Why is Real Estate So Expensive in Canada?
Anthony GaydenPro Member
Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votesI 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?
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."
Comparing household income between Canada and the U.S.A. normally requires currency and cost of living normalization. $100K CAD -> $77K USD at the moment. Cost of living normalization is outside my expertise, but you can find reference material on-line.
Housing prices in most of the country are out of step with the underlaying economy, that is why the national average cost of housing is 5.2 - 5.7 times family income (depending on the report/data you read). The lowest discrepancy is in the Maritimes (Moncton is ranked as the most affordable housing in the country), but even here Halifax is running out in front of the region while smaller communities are disappearing and cities such as Saint John have faltering local economies.
Nationally, median household income is ~77K CAD. <see here>
Roy, I ignored the exchange because it applies to both income and real estate cost. Yes, $100k is worth only $77k US these days (sadly), but that applies equally to the average cost of a home in Edmonton (across all types) -- $378k Cdn is $291k US. Either way, it's 3.8 times the median household income.
My point -- or one of them anyway -- is you have to look at markets locally, not nationally. It's irrelevant to the Edmonton housing market that the national median household income is $77k (Cdn) when, locally, it's $98k. Ike you say, things are less out of whack in the Maritimes than, say, in Toronto.
Roy, I ignored the exchange because it applies to both income and real estate cost. Yes, $100k is worth only $77k US these days (sadly), but that applies equally to the average cost of a home in Edmonton (across all types) -- $378k Cdn is $291k US. Either way, it's 3.8 times the median household income.
My point -- or one of them anyway -- is you have to look at markets locally, not nationally. It's irrelevant to the Edmonton housing market that the national median household income is $77k (Cdn) when, locally, it's $98k. Ike you say, things are less out of whack in the Maritimes than, say, in Toronto.
Bart: I here you, but you need to normalize for cost of living and not just currency when comparing countries.
I hear your point that housing prices in Edmonton are not as desperate, but if look at the Demographia reports (which are more generous in their methodology than others ... Canada is ranked at 4.3 versus 5.2 - 5.7) anything >3.0 times household income is rated as moderately unaffordable; anything >4.0 times as seriously unaffordable; and >5,0 times is severely unaffordable. Vancouver, along with Hong Kong are in a category unto themselves.
You can throw those affordability rankings right out the window when you have some immigrant families willing to live 20 members to a 2 bedroom apartment with at least 10 adults among them all with full-time jobs and/or running businesses. In that scenario prices can go up another 500%+ before it actually becomes unaffordable for that family.
And those are the only people who can afford to live in a number of the apartment/condos that are going up here in Waterloo, where rent for a 1 bedroom starts at $2,600 + utilities. We're also seeing a bunch of high rise condos going up with NO amenities (no gym, no pool, not even parking.)
Median incomes in Edmonton and moreso Calgary are far above their historical norms as well, driven mostly by high oil prices. This is not sustainable either and will eventually revert back to their mean, unless oil takes another upswing or the Cdn dollar returns back to parity, neither of which I believe are going to happen again anytime soon.
Canada, along with Australia, as @Jay Hinrichs pointed out have been riding the high tides over the past decade with the commodities boom. The fate of the commodities boom (and now bubble) is inextricably tied to China’s teetering charlatan economy and this has single-handedly kept Canada from falling into the deep abyss such as the US and much of Europe experienced in the Great recession.
I second @Bayard P.'s comments about "immigration saving the day" for real estate. Canada's open immigration policy has been in place since the Trudeau administration in the early 80's but that did not help the bubble from bursting in the late 80's/early 90's with the overbuilding of housing then. I've posted before about over-building in Canada, housing supply is being constructed at a rate in excess of ~150K per person annually, how is that expected to be absorbed? So far, it has been by foreign investors snatching up properties, and just sitting on them. With Canada falling out of favor as being a safe haven for investment, I can't see how long this will continue.
