First things first.
The source of all of these articles and stories about Canada’s housing market being a bubble is a tool released by Bloomberg Economics in mid-July, 2019.
Economist Niraj Shah built a “housing bubble dashboard” that used the cost of housing compared to cost of rent, wages, inflation adjusted prices and household credit – all with a goal of determining how unsustainable a housing market should be considered.
This is a complex study, with lots of factors, assumptions and projections. It has to be, as the global real estate market is a complex beast.
The results of this study showed that Canada, along with New Zealand, seem to be on the most unsustainable path due to the high cost of housing compared to wages.
The inference that has been drawn from this study is that if Canada continues on this path, where housing prices are growing in excess of wage growth, is that we are vulnerable to a correction in house prices.
The study does NOT say there is a correction in house pricing, nor does it say that Canada must continue on this path of house price growth without corresponding growth in wages.
It just says that we’ve got high prices for houses relative to how much we get paid. Which means if the market corrects, we’re at risk.
You’re likely aware that it’s gotten expensive to buy real estate in Canada, particularly in markets like Vancouver and the greater Toronto area. As such, the news that real estate prices are going up more than our wages isn’t really news.
The idea that we’re more vulnerable to a market correction as a result of this is perhaps new information. It makes sense if we consider it though, as if we’ve seen sustained, high levels of pricing increases, a market correction where prices drop could mean lots of people who bought are now sitting on property that is worth less than what they paid for it when the market was hot.
To put it in very simple terms, if the price of something keeps going up and up, when that stops and prices drop, it’s going to be a rude awakening for the people who kept buying despite the higher prices.
All in all, the Bloomberg study and their housing bubble dashboard is a useful analysis of real estate markets and worthy of our attention.
Now, let’s take that and leap to conclusions.
With this understanding of what the study reveals, let’s look at the headlines we’ve been seeing.
Toronto’s Housing Bubble Predicted To Pop: Report
Canada due for drop in home prices, according to housing bubble index
Canada Is Set For A Big Drop In Home Prices, According To New Reports
All of these articles take the same information reviewed above and infer from the data that the market is about to collapse. The headlines from these articles all take a conditional statement, where Canada’s housing market is at risk if there is a market condition and turns it into a statement of fact or prediction.
Kudos to BlogTO for a remarkably restrained headline and article.
Toronto home prices could be in for a big fall according to housing bubble watch
The writer for this article even spells out clearly that this isn’t occurring or necessarily will occur but that it is possible.
A pop isn’t imminent, in other words, but we’re well-poised to experience one if government policies change.
While no housing market goes up forever, don’t take this latest influx of stories about Canada’s real estate market as a reason to not buy real estate or to immediately sell before the market crashes. They’re not accurate reflections of what this latest study tells us and they are no substitute for continuing to monitor the economy, watching for changes to government policies regarding real estate taxation and financing and to the trends that real estate professionals see in various markets.