Canadian Real Estate Works In A Cycle, Here’s Where We Are

Canadian Real Estate Works In A Cycle, Here's Where We Are

That’s a wrap on National Housing Week in Canada. This week I was invited to participate in a panel hosted by the Toronto Association of Business and Economics (TABE), and Ryerson University’s Centre for Urban Research. The topic was affordability and the future of home prices, and I used my opening to discuss the basic cycles of real estate. Since I’ve had a few people from the event email for my slides, I thought I would just expand the topic for our readers as well. After all, giving insights to just a room full of well connected economists and business people, kind of goes against the point of Better Dwelling.

Now, we write for a millennial audience, so I’m going to dive further into some topics than I did in the original presentation. In the original opening I also discussed how soft-landings, which is when incomes catch up to home prices, are pretty much impossible. We’ve already covered that in an article series, so I won’t repeat it. However, that’s an important part of understanding Canadian real estate markets as well. They aren’t special. This is great, because it means it will follow a typical real estate commodity cycle. Here’s how real estate commodity cycles work, and where we are in the roller coaster.

Phase Cycles

Modern real estate markets typically move in a cycle, first observed more than 100 years ago by an economist named Henry George. He broke the cycle down into four phases – recovery, expansion, hypersupply, and recession. Now, where are we?


Real Estate Market Cycle Slide.
Real Estate Market Cycle Slide.

Phase One: Recovery

Phase one is the first, or last phase, depending on how you look at it. This is when things are kind of depressing. Unemployment is at a high, new construction halts, and there’s no public interest in real estate. Ask your mom, there was a time when kids didn’t want to be real estate agents.

In Toronto, this phase ran from 1993 to around 2008. This is when prices pretty much just recovered the losses after the 1989 peak. This is also when a well capitalized developers begin looking for huge areas of land. For example, Concord Pacific bought the Toronto land used for City Place in 1996.

Phase One, highlighted in red. Source: TREB.

Phase Two, Expansion

Phase two is the expansion phase, and this is where cities feel “normal.” New construction starts to pick up, unemployment begins to decline, and generally the economy is humming along. New opportunity brings in more immigration, and the cheap real estate/good business environment is perfect for creating a lot of jobs. People start to become excited about the work people are doing in the city. The physical land they’re located on is secondary to the things that are happening to the economy.

In Toronto, this phase ended in 2015, early 2016 in my opinion. Aside from 2015 being the year that Toronto was the global “it” city, vacancy started to print new lows. Now we never get to the levels of lows observed in the 1990s, but that has to do with the excellent job the city does with planning these days.

Phase Two, highlighted in red. Source: CMHC.

Phase Three, Hypersupply

Phase three is the hypersupply phase, which is the phase I believe we’re entering in Toronto. This is when everyone feels like a real estate investment genius, even though most people can’t even tell you much they paid in interest. Construction starts picking up, and starts to catch up. The supply will inevitably overshoot demand.

Phase Three. Source: CMHC.

Toronto is a great example of this right now, with over 70,000 units currently under construction. That’s about one unit per person, projected to move to the region over the next year. Keep in mind that most households are not single person households. The most recent Census pegs Toronto at an average of 2.4 people per home. Basically, we have enough housing in the pipeline for up to two years. This excludes the almost 17,000 pre-sale units hitting the market between October 1 to November 30, which won’t hit the market for three years. We’re also not even talking about the additional supply from AirBnB regulations, and assuming there’s no empty homes in the city.

Canadian Real Estate Works In A Cycle, Here's Where We Are - Similar Bui;dings
Condo pre-sale being offered up to a 20% discount from comps. No, sorry. You won’t be able to get this deal, you’re going to buy the assignment this investor will flip.

Now, some of you are probably wondering why entering the phase of hyper supply hasn’t impacted prices? Well they have, just not the ones most of you have been seeing. Some projects are currently being offered for deep discounts through agents, especially overseas. While some developers might say this is pricing reserved for “VIP buyers,” the definition of VIP Buyer is a little wobbly. In my experience, liking a Facebook page or showing up to a dining hall in Hong Kong is sometimes enough to be a VIP. That’s not a whole lot of work for a 20% discount, but you’re not likely to hear about it in the city.

Condo pre-sale advertising, boasting the development is cheaper overseas.
Condo pre-sale ad on Facebook, boasting the development is cheaper overseas.