I also love Bayard's comments about the pep rallies you see at the REI's to buy condos with down payments from your LOC's. This is quite comical. There are more and more gimmicks being offered by developers such as guaranteed rents for 2 years, and boasting ROI's of 12%+. In their proformas, the majority of the returns are from mortgage paydown, with cashflow making up a very minute portion of that, and of course no vacancy/maintenance figures.
Almost all RE investors, especially REI club leaders, have looked like absolute geniuses over the past 10 years since near everything purchased during this period has gone nowhere but up. Kind of akin to the dot com mania, every stock market player who bought anything tech related thought they were a genius (myself included) since they all went up in price....until the burst.
The only geniuses left standing if/when a correction hits are those who bought smartly and are cashflowing while building a steady reserve account for the inevitable capex repairs.
I find it interesting all of the circumstances that contributed to the higher prices. I'm assuming Calgary and Edmonton are more affordable due to being less desirable locations than Toronto, Vancouver, and Montreal?
What about Ottawa and Winnepeg? Are all larger cities in Canada seeing the continued increases in housing costs?
Compared to the US a sales value of 5.7x income sounds great to me. I haven't seen much of Canada except BC and Vancouver. That area is absolutely beautiful. I can very well see why it is 11x, comparable to SF. Like SF, besides being beautiful it is a geographically constrained area and has a high level of economically well-off & educated immigration.
I find it interesting all of the circumstances that contributed to the higher prices. I'm assuming Calgary and Edmonton are more affordable due to being less desirable locations than Toronto, Vancouver, and Montreal?
What about Ottawa and Winnepeg? Are all larger cities in Canada seeing the continued increases in housing costs?
Vancouver is no doubt priced the way is is because it's incredibly beautiful and offers the best year-round climate of anywhere in Canada. In short, it's THE most desirable place to live in the country for most people.
Other than that, there are so many factors that make one place more popular than another that's almost impossible to quantify. The Niagara region of Ontario is a lovely area (probably the next best climate after Vancouver) and yet the population is fairly low and real estate is relatively cheap.
As another example my hometown, Waterloo, has had nearly 25 years of rising prices but we're still doing far better than the largest cities for affordability. Household income is $108k but prices are about $360k (all housing).
Compared to the US a sales value of 5.7x income sounds great to me. I haven't seen much of Canada except BC and Vancouver. That area is absolutely beautiful. I can very well see why it is 11x, comparable to SF. Like SF, besides being beautiful it is a geographically constrained area and has a high level of economically well-off & educated immigration.
The median ratio of house price to household income in the U.S.A. is lower than Canada at 3.6. Sure you have San Francisco (9.2), San Jose (9.2), LA (8.0) and NYC (6.1) and a few other expensive spots, but they are rated as more affordable than Vancouver (10.9), Victoria (6.7), or the Greater Toronto Area (6.5 - 7.0).
Doug - {keep this one under your hat, but} There are some places on the east coast with incredible beauty and more temperate climate than the Niagara Peninsula ... just not the population density, traffic issues, crime, or, yes, the economic engine.
Thanks for such great feedback on this question everyone. I know a lot about rocks and oil, and everyone in Calgary constantly talks about the oil and gas market but I don't hear a whole lot yet on this topic and never really understood why this country is so overpriced compared to the US. Here in Calgary, and Edmonton and now likely Saskatoon and Regina, oil is largely responsible for dragging our home values up. It is going to be interesting to see how the real estate market responds if oil prices don't recover.
I'm no expert on Canada as a whole, but I have a property in Vancouver, and one thing alot of folks seem to discount is the land scarcity there.
Unlike many US cities (say, Austin for example) where it's possible to keep building outwards (albeit at the cost of a longer commute), there's significant constraints on land availability overall in Vancouver (bounded by Mountains and Ocean).
Influencing factors that I've seen in that city:
1. Anxiety that if you don't buy now, you'll never get into the market. Often driven by younger folks (in their 20's). Condos are perfectly priced for these entrants (say 300-500K for a 1 or 2 BR, downtown in the city).
2. Parents supplying downpayments for said youngsters in #1 (boomers have a ton of equity in their homes due to the run up in prices overall).
