This Week’s Top Stories: IMF Warns Canadian Real Estate Prices Are Overvalued, and Over-leveraged Borrowers Now A Record Market Share

Time for your cheat sheet on this week’s biggest stories.

Canadian Real Estate

Canadian Real Estate Overvalued, Toronto Needs A 28% Correction For Fair Value: IMF

Many Canadian real estate markets are massively overvalued, according to the IMF. Their model shows Toronto’s estimated value is 28.2% lower than current prices. Vancouver’s estimated fair value is a smaller 13.3% drop to get to its fair value. Montreal bucks the trend by actually being within 1 point of fair value.

The largest overvaluation wasn’t in any of the typical global markets, but instead in a GTA suburb. Hamilton needs a 29.6% drop to get back to fundamentals. The organization isn’t forecasting when, or if, this will happen. However, the longer the inefficiency remains, the worse the impact on the economy.

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Canadian Mortgage Approvals For “Over-Leveraged” Borrowers Soars To A Record High

Canada’s over-leveraged mortgage borrowers now represent the largest share of originations ever. OSFI, the country’s banking regulator, is watching highly leveraged borrowers. In Q4 2020, this segment of borrowers passed the 2017 peak share. When the issue hit this level in 2017, the regulator tightened mortgage lending. Low rates have wiped out the effect of the new measures.

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Did The Canadian Property Bubble Start In 2004 Or 2016? Yes

Arguing when the Canadian property bubble started has become a national pastime. That’s because there are two different bubble criterias being met. The latest is a bubble on a bubble.

By 2013, even the Bank of Canada was warning about a real estate bubble. That’s because affordability was stretched. Those issues were never solved, but instead, the criteria for affordability was changed. Today, Canada has a cultural bubble, that’s spilling into the suburbs and small towns. Everyone in the country thinks someone will line up to buy their home at any price. It’s the definition of greater fool theory.

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Canada Says It Will Not Tax Home Equity, After Industry Says They’ll “Shut Down” Talk

The Government of Canada has outright said they will not consider taxing home equity. The minister in charge of housing said, “Our government is not thinking, or considering… or bringing a home equity tax.” He followed with, “Any suggestion is false… we have clarified that a number of times.”

The statement follows increased calls to tax home equity, as a “cooling” measure. It also comes just a few days after the industry said they would “shut down” the discussion.

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Canadian Home Buyers Are Bidding Way Above Ask For No Real Reason

Canadian homebuyers are buying the hype, and it’s costing them hundreds of thousands more to buy a home. Due to the common practice of blind bidding, buyers need to guess how much the other person is bidding. This sometimes leads people to bid way over ask, even if there’s only one other person they’re bidding against. Diving into the data, agents that tried to start a bidding war in February, only found buyers half the time.

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Canadian Property Affordability Near 90s Bubble Peak, And Likely To Blow Past It: RBC

Canadian property affordability is deteriorating towards early 90s bubble levels. RBC says a median household buying today needs to spend 50.3% of their income on mortgage payments in Q4 2020. This is just below the previous 2018 high, but prices have climbed a lot since the end of last year. This likely means we’re past the 2018 peak, at much lower interest rates. The benefits of a mortgage rate cut have been more than eaten up by rising home prices.

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Canadian Estate Prices Are The Most Overvalued In The G7, Shows Another Indicator

Canadian home prices are the most overvalued in the G7, shows price-to-rent ratios. The IMF’s index shows a reading of 128 in Q2 2020, meaning the gap between rents and home prices grew 28% since 2015. This is the most of any G7 country and nearly 2x the G7 average. Canadian home prices have the most stretched valuations, relative to rents in the G7.

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Canadian Confidence In Home Prices Rising Hits A Record High: Mortgage Pros

A record number of Canadians want to buy a home this year and think prices will rise. Mortgage Pros Canada’s annual survey shows a record average score for intention to buy a home. Their chief economist says this tends to foreshadow rising home sales. The survey also found people have record expectations for home prices to rise. The data shows the expectation of rising prices has no link to future price growth. Instead, it’s closely linked to what just happened, and people project it will happen again.

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Canadian Real Estate Markets See Risks Rise, Toronto Now Highly Vulnerable: CMHC

Canada’s national housing agency sees elevated risks in many real estate markets. The organization now has five of Canada’s largest markets, marked as “highly vulnerable.” In the previous quarter, the number was only two markets, so things are getting worse. Amongst the riskiest markets according to the agency, are Toronto, and Hamilton. The concentration of three markets in the same economic region is especially problematic.

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Toronto Real Estate

Greater Toronto New Home Sales Fall 34% As Pent-Up Demand Releases

Greater Toronto’s new home sales made a big drop, as pent-up demand releases after a hot year. There were 3,240 new homes sold in February, down 34.1% from the same month a year before. The substantial decline was largely led by a drop in condo apartment sales, mostly in the City of Toronto.

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  • Lorne Tuplin 3 years ago

    Perhaps the IMF doesn’t understand what is happening more & more often in the Victoria market! There is much more afoot than they know about and it has to do with the ability of MANY more employees being able to work from home. .. and many of these realizing home doesn’t have to be in a part of Canada where spring emerges in late May! They are collectively dismissing Vancouver as just another huge metropolis & moving to Greater Victoria where the daffodils and cherry trees, not to mention the Magnolias, are coming into full bloom. Want to join them? I have 44 years experience in real estate and am happy to help you find an amazing place to call home. Lorne at 350-317-4600. Call or text today!!

    • Jason Chau 3 years ago

      Bahaha. No one’s moving to Victoria. It’s almost as expensive as Vancouver, and it’s not even accessible to a greater region. What insane business person would set up camp in an expensive retirement village?

  • Joe B 3 years ago

    Just read comments in the liberal news from Scotia economists who cited INSUFFICIENCY of supply as the reason behind Canada’s overheated housing market. If I got a nickel for every time I heard this I’d be a rich man. This is the biggest lie going these days. In many Ontario markets it is getting harder and harder to find an undeveloped plot of land. The real issue is not insufficiency, but MANIPULATION of supply and one of the greatest price fixing schemes the world has ever seen. Due to loose tax and regulatory policy, various individuals/ entities with speculative agendas have intentionally cornered the market for years which has artificially inflated pricing for hard-working Canadians whose incomes have not risen commensurately (not even close) with the surge in real estate. People are being forced to pay more and more for a roof over their head as a result of these practices and it will have dire consequences eventually. It’s about time lenders, realtors, and governments stop looking the other way and acknowledge what is going on and how big of mess has been created. Only then can meaningful change ever occur.

  • Bruce 3 years ago

    Try looking at the cost of buying all materials to build a new home. Lumber is up well over 100% over the last year. Roofing, electrical wiring, brick or stone, concrete labor for all trades. Look at how many pages there are for permits. The city/township has their fingers in every piece of this pie. Right now there is not one bit of evidence this is slowing down. New immigrants coming in need a place to live. You need to look at the whole picture not just the final tip that you seem to be viewing and reporting on

  • Joanna Panzera 3 years ago

    Joanna Panzera said “I think the Canadian housing market is something I’d rather stay out of right now. I’m waiting to see the after math of covid before investing. “

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