How did we go from a tight supply to overshooting demand? Developers are a business, and they’re run by people – shocking, I know. As a business, it’s their job to maximize profits. This involves buying at the bottom of a trough, and selling at the peak. Anything earlier, and they’re leaving profit on the table. They start advocating for more supply than makes sense, because they need to develop and sell the land immediately.

As humans, they’re subject to FOMO just as much as buyers. Buyers think this is going to be their last chance ever to buy a property. Most developers think this is the last time to ever to sell at such a premium. If they wait until after the peak, they could be stuck hanging on to land until another cycle kicks in. Essentially, they go from making maximum profits, to transferring risk to individual investors. This isn’t a good or bad thing. It’s business, and successful developers aren’t successful because they don’t know how to maximize profits.

“I made a fortune getting out too soon.”

— JP Morgan

Phase Four: Recession

Prolonged phases of high home prices inevitably cause a recession. Higher prices mean a higher percentage of income goes towards servicing shelter costs. The less disposable income you have, the less you have to spend in restaurants or shops. High cost of real estate, and a lack of customers is killer on businesses. This in turn leads to less businesses, and less jobs – creating less opportunity. Vacancies will increase as less people are temporarily attracted to the area, and the price of real estate will typically come down. There will also likely be a loss of skilled labour to regions with better economic opportunities.

Phase Four. Source: National Bank of Canada, Better Dwelling.

This is best illustrated in the above chart, created from calculations sent to us from the senior economist at the National Bank of Canada. It shows the percent of income the median family would have to use to service debt, with recessions highlighted grey. When the rate pushes above 50% in Toronto and Vancouver, a recession typically follows in Canada. Currently Toronto is at 71.7%, and Vancouver is at 79.87%. It would be nothing short of a miracle to skip a recession at these levels. Canada only has a few economic engines, and when they stall, the whole country feels it.

This isn’t a doomsday call, this something businesses and cities need to start planning for. If you have no idea where you are in the observable cycle, you can’t really make the right decisions on how to tackle the issue. Heck, you really don’t even know if you should be tackling an issue.

Investors and governments should not be driven by irrational emotional decisions to appease voters. Lengthening amortizations, flooding the market with additional credit, or creating additional down payment programs don’t help with affordability. They impede a natural cycle, and extend peaks higher than they would typically reach. The higher the peak, the further the fall to the trough will be. Oh, by the way – Happy National Housing Week! Or is it Merry National Housing Week? I can never remember.

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  • Reply
    Ahmed 3 weeks ago

    You mean there isn’t an endless number of people lining up to move to a city, even after incomes stop making sense? The most recent Census was telling, where Toronto and Vancouver had the lowest net population increase.

    That’s not because we weren’t giving out visas, we’ll let anyone with a pulse move to Canada. It’s because it’s not the bastion of opportunity it was before. As we get closer to the recession, less people will move here.

  • Reply
    Michael Z. 3 weeks ago

    There’s two main types of foreign buyers in Vancouver, money launderers and flippers. When flippers run out of locals they can sell to, foreign inflows are going to stop.

    The money is here to take advantage of you, these aren’t long term investments. People refuse to understand this.

  • Reply
    Millennial Falcon 3 weeks ago

    Toronto prices were reasonable until about 2015, I totally agree with the phases. It wasn’t until the end of 2016, where everyone started scrambling to get into the market. Sorry to break it to everyone, but six months don’t make a market. If you bought then, you likely got squeezed. Advising buyers to look out for dropping prices, it won’t be longer.

  • Reply
    Laura 3 weeks ago

    How long does the hypersupply phase usually last for? And when do you predict we’ll enter the recession phase?

    • Reply
      Ocean Blue 3 weeks ago

      I imagine the hyper supply phases doesn’t last very long. They can only import so much capital. Yes, in Vancouver is was two years of overseas sales insanity, but Toronto has many more builders than Vancouver. Only 3% of the buildable space has been utilized in Toronto, so we’re not even close to running out of room. Some developers are probably planning on hanging on for another 30 years.

      • Reply
        Laura 3 weeks ago

        So if there are more builders in Toronto, does that mean the hypersupply phase can last for a long time here? I’m confused.

