Canada

It’s Official! The Canadian Property Bubbles Are Now Deflating

The largest property bubbles in Canada have officially begun to deflate. Last month we crunched the numbers on what it would take for Toronto and Vancouver housing to maintain its momentum. Failing an enormous monthly price increase in July, the previous month would be the peak.

Well, it didn’t hit the target rate of growth needed to keep the momentum going. Consequently, June was the peak for the annual rate of price growth. Now the rate is coming down faster than a billionaire after 8 minutes in space. This is going to have a big impact on consumer expectations going forward.

Toronto Home Price Growth Saw The Fastest Deceleration Since 2018

Quick refresher: Last month we determined Toronto home prices need to rise 1.95% ($20,500) to keep momentum. Not over the past year, just in the month. Additionally, the 3-month annualized rate of growth would need to be above 13.09% for the trend to reverse. Failing that, the trend would begin its reversal. 

Toronto home prices didn’t rise nearly enough. They barely grew by a mortgage payment, rising just 0.38% ($4,000) in July. This brought annual growth down to 18.06%, shaving off nearly 2 whole points. Toronto hasn’t seen annual growth drop this many basis points in a month since 2018. Back then real estate prices in the city were falling.

Toronto Real Estate Composite Benchmark Growth

The 3-month (annualized) and annual rate of price growth for a typical home in Greater Toronto.

Source: TRREB; Better Dwelling.

As for the 3-month growth, it also collapsed to relatively anemic levels for the market. The annualized rate fell to just 6.72% in July, almost half of what it needed to prop up the trend. Unless there’s a sudden and abrupt massive surge, it’s going to be hard to reverse the direction in August as well.

Vancouver Home Prices Stall, Rate of Growth Plummets

Quick refresher: Last month showed Vancouver needed an even bigger boost for home prices than Toronto. Prices needed to rise 2.42% ($28,400) in July… just in July. Additionally, the 3-month rate of growth would need to hit a 9.20% annualized rate of growth. Failing that, the price growth trend would begin to reverse.

It didn’t. Vancouver home prices were virtually flat, rising just $400 in July. The annual rate of price growth fell to 13.8%, down almost a point from the previous month. A drop of this many bps in the annual rate of growth over just a month hasn’t been seen since 2019. Which feels like it was forever ago.

Vancouver Real Estate Composite Benchmark Growth

The 3-month (annualized) and annual rate of price growth for a typical home in Greater Toronto.

Source: REBGV; Better Dwelling.

As for the 3-month growth, it fell a quarter below the level it needed to be to preserve the price trend. Composite home prices saw a 6.84% 3-month rate of growth when annualized. An absolutely massive price increase would be needed to reverse the trend in August. Failing that, the market will continue to cool.

Toronto and Vancouver home prices still made huge gains from last year. However, the trend is starting to turn in the other direction, which may roll back some of those. This has less to do with losses and defaults than it has to do with sentiment. As price growth accelerated, so did the expectations of further home price growth. People then rush to buy to avoid paying more later, pushing price growth higher.

Now that price growth has begun to decelerate, it can trigger the opposite response. More people will sit on the sidelines, or feel a smaller sense of urgency to buy. This causes more price growth to decelerate, which causes more people to sit out of the market. It’s less economics, and more an issue of physics. An object in motion remains in motion unless acted on by an unbalanced force.

That said, don’t get too excited at the prospect of falling home prices returning affordability. Even a very large crash wouldn’t return affordability to these markets. At this point, the level of mismanagement of priorities will take years to fix the damage created.

We’ll crunch the numbers on what needs to happen in August next week.

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27 Comments

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  • David Chan 1 month ago

    Odd situation. Inventory tightened buy the number of sales dropped. Buyers are holding off to see if it’s a lull or the reality. This is how they always capitulate prices lower. All of these geniuses are going to list in September all at the same time, when everyone renegotiates their rental leases.

    • Emily 1 month ago

      Or only put our houses on the market if it’s going to be worth our while.