3. Immigration (lots of folks, especially from Asia, love to move to Vancouver. Richmond is a hugely popular suburb with Asians; you can drive around there and see little to no English - all Chinese signage and so on).
4. Zoning - Vancouver city council is an interesting beast; they'll allow huge condo developments on some areas, but are very strict in others - overall it's a big artificial constraint on development with very high fees (that then get passed to the consumers) - but that's not much different than many other cities.
5. Mortgages - very easy to get, minimal closing fees (often you can get the bank to pay appraisal, documentation, and so on). If it's your principal residence, you get low downpayment via CMHC (the government run mortgage insurer) with an insurance premium, otherwise it's 20% down to avoid that. Underwriting has gotten stricter (no more 40 year terms, no more "no doc" loans, etc. that used to be present), but overall lending in mortgages is low risk for the banks - they can pool up and buy insurance on their uninsured mortgages from CMHC lowering their risk profile even more (which to me is silly on our governments behalf but oh well...)
Credit Unions and even alternative financing companies and the like are in the game but the most competitive products are often from the "big" (there's 5 or so very large country wide ones that a majority of consumers deal with) banks - and interest rates are *incredibly* low with them.
Factors I hear about but don't really buy into:
1. It's all foreign money (you get alot of Xenophobia or thinly veiled racism that goes with this, unfortunately). The spike in prices is largely blamed on foreign (Chinese, Korean) cash buyers who pick up multiple homes/condos in the city and then leave them vacant.
Why don't I buy it?: There's no hard data - best estimates from realtor agencies (which admittedly may be biased) are around 5% are foreign buyers (i.e not Canadian addresses).
2. Huge numbers of units are going empty / not being rented out (hence the big plan by some hedge funds etc. to short Canadian banks and so on); it's possible, again no good data on it. Vacancy rates are incredibly low overall. Short term rentals are present (and tend to do quite well) but hasn't taken off huge the way say, San Francisco has. Rent Control is in place which depresses overall rents as a median - good article recently from the "Goodman report" (Goodman represents a big chunk of the commercial apartment building sales that occur in Vancouver) which noted that there's numerous rent increases occurring on lease turnovers; so a 4/5/6% CAP apt. building is slowly rising to be 7 or 8% or more, but it takes a long time.
In any case - it's also VERY dependent on when you bought/buy, what neighborhood (location location location!), and the type of home.
I owned a principal residence condo that I purchased in/around 2006. Sold in 2014 at a minor loss after realtor commissions and taxes were accounted for.
An investment property I own downtown was purchased in 2009 and has appreciated 30+% ; 2006 was a peak, bad to buy. 2009 was a trough - good to buy; everybody was scared out of their minds, developers pulling projects, financing hard to get: good time to pick up a deal.
On todays prices, I can't make the numbers work in downtown:
Good 1 BR condo (relatively new construction within 10 years), say 600 sq ft, near skytrain (mass transit system in downtown/nearby suburbs - so no parking spot, no storage locker, etc.), basic layout (i.e no granite/stainless upgrades and so on) and you're looking at at least 350K, probably closer to 400K when all is said and done.
That will rent out at about 1500$ a month, maybe a touch more - definitely not the 1% that folks want.
Single family homes are even crazier pricing - and that's only gotten worse (price wise) with the introduction of "laneway" houses (you can add a small addition to the home that's separate but on the same land, and rent it out). 1MM$ for teardowns is not unusual.
Further out (Surrey perhaps, and so on) prices are better/more attractive but still nowhere near that 1% mark. For that, you have to go to the interior - smaller towns, further from the border, more reliance on one industry for their jobs, lots more land to expand into, and so on.
That's my take anyway :)
*Clarifying my comment on Rent Control:
- You can lease out your home/apartment/whatever for as much as you want/whatever the market will bear.
- The control is in the increases: those are regulated province wide by the government. Last year, it was 2.5% maximum increase for example.
- Raising it beyond that means you have to turn over the tenant (whether that's buying a building and evicting everyone (happens a fair number of times, and gets alot of negative publicity), or paying off tenants to leave, or whatever else. Very similar to San Francisco in that regards for folks familiar with controls in that city.