        • Reply
          Joe 3 weeks ago

          Hypersupply can go on for awhile. You have to remember the process of building and selling condo units takes multiple years from concept to architecture, engineering, construction, sales, etc. There have been instances in the past where the land is allocated and cleared, a few units have been sold, a recession hits, and everything is halted. However when a condo building is well underway in terms of construction, and a recession hits, the building keeps going through to completion. That’s the problem: money will dry up just as many of these condos start going up, and inventory will continue hitting the market months, years into a recession.

          That happened in Miami around 2006-08, money was drying up, but many projects kept going b/c they had been partially financed years earlier.

  • Reply
    Not an economist 3 weeks ago

    There was no recession following the 1994 peak – why was that?

    • Reply
      Simon 3 weeks ago

      I think it’s a common mistake that most people make when looking at charts. Not every walk higher is an uptrend, and not every down trend sees prices drop for the whole time. So while there is a jump in 1994, it’s relief from a longer down trend. Here’s what I see.

      It’s really hard to make money on minor blips that only last a few months, especially with something like housing. It’s not liquid like a gold bar. I also believe in 1994 there was a change to the way mortgage back securities were issued, but I’ll have to look at historic policy changes to nail that one down.

      • Reply
        C 3 weeks ago

        Excellent graphic!

      • Reply
        Neo 2 weeks ago

        Does that chart end in 2015? Wow, that would mean it doesn’t even take into account the parabolic moves in 2016 and early 2017.

  • Reply
    Sal 3 weeks ago

    I am a typically professional person moved out of Vancouver and move back to Europe. I had good and stable job but I thought the situation is pretty scary so I sold my place (no mortgage no debt at even my car was full paid) because this time is not different than other time before. 1997 nobody could see the economic crisis was coming with the euro but I could see the same situation so I sold my place a moved to Canada. Unfortunately for the people crisis happened and the property went down ( Italy, Spain, Greek……) Now the situation is at the recovery for the property starting with Spain (3.5% GDP last year). Money is moving out of here if we look the sales data property are getting longer to be sold already Vancouver included, 2018 will be the turning point.

  • Reply
    bluetheimpala 3 weeks ago

    In all previous cycles, I question whether there was the level of indebtedness we have at the moment and if anyone had to sell to avoid being under water. My fear is not so much that we can predict the cycle but this next hit will be something never seen before. Do you have any data on this?
    Won’t a sudden drop in housing prices cause a ‘run on the bank’ scenario where parents/grandparents who took out $$$ to fuel the boom via their offspring freak out and look to cash out?


    • Reply
      Simon 3 weeks ago

      A bank run is unlikely, especially with the Big Five. The good thing about Canadians are they’re majority homeowners. They’re not a highly mobile workforce, so they aren’t a huge risk for the banks. They’re not going to pick up and move to another country for a better opportunity.

      Homeownership promotion is used as a tool from governments, to prevent the population from leaving on a whim in the even of economic downturn. There’s a reason anytime things turn bad, most countries try to ply people with easy mortgages.

  • Reply
    Totally Nuts 3 weeks ago

    My only criticism of this article is that we are building 70,000 units but a very low percentage of those are family units. As a result, prices of family sized units have shot up, leading people to purchase smaller condos as “the best alternative”, which has in turn driven those prices up. I’m not sure how the bubble ends except with an increase in the supply of family units.

    • Reply
      bluetheimpala 3 weeks ago

      The bubble ends when the prices are unsustainable and an economic event hits. Pray.For.Mojo.

    • Reply
      Erick 3 weeks ago

      Prices are affected by supply and demand. The real estate sales industry (OREA, TREB), media and developers seem to be screaming for more land for developments to increase supply and make MO money. However, the various levels of government have a number of tools that can equally be implemented to stifle demand, particularly from overseas (read China). If non-residents have the same rules as residents for mortgages then the new OSFI rules in January should stifle both resident and non-resident demand resulting in a decrease in pricing.

  • Reply
    Agent X 3 weeks ago

    The canary in the coal mine is the detached home prices in Vancouver….price growth decelerated quickly at the end of last year and has barely recovered (Benchmark Price up 3.3% year over year)

    For some neighbourhoods and areas on the Eastside, you are deep into a buyers market (sales to listing ratio below 14%). Once you get above $1.5m the market for detached homes on the eastside, it’s a buyers market. Same story in Richmond.

    So for 2018 – what’s going to happen to single family homes? Prices will fall. Slowly at first. (But not neccessarily for condos or townhomes tho’). But again it depends where you buy (and what you buy)

    Single family homes on the Westside is still in seller’s market territory up until you get to $2.25m, so it really varies by area. But what this appears to show – is that the additional “luxury” tax on homes above $2m is actually taking effect.

