Canada

Canada’s Property Bubble Is Now So Large, A Soft Landing Would Take 19 Years

Canadian real estate prices are now beyond frothy, and the government says that’s fine. They believe they can prevent home prices from falling, and let incomes catch up. If you’re in government or banking, you may have already seen me explain how impossible this is. If you haven’t, this is known as the “soft landing” scenario, and it has never happened.

On many occasions, the industry declares a soft landing after a pause in price growth. Short pauses in home price growth, or prices falling briefly, aren’t a landing though. The market inefficiencies remain, and extend further once price growth continues. It would take decades for the largest property bubbles to correct by income alone. Let’s dive through the numbers.

About The Calculations

Before we get to the numbers, there are a few ways of measuring incomes “catching up.” Today we’re looking at how long it would take incomes to rise enough to carry payments on a typical home. There are other barriers such as saving a down payment, but we’ll assume you can find it on a park bench or something. That means today’s numbers will be more ideal than the reality would be, but you know, we’re optimistic for you.

For the incomes, we will use the median income of a household between 25 and 34 years old. Income growth is about 2 points, around the inflation target. It may seem reasonable today, but in the past wages have failed to keep up with inflation. This is especially true in Toronto, where the wage has actually fallen a few times. That also makes this a little more optimistic than reality.

Mortgage payments will be on a 5-year fixed rate, with a 25-year amortization. We will assume the rate is 2% this whole period, but that would require perpetual recession for Canada. Low-interest rates are typical of a weak economy, while high rates are typical of a booming economy. In other words, this will be unrealistically low, just like politicians assume.

For home prices, we will be using the Canadian Real Estate Association (CREA) benchmark. Using the aggregate benchmark reported in February 2021, more specifically. A typical home is not a detached one, so if you’re hoping for that, add a few extra years. In this estimate, home prices do not rise. If home prices increased at the rate of inflation, the same as wages, the gap would persist forever. Nice thought if you’re a homeowner, but makes less and less sense if no one can ever buy your home. Got it? Great, on to the calculations. 

Greater Vancouver Real Estate Needs To Stall For 19 Years

Greater Vancouver real estate prices need to stall for a long time for this to make sense. The median household needs 19 years of wage growth outpacing home prices, to carry a mortgage. It would mean 25 to 34-year-old households would be around 44 to 54 years old when they can carry payments on home prices. That’s a very long time to move out of that one-bedroom rental. It’s also for the Greater Vancouver region, not the city — which is more expensive.

Fraser Valley real estate isn’t far behind, even though it used to be considered a suburb of Vancouver. Incomes would have to grow for 17 years to catch up to home prices, to pay the mortgage. If you’re a household between 25 and 34 years old, you would be between 42 and 52 years old. Just in time to hear previous generations talk about retiring at 55.

Greater Toronto Real Estate Would Need To Stagnate For 19 Years

Greater Toronto real estate may be a little cheaper than Vancouver, but it needs just as long for incomes to catch up. Households need to see incomes rise and prices stall for 19 years. If you’re between the ages of 25 and 34, you would be between 44 and 54 years of age before you could carry the payments. Remember, this is just for Greater Toronto. In the City, you would need longer, especially if it’s for a detached home.

Just west of Toronto in Mississauga, things only get a little bit better for incomes. It would take 15 years of home prices stalling, for wage growth to make payments affordable. Households between the age of 25 and 34 would be between 40 and 50 years old. Not terribly old, but not exactly the kind of jump in affordability you would expect to commute an hour for.

Greater Hamilton real estate, where Toronto’s young adults moved until 2019, is more affordable. It’s just not much more affordable. Households need incomes to rise for 11 years, while home prices stall, to pay the mortgage. The typical household between 25 and 34 would be between 36 and 46 years of age at that point. It doesn’t seem bad in contrast to other regions, but remember — this is an unrealistic scenario. The IMF recently warned Hamilton is the most overvalued market in the country these days.

Even if you’re willing to entertain an unrealistic scenario, the best case for a soft landing is a tough sell. Households need to see their wages grow 2 points faster than home prices, for over a decade. Almost two decades in Toronto and Vancouver. The middle-aged Millennial would be halfway through their adult working years. In which case, it may be very risky to consider a home as one’s primary retirement vehicle. That means diversifying bets, which makes astronomical down-payments even less attainable.

