Canadian Real Estate Markets Up To 76% Overvalued, Correction Through 2023: BMO

Canadian real estate prices are plummeting, but have a long way to go before the froth dissipates. BMO warned investors over the long weekend that home prices deviated from the trend by up to 76% in Q1 2022. Home prices historically only add a small premium to real wage growth and interest rates. However, Canada is currently seeing the widest deviation in the past 40 years. The bank expects a significant correction through 2023. 

Canadian Real Estate Prices Are Massively Overvalued

Canadian real estate has made an unusual deviation from the trend, making it clear this has been a bubble. Since 1980, BMO estimates home prices have increased 3% per year in real terms. The bank says this roughly reflects real (inflation-adjusted) wage growth and interest rates. That changed recently.

Over the past two years, home prices have climbed 38% above trend, noted the bank to investors. Prices have jumped over a third in the past two years, going waaay past the baseline trend. Deviations from the trend are better known as overvaluation, and tend not to stick around too long. Canada has never seen such a large gap above the trend — at least in the past 40 years. 

It’s A National Bubble, But Southern Ontario Is The Worst

The bank warns most of the country has seen frothy gains, with a few exceptions. However, Ontario is pushed to an extreme, with home prices 55.4% higher above the trend, as of Q1 2022. It’s worse in Southern Ontario, with Toronto (+41%), and its exurbs (1 to 2 hours away) rising 76.3% overvalued. Cottage country (+63.6%) has also gotten ahead of itself, and won’t have fun discovering where its true value should be.  

“While Toronto prices were 41% above trend, exurbs (using markets 1-2 hours outside Toronto) were ahead by more than 70%,” warns the bank. 

Other regions also have steep trend deviations, including Atlantic Canada (+34.7%), Quebec (+32.6%), and BC (+21.4%). Those might not look huge in contrast to Ontario, but if normalization were to occur and a third of price gains were trimmed — you probably wouldn’t be too happy. 

Not all provinces are suffering from this steep overvaluation. Manitoba (+12.3%), Saskatchewan (-3.4%) and Alberta (-5.0%), all had a relatively small climb, or dropped in the case of the last two. Consequently, there isn’t nearly as much to correct. 

A Canadian Price Correction Is Already Underway 

It’s hard to find someone that hasn’t noticed this recently, but Canadian real estate prices are doing the unthinkable — falling. Home prices are down 8% from the February peak, with many local markets down even further. 

BMO explained to investors, “a price correction in Canadian housing is well underway, and many local markets are easily already down 20%. We expect the adjustment to run through most of 2023, as the market absorbs the sharp increase in borrowing costs, while a broader economic slowdown also weighs on previously raging demand.”  

22 Comments

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  • ned 3 weeks ago

    NICE!

  • Tony Oostendarp 3 weeks ago

    We all know that the prices for homes the last 2 yrs has gone waaayyyy up. But with the house prices to start going down in 2023, this will be a problem for those who bought a home in those 2 yrs. They will be paying high mortgage amounts for many years for a home that will be. valued a lot less. And with the rising mortgage rates…. theres going to be turbulent times ahead for a large part of our society.

    • J 2 weeks ago

      Well lets highlight the real danger (is it too late?) in the RE space in Canada – money laundering and mortgage fraud. Everyone (general public, Gov, FINTRAC, RCMP, etc) suspected/knows it’s happening. They did nothing about it for 20+ years.

      Everyone in the industry (RE agents, Brokers, Private and Banks, Inspectors, etc – gold rush mentality) knows about it (1 in every 11th person in any room is an RE agent). Throw in all the jobs connected to the RE game and you have what? 1 in 4th person has a link to money/gains in the RE game?

      It’s ALL Monopoly money at the end of the day. It will make 2008 look like child’s play imho. The entire world is loaded with dirty money and housing bubbles – Global debt levels are beyond comprehension of the average person who is struggling to get by. Global inequity has gotten worse after globalization with all the wealth from tech and automation ending in the hands of a few mega corporations and banks.

      International economists been sounding alarms for a decade plus on DEBT.

      https://www.theguardian.com/business/2022/oct/13/time-may-be-running-out-chronicle-of-a-debt-crisis-foretold

      This is an engineered debt bubble that will rival the Great Depression – who did it? Banks and the uber rich – they want to own everything. The Panama Papers are just the tip of the perverbial iceberg. There is so much hidden dirty money – enough to make every person on the planet well, housed, and fed.

      Pitchforks and tiki torches are on the horizon, I hope these people have their super bunkers to hide in. The reckening is coming.

      https://www.theguardian.com/world/2019/oct/16/panama-papers-law-firm-mossack-fonseca-sues-netflix-over-the-laundromat

  • Jerry 3 weeks ago

    This is happening because of the low interest rates. This government put in place. (Recklessness). Reality is setting in, and people will see that investing in houses besides your own. Is like investing in the stock market. It goes up and down. Unfortunately, we are going way down now. after a huge uptick this is a normal, but the amounts are not processed I believe this time we’re looking at clearly a 50% drop from today within 2023.

