Canadian Housing Market Armageddon but this market is definitely in need of a correction.  How will people react when they see house prices fall following +15 years of annual appreciation?  I'd rather be the person sitting on the sideline prepared to take advantage of the correction.  As a famous Stark once said "Winter is coming."   

I don't think anyone expects immigration to prevent a housing bubble, it's only another demand placed on the housing supply in addition to speculation, demand due to historically low interest rates, etc. I don't know of anyone who is saying that the housing bubble in the US burst because of demand driven by immigration. It was related to people obtaining mortgages with no reasonable means to pay them back. 

The housing demand increase due to immigration in Canada is much more concentrated than in the US. Toronto, Montreal & Vancouver take 69% of all immigrants to Canada. The top 3 US cities (New York, Miami & Los Angeles) take a total of 22% of immigrants to the US. If New York took the same % of national immigrants as Toronto does, over 400,000 new people would move there every year as opposed to 130,000 currently. What effect would this have on demand for housing and home prices?

One can decide for oneself if prices are justified based on house price ratios to rents and household incomes. Personally I believe things are overheated but this can change quickly, just ask our friends out Alberta way.

A small graphic of destinations for US immigrants

Net immigration 2013 census map

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