Meh. Past that? Sure, let’s say incomes rise faster than home prices, and it’ll only take over a decade to catch up. If that’s the case, home prices aren’t a great investment. If you’re buying the flat price growth narrative, there’s not much of a rush. If you’re buying the higher price growth narrative, remember — that’s one of the few ways cities fail.

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52 Comments

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  • GTA Landlord 3 weeks ago

    Same guy on the news has declared a soft landing about 14 times since 2017. Market is now super efficient, and I won’t believe anything else.

    No professional real estate investors would buy any of these properties for rental yield, but everyone assures me you can pay a little every month to have a tenant in your unit.

    • Audun Nilsen 3 weeks ago

      I don’t want to berate GTA Landlord, but this was the only way I saw of making a comment.

      You people are fools. If you want to make a bubble go away, just like that, you hike supply. The IT bubble was solved by having other firms than Foxconn in on the market. Same thing is necessary in the housing market. Even better, instead of just making cheap housing available, you should have people building them that don’t have to go through four years of training, finally landing on a wage that is twice as high as the guild will offer. What’s missing is ORGANIZATION, people!

  • Bob Walter 3 weeks ago

    If only people were talking about a soft rise with half the enthusiasm as they were talking about a soft landing, maybe a house crisis could have been avoided.

    But nope, astronomical rise = good. Astronomical decline = bad.

    In the end houses can only be worth what other people are able to pay for them.

    • Ian Brown 3 weeks ago

      > people are able to pay for them

      This is key. The government can want prices to go up forever, but at a certain point people consider what their other options are. Sometimes it’s another country.

      • Expat 3 weeks ago

        That’s me. A Canadian with a juicy bank account sitting over here in Europe. lol, Canada.

      • Expat 3 weeks ago

        Yep, it’s absurd. My wife and I are two Canadians with substantial bank accounts and we’re laughing at what Canadians are paying. We live in Europe because things just got too absurd. I am personally looking forward to all of the real estate agents crying over this later.

        • The Truth Shall Set You Free 3 weeks ago

          I’ll be following suit soon enough. The damage the Federal Government has done by more than doubling the national debt (started well before the pandemic) will take decades to fix. They don’t realize it as no one in the party governing is an economics major.

    • John Doe 3 weeks ago

      Houses can only be worth what the banks are willing to lend people.

    • Robert in Vancouver 3 weeks ago

      Vancouver and Toronto are becoming international cities like London Rome and Paris. Home prices in such cities are always out of reach of the average buyer, it’s just the way it is.

      And in the case of Toronto and Vancouver you’ve got green belts around those cities that prevent any development or housing which means even more limited supply for the growing demand.

      • Whiskey Foxtrot 3 weeks ago

        London, Rome, and Paris are all more affordable for local wages than Toronto or Vancouver.

        You can even find an affordable place NYC before you find one in Vancouver. This is a bubble.

        Vancouver is great, but pushing real estate values when the value of the work in the cities hasn’t caught up is just bad planning.

        • Kris 3 weeks ago

          What a joke. Builders are not going to lower prices for new homes period. The demand has not changed and buyer psychology is already baked into the high prices. Basically if you want a house this is what it costs, if you don’t like it too bad because there are tones of people willing to pay. The builders will just pocket the extra profit to make up for short term loses and the rest is gravy. Never trust a Banker.

        • Kris 3 weeks ago

          Toronto is definitely not on the same level as those world class cities. Prices are so detached from local wages and fundamentals that only a moron would not call this bubble. OSFI needs to remove the non-conforming regulations for 65% ltv or lower loans which essentially permits over extended ratios, weaker credit, etc… It’s basically equity lending for the banks. Now here is the kicker… the banks still bundle these loans with other higher grade loans and sell them off to CMHC and now the BOC. Any shlep can refi his existing property pull out 35% down payment to buy a another property and qualify no problem based the 65% ltv. If the banks don’t do it then the B lenders will. With today’s low rates B lender rates are as low as Bank rates were 2 years ago. System is broken and OFSI needs to fix it but they won’t because our economy is too reliant on housing. Therefore prices must continue to go up or remain stable. Young people you got screwed with a capital S and you can blame policy makers for that. We should have had our crash 10 years ago and took our medicine but instead they rode this thing to the point of no return. Interesting how these bankers and policy makers are now trying to change the public’s psychology towards renting; trying to remove the stigma.