      My sister put her house on the market while it was hot. It sold in days and for more than she hoped. We’re getting our house ready. We’ll see what prices are like late February. If it’s worth our while, we’ll list. If we’re going to leave the Toronto property market, it’s not going to be in the middle of a lull.

      We can wait. We’ve got time.

  • Credit Guy 1 month ago

    Market definitely feels different. A lot of people are out and about, and I don’t think my friends have said anything about real estate prices in more than a month.

  • Trader Jim 1 month ago

    haha. This must be tragic for you, since you wanted to see to what extent the government will extend home prices.

    • Whiskey Foxtrot 1 month ago

      This is where we see the government act against everyone. If they implement a new credit program WHILE prices are falling, they’re clearly trying to boost prices, not create affordability.

      They’ll have a hard time faking that one since the Bank of Canada now has it set in stone that credit influences home prices, and they didn’t know. [sad foghorn]

  • Charlie 1 month ago

    Love the commentary and insight, but there is an insidious motive here from the powers that be and it must be exposed. The Canadian government is at fault and specifically their use of the Central banker as an arm of their policy initiatives. Trying to sustain our GDP and overall growth by pushing real estate prices to unsustainable levels and lying about the CPI is clearly as an egregious an act as trying to solve the climate crisis by using our national weather service to change their way of reporting on our temperature and heatwaves. Nothing destroys our faith in government more than their attempts to lie and cheat their way out of a crisis of their own making. They learned nothing from the Big Short and will learn nothing from the destruction of our climate and now our real estate markets. Short term gain for long term pain is their modus operandi. This will never change as we choke on the damage done for years to come.

    • Whiskey Foxtrot 1 month ago

      I just sort of said the same thing to someone else. I do believe they’re trying to slowly deflate the bubble by restricting credit supply and easing on the gas.

      It’ll drive voters right to the conservatives if they don’t, and the Fed doesn’t care about people — they care about their ability to hand out billions to their friends.

    • Jesus Murphy 1 month ago

      you own a cat,

  • peteypablo 1 month ago

    I think now that prices are as high as they are capital will just flow into other investments that are cheaper, have a lower cost of entry and exit, and lower downside risk. There is also the fact that people now have more choices of where to spend their cash as the economy opens up and travel begins to return. I wouldn’t be surprised to see listings rise in the fall as people look to cash out. Their will likely be quite a few bag holders out there at these high price levels if prices begin to fall. Maybe this is why the gov was open to considering allowing these investment firms to purchase residential properties in bulk? Allowing this to happen would set some type of floor on prices as these funds can afford to buy at scale.

  • Michael J Fox 1 month ago

    Gee… a slowdown in summer after the massive sales during Jan to May… who would have thought….

    Hilarious the title is a bubble deflating lol

    • Van YIMBY 1 month ago

      It’s deflating to those that know the HPI lags 3 to 6 months since it’s an aggregate weighted average, so prices are in fact falling. It just won’t show in the HPI for a few months.

      I don’t think people realize how much new supply is currently in the pipeline. Deliveries are going to tbe more than enough to absorb population growth for years. Even more is coming.

  • Ghl 1 month ago

    Can anyone name a company or industry Canada dominates? The answer is probably no, the problem with the economy is we have no world competitive industry. Housing is the only thing we have left. If we crash housing can anyone tell me what we will replace housing as economic driver for the country? You need to see the whole picture.

    • Christopher Barclay 1 month ago

      That’s what politicians in the late 80s were saying. As long as you have immigration, things are fine.

      Of course, immigration was not fine. Few opportunities develop when this much is pumped just into building homes. When things shift, people can’t just all of a sudden go from being a framer or dry waller who made $60/hr to pouring coffee at Tim Hortons.

    • Alex 1 month ago

      Many other countries don’t dominate an industry and yet do not face the same issues Canada is facing with respect to real estate – this is very much a politically influenced issue sparked by our government pandering to voters and appeasing stakeholders.

      If (and when) real estate crashes, it will certainly be painful for some individuals, especially those who are severely overleveraged, but our economy will come out better in the long run.