  • Dennis_K 3 weeks ago

    This is good to know, since the difference between median incomes and median home prices have been increasing since the year 2000, which the Bank of Canada itself admitted back in 2015.

    However, are just mortgage rate increases actually going to put home prices back into alignment with median incomes, and are we trusting that to keep them there, in terms of stability of long-term (market) housing affordability?

    I ask this question as it’s uncertain to me whether all (or the most significant) factors that have led to pricing exacerbations over the past 20 years (i.e. prices out of line of real disposeable incomes) have actually been addressed, either through policy changes or otherwise. If the causes of pricing exacerbations can be categorized into (a) excess liquidity, and (b) non-essential demand, then increases in mortgage rates only affect those categories in so much as persons are needing to borrow in order to buy.

    What happens when excess liquidity, provided by foreign capital, money aundering, tax avoidance, etc. isn’t stopped? What happens when non-essential demand, coming from entities that don’t need a primary residence in Canada to live and work from (i.e. speculators, reno flips, corporate / business entities, trusts, etc.) are still allowed to acquire properties at will?

    My preference would be to have policies (both civil and monetary) that emphasize single-family residential real estate as housing for resident citizens first and foremost, and and discourage it as a monetary instrument (if allowed at all). I don’t think we can have any stability in housing affordability moving forward as a national until we do this, since the same kind of thinking that got us into this mess (i.e. business-as-usual policies) isn’t going to get us back to a reasonable measure of market affordability.

    • M 3 weeks ago

      It’s not that complicated: if the gov gave everyone a million dollars to buy iphones *but only iphones* iphones would get pretty expensive. If the gov is ever restrained from propping up the entire economy through mortgage lending (which has turned into an ocean of derivative lending), prices will become reasonable again… it’s a big if.

      • Old Greg 2 weeks ago

        It’s not even an if anymore, run the numbers on cost to carry…. It essentially = this is going to get messy fast!

    • Joe B 3 weeks ago

      Agreed that rate hikes alone will not restore meaningful affordability levels.

      Housing became an unregulated Securities trading market long ago in Canada and until strict regulations are put in place that won’t change. Doubtful the Feds go there as Real Estate is just too big to fail in Canada and they know it.

      • Gerald Silva 2 weeks ago

        Japan did it, and yet it failed.

      • Skinny Minny 2 weeks ago

        This is all leading up to private/public partnerships to build purpose built rentals that are managed by the private sector and regulated by the government. Maybe there will be tax breaks, waiving of development fees, and subsidies to get these projects built up and possible subsidized to deal with the affordable housing crises. Home ownership itself remain very expensive leaving some sort of affordable rental options as the only solution. Welcome to the future where you will own nothing and be happy; except for the rich that is.

  • Yoroshiku 3 weeks ago

    It sounds good to emphasize ‘single-family residential real estate as housing for resident citizens first and foremost, and and discourage it as a monetary instrument,’ but since so many Canadians are using real estate speculation to fund their retirement, I don’t see this happening.

    I’d also like to see the gov’t do something about anonymous foreign buyers and what appears to be money laundering in real estate but I have my doubts about that happening.

    • Dennis_K 2 weeks ago

      Yoroshiku – I’ve heard this sentiment uttered before, in regards to using real estate speculation as a retirement vehicle, but the question is – who promoted this idea, and why?

      I’ve been in Canada my entire life, and I’ve never heard any government (federal or provincial) ever promote speculation in real estate as a retirement vehicle. This is why public and private pensions were developed – to conservatively help us cover our costs in retirement. If anything, all I have ever heard from the government in terms of retirement (and savings) vehicles are things we already know about, and those are RRSP’s and TFSA’s. After all, your principal residence is a place you need to live in, even in retirement. Even if you want to sell and downsize, you still come out slightly ahead, since, well, you’re downsizing. But speculating on price increases to be out of alignment with economic fundamentals (i.e. even above inflation), just so that you can have enough to live off of in retirement, is not a gamble anyone should have any reliance on.

      Speculating on secondary real estate is also a big gamble, because who’s going to give you the ‘big payout’ you demand / need, if people’s incomes aren’t there to support the prices being commanded? My view is that even if it wanted to, ‘government’ can’t safeguard real estate speculation for any one generation without resulting in rapidly cascading negative effects throughout the economy for everyone (i.e. choking down disposable income, such that economic activity is slowed, including those upon which pension funds are dependent).