          • Sam 3 weeks ago

            And to think 10 years ago we were so smug in thinking that we’re so much better than the Americans……sooooo embarrassing.

          • The Truth Shall Set You Free 3 weeks ago

            This is 2008 2.0 but this time it’s only Canada, Norway, Sweden, Australia and NZ. Canada of course is well ahead of the others. Once the BoC halts buying up ‘trash’ bonds from the banks the banks will be on shaky ground. I fully expect 3-4 of the Big 6 banks here to either go belly up or merge to survive.

        • Tim 3 weeks ago

          It is not a bubble. Supply is artificially kept very low by the Green belt. Prices will never fall.

      • Rob 3 weeks ago

        Toronto = London, Rome, Paris
        Are you sure ?
        I don’t think it’s on anyone’s bucket list

  • Ethan Wu 3 weeks ago

    Good analysis. I’m guessing you would lose people if you add student loans, and the rest of the cost basis rising with inflation. Add 4% interest to student loan debt, and remove 2% on total costs, etc.

    19 years is really generous even if Adam deploys his magic price freeze gun.

  • James 3 weeks ago

    Better Dwelling needs to start doing Youtube videos. Steven explaining this in person is one of the of the funniest things I’ve ever seen.

    “This is the industry forecast for a soft landing”

    [[ DRAWS A STRAIGHT LINE ACROSS A PRICING AXIS OVER 20 YEARS]]

    “Does that look right?” LOL

    Keep up the good fight Sir.

  • Neil 3 weeks ago

    Not totally disagreeing with you but starting the age range at 25 isn’t realistic. Not many people bought their first home at 25.
    Anyways all these asset bubbles are a symptom of rates being so low for so long. It either has to correct sideways for a long long time or there needs to be a shock to normalize all this.
    So far it seems like they’re just going to keep kicking the can down the road and leave it to future generations to deal with.
    Tough problem to fix. Central banks have kinda painted themselves into a corner with over a decade of free money and govts aren’t exactly known for being responsible with tax payer money.

    • Sam 3 weeks ago

      Kicking the can down the road…..wow…..thinking that we now need to aggressively pursue a “soft” landing…..

      I want the banks, the government, the BOC, and the CMHC to wear this…..even if it means a complete melt-down. I’m ready to suffer if it means the right parties get their come-uppance.

    • Rob 3 weeks ago

      Bubbles don’t correct sideways (David Rosenberg)

  • tc 3 weeks ago

    yes, i think you will have a bigger audience and impact on Youtube. Easier to share and go viral.
    A lot of people are too lazy to read a blog. That’s how the government gets votes, catering to the uneducated and lazy.
    With a few viral videos, might make the public a bit more aware and make a difference.
    Can outsource the videos if you don’t want to appear in the video.

  • Ashley 3 weeks ago

    Lots of people have been drinking the cool aid that 400k immigrants are coming and house prices will only go up. People are not looking at the composition of the immigrants coming.
    I have a good view of immigrants coming from South Asia and largely people coming are not high skilled professionals. People coming in are from rural areas doing uber, delivery, warehouse jobs,…
    There was a phase from 2016-2019 when skilled people migrated from US due to immigration challenges there, not anymore.
    Govt. is only worried about 4 years and making economy look good but people need to worry about mortgage for 25 years.

  • Bernie 3 weeks ago

    You need to add a third element to the analysis, which is cost to borrow. Interest rates were 15-20% in the 90s, now you can borrow for under 2%. As long as that is the case, the gap from home price to income will continue to climb or at least stay where it is

    • Rob 3 weeks ago

      Therefore if house prices were to correct to the mean, interest rates can’t go any lower to reflate.

    • Don684 3 weeks ago

      The central banks worldwide are fueling the house price rises. Rising home prices are not just an issue in Canada, the same is happening worldwide. Due to the pandemic, the world is at emergency interest rates. In the 1960s mortgage rates were about 5%. We have never seen mortgage rates below 2% as they are now. When interest rates rise house price fall, when interest rates fall house prices increase. It is all about affordability. I doubt interest rates will rise to any great degree in the next 5 years or more. World governments are very actively borrowing to boost their economies. They have to finance that debt, so they do not want interest rates to rise. Plus as the world governments continue to print money at increasing rates, owning hard assets is probably a good investment.

