Canadian Real Estate Prices 38% Overvalued, Largest Trend Deviation In 40 Years: BMO

Canadian real estate prices have never been this overvalued, according to new analysis from BMO Capital Markets. In a research note to clients, the bank didn’t just explain home prices are overpriced. Since 2020, home prices have made the largest trend deviation in at least 40 years, and are likely to correct. 

Canadian Real Estate Prices Are Up 57% Since 2020

Canadian real estate is the bubble heard worldwide. Cities in Canada were already topping global housing bubble lists before 2020, but now it’s the whole country. Flooding the system with cheap money spread exuberance across Canada.

Just how crazy did home prices get? The price of a typical home across Canada has increased a whopping 57% since 2020. About a third of a typical home’s value was made in the past two years. Put another way, just the price gains from 2020 to April 2022 was the equivalent of the price of a whole home in 2009. Only in Canada would that data point not trigger a WTF moment when reading it. People genuinely think it’s normal. It’s not.

Canadian Home Prices Didn’t Always Grow This Way

BMO Capital Markets wants to make it crystal clear — this is far from usual, even in Canada. “Real home prices in Canada have historically grown at about 3% per year dating back to the early 1980s, roughly reflecting inflation, real wage growth and gradually falling interest rates,” explained Robert Kavcic, a senior economist with the bank.

“In this latest episode, even as inflation has accelerated to multi-decade highs, real home prices have surged by more than a third in the span of two years, clearly stretching beyond that long-run baseline growth trend.”

Source: BMO Capital Markets.

The above chart provided by the bank shows home prices are significantly extended. “For now, just note that as of the first quarter, when we believe the market peaked, real Canadian home prices sat 38% above trend, the widest deviation in the past 40 years,” he said.

The million dollar question (well, $882,400 in April) is how much home prices will correct. There’s not a lot of historical evidence to show home prices are able to maintain such a large deviation. The longer surges like this last, the more capital is diverted from consumer spending for basic shelter. This creates two options — a home price correction  or a home price correction and recession.

20 Comments

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  • Scott 6 months ago

    Thanks Stephen, for explaining how all this is entirely explained and for doing the work our entire public sector doesn’t seem to be able to do…

    • Richard zywotkiewicz 6 months ago

      Just another load of malarkey. Again Toronto is the centre of the universe. Southern Ontario is all of Canada. How can a 300K Bungalow in Winnipeg that’s worth 1.6 million in Greater Toronto be 60% overvalued. Last time I checked Winnipeg is in Canada too.

  • robert christian 6 months ago

    I take it the writer has sold his home?

    • Trader Jim 6 months ago

      Punwasi or Kavcic?

      Punwasi: On Twitter he repeatedly says it doesn’t make sense to trade your primary residence like a stock since most people are terrible at trading stocks. You’ll ride out volatility if you’re living in the home and one of his last tweets was “lenders don’t want your homes.” It’s short-term speculators that get hurt.

      Kavcic: No horse in the game. BMO has been saying it’s a bubble for the past year. The CFO sold his home in 2017 right before Toronto’s mini-crash, and it’s valued at around the same level. Lux didn’t move much over the past year in the plus $4m range.

  • Paul Q 6 months ago

    Succinct article today!

  • Michael Tran 6 months ago

    So people saying prices need to cut in half aren’t completely bat s**t crazy?

  • Giulio Moroni 6 months ago

    How the prices are inflated if the building materials price in the last 5 years has doubled.

    • Gerald Haw 5 months ago

      The price of building materials inflates with the ability to absorb it. If people could only afford to pay $400k to build a house, material costs would either fall or homes wouldn’t be build out of that specific materials.

      They build households across the word for a fraction of the house. Even in the US the hard costs for home building is 40% less than Canada.

  • Adrian 6 months ago

    It has been noted that Canadians are sitting on $300bn of cash. I posit that while housing prices will fall 10-30% depending on the market, even with mortgage rates in the 6% range, with strong employment intact, we will see them stabilize and over 10 years return to current levels. Sure, not a great ‘return’ but if you buy RE as an investment but aren’t a RE a investor you were the greater fool to begin with.

    • Rob Turner 5 months ago

      btw people should take note Canada’s Department of Finance doesn’t understand what the “$300 billion” in savings means or how the number is created. Anything left over at the end of the balance sheet is considered savings.

      If you paid down debt (as the Gov also boasted), you “saved” money. About 1/3 would have gone to debt repayment, a third were in the top 10% of households, and that leaves a third to the rest of society. Since the bottom 40% of households had a negative savings rate (they incurred debt) and there’s about split amongst households that most likely already have homes.

      Or spent it on things online outside of Canada, since that’s not tracked either. 😛

  • Ike 6 months ago

    Who decided that housing price was 38% overvalued?

    38% over trend so what. Past performance doesn’t predict future performance.

    • Ryan 6 months ago

      There are new realities that are pushing up the price for homes. Immigration,inflation etc. Prices are going to remain elevated

    • Yoroshiku 6 months ago

      As has been reported here, home prices have gone up anywhere from 450 – 490% over the last 20 years in Vancouver and Toronto. (It’s a bit lower for Canada nationally.) The problem is that Canadian home prices are disconnected from fundamentals like buyers’ incomes.

      It’s good for people who are speculating on houses or who are counting on selling their homes and living off the $ for retirement. But what happens if housing crashes?

    • Frank Daugherty 5 months ago

      It’s the fundamental price.

      “Past performance doesn’t predict future performance” is precisely the reason it’s overvalued. Had past performance been indicative of future performance it would only go up.

  • Mike 6 months ago

    Unfortunately the cheap money and our once stable Real Estate has been turned into a commodity with speculators and investors consuming 30% of homes.

  • Lawrence Drake 6 months ago

    These analysis ignore the fact that billions of dollars are laundered in our real estate from places like China.

    Our governments ensure the laundromat remains wide open despite claims otherwise.

  • Dusty 6 months ago

    Depends where. I predict a 28% reduction in prices in certain parts of the country. GTA and Lower Mainland are maybe 15% over their value now. In 5 years it will be up to these levels again unless we become a place where no one wants to live. I’m sticking around.

    • Average Man 5 months ago

      Well, we’re predicted to have the worst performing economy in the developed world over the next 40 years so…

  • NL Buzz 6 months ago

    Here in Newfoundland it’s gone crazy price wise as well as bidding. EVERY single house is now going over ask with multiple bids and I cannot even get a home. It seems BC and ON buyers are coming in en masse and bloating it up here now.

    • GTA Agent 5 months ago

      This is the same Newfoundland where St. John’s prices are amongst the fastest falling in the country last month?

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