      Maybe we should be undertaking a critical examination of who promoted this ‘real
      estate for retirement’ narrative. Ask the question as to who benefits – maybe it’s those involved in the entire real estate sales food chain – but they have no accountability or liability if the narrative fails, do they? Hmmm……

  • Ron Bruce 3 weeks ago

    With no capital gains—Real Estate is an Investment in Canada regardless of value. There should be a lifetime nontaxable value of up to $1/2 million on personal property. Over that price, there should be a tax of 30-to 40%. The Federal government’s finance department and the Bank of Canada keep digging a hole for the next generation. Canadians should be incentivized to invest in innovation, not warehousing people.
    Politicians cater to wealthy property investors onshore or offshore, not workers developing innovation or a liveable Country.

  • Pat_H 3 weeks ago

    Dennis, I couldn’t agree more with you on reserving real estate for housing for residents, and not to be used as a financial investment that is the resting place for excess liquidity. No wonder the cost of housing has been unmoored from local economic conditions (local wage growth, population growth, household formation etc). Adding to the problem is nimbyism that prevents building – if existing homeowners won’t allow densification, why is foreign-earned money allowed to buy up limited housing?

    Also, policy makers cannot continue to operate in their own silos. The feds want to increase immigration, but the provinces (they have responsibility for housing) haven’t done enough to increase housing for incoming people. Highly skilled people may start to think twice about moving to Canada when they realize how the cost of housing can crush their finances.

    • Dennis_K 2 weeks ago

      Pat – you are correct in that foreign capital can lead to heavy distortions in any housing market – pricing no longer reflects the needs and abilities of the local populace – it comes down to commanding whatever one can get away with.

      Not sure about NIMBY-ism though. Suggests that supply limitations have lead to pricing exacerbations, and I can’t really be convinced of this (and especially pan-nationally), since pricing is a reflection of liquidity, not necessary the physical need for housing. My own research has indicated that we did build enough new housing (pan-nationally) for the past 20 years to meet (if not exceed) the physical need for housing, based on population growth. NIMBY-ism may lead to pricing exacerbations in specific, and limited, geographic areas, but what we’ve seen pan-nationally over the past 20 years is much more broad than this.

      Generally would agree about integrating policy-making between the various
      government levels when it comes to planning around demographics. Who knows, maybe it is being done now, but the public isn’t educated on this topic (i.e. public forums, educational sessions, etc.), and as far as I’m aware, the results of such analyses are not made public or invited for review. When it comes to newcomers, there is space for asking what our immigration policy is meant to achieve. I mean, high numbers sounds nice, particularly when we know our national population is aging, and soon a significant cohort (i.e. Boomers) are soon to retire, but wouldn’t it be better for us to ensure that newcomers have a full-time, living-wage job offer in hand (i.e. at or above the median wage for their working area), prior to arrival, so that they know where they will be living (i.e. if it’s what they want for themselves) & what the costs for being there are? Similar to your sentiment, I don’t see any benefit to the country with an approach that says ‘Figure it out once you’re here’, only to find jobs driving taxis, working in Amazon warehouses or as Starbucks attendants.

  • Dylan Staver 3 weeks ago

    One can only hope. But how much is it really going to come down, if there is a limited supply, mass amount of immigrants, trade shortage, and materials at such high prices.

  • DonCarlos 3 weeks ago

    I don’t wish any ill will on anyone who has bought recently. That said, housing price increases have positively deviated from trend for basically my entire adult life (since 2005), save a few minor exceptions, largely as we know since interest rates, particularly lately, have been held lower than they should have been. Now the chickens are coming home to roost.

    Now that a potentially massive correction is maybe in the bottom of the second inning, doesn’t it seem abundantly clear that this is the only way it could end?

  • Dan 3 weeks ago

    I worked in the trade in the 90s and felt the pain when everything slowed down then crashed . I think we are heading down the same path if not worse due to all the other world events that we are facing .

  • Christopher Burke 3 weeks ago

    Crap and nonsense

    • Omar 2 weeks ago

      The bank that lends most of the money for mortgages doesn’t know what they’re talking about
      – real estate industry

  • Amit 2 weeks ago

    Artificial Boom and bloody bust.

  • Edward HC Graydon 2 weeks ago

    Wow! 76% that is huge. In fact it really does call attention regardless of ones wealth to the dangers of consumer debt and the banks ability to call in a loan regardless of reasoning. Those with equity lines of credit based on asset backed loans like housing are going to really take a wicked hit. It will become a great burden on this countries economy as it seems enivitable in my opinion that the banks are going to ask you the home owner to add additional equity to cover the drop in the original avaluation . Then, if you borrowed against the property they might very well freeze that until you top up . Loans are going to be called ! And the ability to keep afloat challenged.

    The debt load held by Canadians at $186 for every dollar earned under normal economic times would have been close to impossible to return or service. Now take into account inflation ,high debt load and a uncontrolled rate of inflation and it would appear a time to reduce spending.

    Things are going to really get rough .

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