      On the current path we are on, one sector is set to cannibalize the entirety of the Canadian economy, which is just not sustainable.

      I think many people including homeowners are starting to shed themselves of the cognitive dissonance that this is a sustainable path, especially since baby boomers now have their millennial children living at home well into their late 20’s and early 30’s, all the while having good careers and being generally successful otherwise.

    • RainCityRyan 1 month ago

      Lumber … and I mean specifically RAW logs. We have somewhat competitive resource extraction here, but as the broad shifts occur from a goods to services it’s not a great space to be a competitor in.

      It’s like throwing shotput … cool that you’re good at it, and congrats on the medals and all, but shoe companies aren’t banging down your door for sponsorship …

    • Joe in St. Catharines 1 month ago

      Excellent comment… we replaced producing things of value, and replaced it with home building / selling / outfitting that home with goods that we once produced….

  • expat 1 month ago

    “Now the rate is coming down faster than a billionaire after 8 minutes in space. ”

    Lines like that are why I keep coming here.

  • iver 1 month ago

    exactly. finally someone sees the big picture. kids have a very foreboding future in Canada. we have only 3 industries; housing , drugs money laundering.

  • flipg 1 month ago

    Canada could dominate in many fields, from rare earth mining to fresh water, from wooden furniture manufacture to technology…. We have neglected talent and undervalued resources.

    Thanks to Governments that incentivize NonProductive investment like Real Estate speculation.

    • questions guy 1 month ago

      agreed.

      the overly generous ‘personal residence’ tax exemption is a perfect example.

    • D 1 month ago

      What was the incentive for blackberry to close out their own unique OS in favour of using android? A lot of Canadian business owners and the shareholders of major Canadian companies share in the blame. Greed is going to kill this country.

      • Brunolio 1 month ago

        Spying on location and data. BB was kicked out for being too secure.

        Lucky for bb, they had 37 billion in profits to retool for IOT. Just wait, they are going to be huge again.

  • D 1 month ago

    Next month: record all time highs for home sales

    Only way to deflate the bubble is high interest rates.

    • C 1 month ago

      That’s highly unlikely. There are downward pressure from several fronts. Buyers Gridlock, Buyers Strike/Change in Sentiment, tighter lending standards, significant ghost inventory that seems to be starting to come to market (This alone could crater prices. Without the price rises, these are significant liabilities, stressors, and time consuming pains. So in a normal to falling market how long will the sellers choice to lose money every month and ensure the stress. I’m being betting not many and the clock started ticking on this in the spring. Without a significant upward trend by end of September, it will be very clear to these sellers and their buyers.) I have also been wondering if there has already been a Minsky Moment in sections of the markets. Who wants to admit to potentially being the last greatest fool or paying irrational historic highs. It’s not a good look and it’s not good for your portfolio. They also figured out that it doesn’t really work out so well if you become a buyer after selling. All that glorious profit is lost in the but side! I’m also wondering if those purchasers that are left are giving more thought to the eventual rise of interest rates and their repercussions and the impacts and risks associated with the rising inflation. As the 🍒 on the top, the significant price escalations of the last year were due to temporary and extraordinary causes. On everything besides RE we expect prices to revert to mean once the pressure is off. Why wouldn’t that happen here as well. That alone could change the sentiment so cause a change in Sentiment and cause a greater correction. Lastly, demand was heavily pulled forward several years by purchasers coming really to market due to FOMO and more interest rates. They are no longer available creating a imbalance of buyers and sellers. All while significant inventory is expected to come to market and changing the dynamics to the opposite of last year. Few buyers (including ones that refused the craziness) but lots of sellers. Add it all up and there should at least be a correction, if not a crash once things really get going. 2 seem to be coming towards the end of the denial and wait and see. The only way for the status quo to be maintained is with irrational thought and conduct. We seem to be running out of that runway too.

  • Dee 1 month ago

    Current greed is unsustainable. It will collapse naturally or society will disintegrate. If you think this sounds apocalyptic or unrealistic, wait and watch. People are getting hurt and there will be consequences when enough people are hurting.

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