    The start of the show this year?….townhomes in humble Squamish. The benchmark price up a whopping 43%, the biggest gain of all housing types in all areas of the GVRD. Even for other housing types Squamish led the pack for year over year price gains. Are young families, people moving out of Van to set up home. I think so…

    I see my buyer clients now really hesitating about buying. They are unsure of the market. And my buyers are well financed. But the new mortgage restrictions have taken almost 20% off their borrowing power. The local and federal government initiatives are biting. But it may take a year for the effects to really show up.

    Great blog and Great information you provide, thank you…

    • Reply
      Functioning Brain 3 weeks ago

      An honest and realistic real-estate agent….I never thought I would see the day!

      Good on you for not pretending that everything is going to soar forever! I am sure your clients appreciate that you are not selling them a line of bull to pad your own pockets!

      I tip my hat!

  • Reply
    Steven Flaming 3 weeks ago

    This is such great content, I love this blog and the free education it provides.

    Have you any insight on how vacancy rates and cap rates are impacted by a recessionary phase of the cycle?

  • Reply
    Rachel Cloe 3 weeks ago

    imho, phase 4 would happen when the Bank of Canada says “enough” to all the madness, and begins to tighten (raise rates) in earnest.

  • Reply
    Willy 3 weeks ago

    Is the peak price usually at the end of the expansion phase or somewhere during the hyper supply phase? I mean where does the price start to fall?

  • Reply
    Jer 3 weeks ago

    Where would you place Victoria in this cycle?


  • Reply
    Kika 2 weeks ago

    All this analysis is great ,-all asset classes are overvalued when compared to their fundamental valuations .
    The intention of central banks was to prevent a cycle of depreciating assets and bancruptcies as in the 1930s depression .
    Whether they have infact only deferred the depression / recession , or have provided a viable way out remains to be seen . It is unlikely that they will allow asset depreciation as they have fully studied the case of Japan in the 1990s . Their last 20 years is seen as lost due to depreciating asset values . That was the point of a concerted effort in the West to drive asset values up . It is most unlikely that the Central bankers will allow any major drop in values at this stage . Sorry folks they will not allow assets to fall . Whether it be in China or the West . Unfortunately it has left people with no assets or hope of inheritance massively worse off and I don’t think they are too concerned . Specially the young . However remember , most will have an inheritance to look forward to as their parents or grandparents assets have skyrocketed . But the dream of a simple job and simple house in the subarbs is over . The young will be overworked and indebted for a great part of their lives .Stress they say is felt when reality does not match expectations . All their will be is a lot of stress as what they expect is so different from the reality of life . My advice is to adapt and get used to the real world . It’s survival of the most adaptable, not sp specially the fittest that will ensue .

  • Reply
    Steffan 2 weeks ago

    Totally agree with the content…But Toronto has many real estate options whether you are searching for condos, apartments or villas. Many new projects are also under construction like Lake Side Condos Toronto, One Yonge Condo Toronto, Urban Toronto.

    • Reply
      Oliver Clozof 2 weeks ago


      How can I get my fist to your face through the blog?

      Market price means market price regardless on quantity of new units or cost of new units. As we have seen all new units are scooped up by foreigner or local speculators and are not available to end users at sub-market prices. Government intervention is required.

  • Reply
    You Had Questions About Canadian Real Estate Cycles, So Here’s Some Answers | Better Dwelling 2 weeks ago

    […] week we got an usual number of questions, about a piece I wrote last week. The article focused on Canadian real estate cycles, and was based on some things I said as a guest of the Toronto Association of Business and […]

  • Reply
    ryan 2 weeks ago

    Many people are just waiting for a crash to jump into market, even those people who putting comments here saying”oohh prices are crazy high” , they are just waiting for buying opportunities, you can feel it from their comments , this makes it difficult for crash to come or at least it will be delayed for a long time.

  • Reply
    ryan 2 weeks ago

    one thing that every analyst is missing: the new immigrants form developing countries have much more money compare to 15 years ago immigrants fron same country. I came to this country in 2002 and I sold my small condo back home for $23K, the same condo is around $300K now; having an small condo(no mortgage) is a norm for middle class Chinese or Iranian or … coming here

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