      • Bruno 3 weeks ago

        Said everyone in 1980, right before losing all their money. They can’t keep interest rates down if inflation starts rising.

        If you have a house, you’re going to be fine. If you don’t have a house, it’s a hard argument.

        • Sam 3 weeks ago

          Or……all of a sudden all national banks buy into MMT…..and who knows after that.

        • Peter t 3 weeks ago

          Prices doubled in the 1980s

          • Gary 3 weeks ago

            Toronto prices in 2014 were the same as prices in 1981 inflation adjusted, so no. That’s not true.

          • Kris 3 weeks ago

            And they crashed in 1989 and took roughly a decade to recover.

  • Decision Maker 3 weeks ago

    Let’s see here. I can buy a miniature, dilapidated shack in Taranta for $3 million or buy a 3 bedroom on the pacific ocean in Malibu for the same price. Decisions, decisions!!

    • World Class 3 weeks ago

      But Toronto is a world class city….

    • Kris 3 weeks ago

      The situation is so bad on so many levels that we haven’t seen nothing yet. Wait till the brain drain happens. Canada won’t be able to retain young high skilled talent. As for immigrants, we are competing with the rest of the world for those immigrants as well and will only be able to attract the wrong type of immigration. I hope they figure this out quick because they literally painted themselves into a corner by letting this bubble keep growing for over a decade.

  • Brento 3 weeks ago

    Too bad the author didnt actually quote the numbers they are doing math with… By just quoting age brackets does nothing to put it in perspective. Too many doom and gloom articles meant to influence folks rather than concrete numbers. Instead of scaring people, maybe reposition the article so people know where they stand and where they need to get to to buy a home.

    • Jason Chau 3 weeks ago

      Want to know how privileged Boomers are? They think housing reports for Millennials shouldn’t quote the age bracket of millennial home buyers, because it doesn’t apply to them.

      They can only mention so many times per day the median income for a household between that age is $100,000/year.

      • Rob 3 weeks ago

        Bubbles don’t correct sideways (David Rosenberg)

    • Ryan 3 weeks ago

      Here is one number, Canadian home ownership is at all time high at 68%. This is actually incredible considering that Canada doesn’t have state sponsored subsidized home ownership program.

      If Vancouver or Toronto is too expensive, perhaps one should consider the suburb of these cities. If single detach house is too expensive, one should consider a condo. If condo is too expensive, one should consider multi-families dwelling. No one is entitled to a single detached house in nice neighborhood in these cities.

  • Peter t 3 weeks ago

    Prices are going up forever; we’ll just have HAVES and HAVE NOTs. Just like in the 70s we had inflation and prices doubled, just like in the 80s we had inflation but prices doubled, we’ll have inflation until 2030 and prices will double again.

    That’s what happens when you inflate the money supply.

    • Terrance 3 weeks ago

      Inflation of the money supply is not equal to prices rising in real terms.

  • MHH 3 weeks ago

    Canadian housing should implode, 50% (minimum) to 80%, maybe even 95% -down- and stay lower (65% on average) for 15-20 years. It doesn’t depend on your local market because just like a rising tide lifts all the boats, when the tide goes out, you see who’s been swimming naked (Buffett). That means, when Toronto and Vancouver collapse, so will all the other smaller markets all over Canada. Other countries too, but Canada is severe and mismanaged by incompetents who lack vision.

    I’m in my 40s and I paid attention to housing prices as a kid, watching family, relatives, etc, double their money, then go massively underwater and go bankrupt, and stay down for many years.

    These cycles do repeat, only this time it’s not the ’80s, it’s going to get worse than the 1930s. The bigger the bubble, the worse the crash, natural principles. Central banks can smooth out those cycles but they can’t stop them.

    Since about 2003, everybody has believed “Real estate always goes up.” They will not listen to any other point of view or reason, which is that on average, housing just tracks inflation, more or less.

    Since this is a massive, global deflationary Greater Depression, it will be worse than most can imagine and the collapse will be sudden, severe, really sharp and shocking. Nominal rates can be 0% but with deflation, that means effective rates are already climbing, well above 5% but nobody can understand that, or they refuse to think about it because it’s too disturbing.

