Canadian real estate prices are the most overvalued in decades, but not all markets are equal. Earlier this week, we shared BMO data showing Canadian homes were 38% overvalued. Today we’re sharing a regional breakdown, showing where the widest trend deviations are. Most regions are overvalued, but nowhere is even close to Greater Toronto.
Canadian Real Estate Is The Most Overvalued In Ontario
Canadian real estate prices are now pushed to the limit but nowhere is like Ontario. Home prices were 55.4% overvalued in Q1 2022, driving the national trend. The last time a trend deviation this large occurred, it took a whopping 15 years to complete a correction.
A significant share of this froth is concentrated in and around the Greater Toronto Area (GTA). But first, it’s probably important to understand why corrections are needed.
Corrections Serve A Useful Purpose and Can’t Be Avoided, Only Delayed At A Greater Expense
When shelter costs rise too high, they divert capital from the productive economy. Housing is technically called a non-productive investment, since it doesn’t produce anything. It doesn’t matter if you spend $500k or $1 million, it would serve the same purpose for an end user.
Debt is your future income used today. The larger mortgages become, the more future income buyers are borrowing. In other words, you’ve already spent a big share of the economy’s future labor value. The more indebted households are, the more the economy will see slow growth. This is also true with rents.
Shelter costs are extremely important by age as well. Younger adults spend a much higher share of their income on goods and services than older ones. Since one person’s spending is another person’s income, this is how economies grow. It’s also how long-term value creation is made, also boosting asset prices. This is real growth, as opposed to artificially stimulated growth through increased leverage.
Eventually an economy faces one of two options:
1. Prices fall in real terms and the economy’s healthy balance is restored quickly.
2. Prices continue to disconnect through policy intervention until systemic failure. Then you’re looking at a much longer downturn, often accompanied by a financial crisis.
We’ll discuss this more in detail next week, but the point is, it’s not as easy as just propping up values ongoing. The economy is essentially on life support during a bubble. Do you want to operate and deal with a recovery, or pump it full of adrenaline and see what happens?
Now, back to Toronto.
Toronto Real Estate Is 41% Overvalued, Suburbs Up To 74%
Greater Toronto real estate may be the most overvalued it has ever been. GTA home prices were 41.2% overvalued in Q1 2022, a finding consistent with data we shared from Moody’s Analytics (43.6%). Most of the region is overvalued, but the bulk of this froth is located in Toronto’s suburban areas.
BMO broke Toronto’s suburbs down into cottage country and exurbs (don’t worry, we’ll explain what that is). Cottage country (63.6% overvalued) hasn’t seen anything like this before. This region includes Bancroft, Kawarthas, Muskoka-Haliburton, and South Georgian Bay. Last year they warned corporate clients buying in the area, to make sure they love the home. With such steep over-valuations, a correction could mean holding it longer than planned.
The exurbs are pushing the highest level of overvaluation in the country. An exurb is a major city’s distant suburbs, typically with a fraction of the density. They observed 73.6% overvaluation in these markets. They defined the region as Barrie, Guelph, Hamilton, Kitchener-Waterloo, London, Niagara, Orillia, St. Catharines, and Windsor.
The gap between home prices flattening across a region is a often a bubble warning. Buyers are reducing the premium for amenities to buy whatever their mortgage allows. The assumption is amenities in the area will catch up later. However, they’re pricing in years of future growth.
BC, Quebec, and Atlantic Canada Are All More Than 20% Overvalued
The rest of Canada’s frothy markets almost seem like a deal compared to Toronto. Quebec (32.6% overvalued) and Atlantic Canada (34.7%) used to be affordability hubs. Now they only look affordable relative to Ontario.
British Columbia (BC) is always surprising, since home prices are so steep. BC (21.4%) is very overvalued but not nearly to the extent as say, Ontario. Moody’s had the region near fair value, which may also shock people in Vancouver or Victoria. Hard to believe, we know.
Canada’s Prairies Are Mostly Undervalued, But Don’t Tell Ontario Before They Ruin It
Believe it or not, some provinces managed to maintain healthy valuations. Both Alberta (-5.0%) and Saskatchewan (-3.4%) were undervalued in Q1 2022. Over in Manitoba (12.3%), the market is still overvalued. However, it’s small enough that a regular market fluctuation can work that out.
Most of Canada’s real estate markets are significantly overvalued, as buyers price in years of growth. Nowhere is that more true than Greater Toronto — ask around and many will explain it’s the next NYC. From Windsor to Pickering, people think Manhattan skylines will cover a region 178x larger than NYC. It’s unclear how many of those people know the median sale price across Greater Toronto (C$1,098,000) is now higher than NYC (C$971,000). Don’t tell them, it’ll be much better as a surprise.