    In deflation, he who loses least, wins and that’s Japan. Biggest creditor nation in the world since 1991 and counting. Their corporations are sitting on $4.8 trillion in cash.

  • Mr. X 3 weeks ago

    You guys were talking about the bubble is about to burst since 20 years ago.
    Let’s face it, it will not happen simply it’s demand and supply law in works here.
    And the banks landing out the money will not let it happen regardless.
    So stop talking this BS nonsense.
    The housing price will continue to go up and up as long as there’s demand for it.

    • Grandpa Simpson 3 weeks ago

      You must have been receiving the Sunday of edition Better Dwelling delivered by your paperboy 20 years ago.

      Let me guess.That darn paper boy would leave it out a the corner, and you used to have to travel uphill both ways to get there. You would also wear an onion on your belt, which was the style at the time.

  • J. Sears 3 weeks ago

    Never is there any thought about the very real Canadian population that have to live on less than $32,000 per year if a couple or $18,000 or less if single. Rents are extraordinarily expensive as are so many other considerations. A 1 bedroom apartment even in rural areas, are typically $1,200+ per month. While going green with expectations of a carbon reductions, what are people who cannot afford cars less than 10 years old because of very limited finances, gas requirements, costs, increased inflation, etc. Never mind the expected increase of taxes to help recover from national and provincial costs from covid.There is little to no consideration for the populations that live on such minimal incomes through no fault of their own. Queens Park is not interested in responding to this crisis. I tried writing to Doug Ford pre-covid on this matter and was given a pathetic response they would pass my letter on to the Minister of Community and Social Services. Of course there was no effort to do so on their part. We are even more stressed with provincial and national intentions to recover from covid costs likely through more carbon taxes, and no doubt other taxes. Inflation increases is not reflected for the impoverished. If we don’t fall into a community service support because of our sad income or their minimal interest in seniors who can’t even fathom RRSPs or how to survive as a senior, or with disabilities. This is terrifying for us. Consideration for all Canadians is tragic and needs action from the politicians.

  • MikeyCan 3 weeks ago

    A dollar borrowed for a buyer’s mortgage is a guarantee that the borrower must earn more than a dollar at some point in the future, that must go straight back to the bank,

    Of course, the person receiving the mortgaged dollar (seller) today does something with that dollar today, contributes to Canada’s productivity today. That spent dollar may even cycle a few times through the local economy, generate a bunch of tax revenue – today – hooray!

    Which is all well and good, for today. But what happens down the road, as the borrower slowly pays back the mortgage? Reduced economic productivity. A growing chunk of their income can’t be spent on the local economy, because the borrowers must pay back the mortgage. Tax generation through money cyclically flowing through multiple businesses comes a grinding halt, for those dollars that are earmarked for mortgage repayment.

    Current ever-inflating mortgages are surely stimulating the economy today, but ensuring a helluva hangover tomorrow, when all that money has to be paid back and won’t be spent at local businesses. This productivity hangover can start to become evident when sharp price increases ( which can’t go on forever), stop one day.

    I’m not even talking about prices going down. I mean, just stopping increasing for a period of time. A real estate owner won’t be able to sell for more than was paid for a property, and will have no choice but to pay the mortgage out of their 9-5 (non-real estate income), to the dismay of local businesses that will suddenly stop seeing that customer.

    As government and banks encourage ever-larger mortgages, and celebrate the productivity it yields today, are they not actually guaranteeing an eventual slowdown of Canada’s future productivity?

    • Ashley 3 weeks ago

      Well said however future productivity will be someone else’s problem. All govt. cares about is growth for 4 yrs if that takes away 10yrs of growth, who cares not their problem.
      I worry our kids will have to bear the consequences of incompetency at all levels of the govt. So sad to see that growth has become entirely a function of debt.

  • bakala 3 weeks ago

    ,,, the monetary system will change soon, and people will lose alot,.. everyone in canada relys on realestate, big mistake . storm is coming, can you hang on? everyone here worships money a bit too much, all trying to make each other feel better for the purchases youve made. In the end it dosent even matter :). humanity matters time to wake upppp stick together respect each other, help each other, and look at the world agendas at hand ,. your all acting greeedy and bashing each over who is right and wrong .sad

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