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How a real estate bubble burst in Toronto, Vancouver could affect the rest of Canada

Saying Canada’s housing market is at a record high is somewhat misleading because the truth is, the real estate market is weakening in at least four major cities.

Buoyed by red-hot markets in Vancouver and Toronto, the country’s overall housing market may appear to be on fire but in reality real estate is slumping in Quebec City, Halifax, Calgary and Edmonton, where houses prices are down.

“The reason is their economies are incredibly flat and you will see housing really start to slow down,” says Don Campbell, a senior analyst with the Real Estate Investment Network. “It’s simple economics that explains why they’re underperforming.”

A Teranet-National Bank house price index released last week showed massive double-digit gains in house prices in Vancouver, Victoria, Toronto and Hamilton, a sharp contrast with the other seven regions covered in the index, where house prices barely budged.

The index noted gains of over 10 per cent in Toronto, Hamilton, Vancouver and Victoria, which when combined with the flat growth in Canada’s seven other regions resulted in overall price growth in May of 1.8 per cent over the previous month.

Led by Toronto and Vancouver and their neighbouring cities, house prices in Canada are up nine per cent since a year ago. According to the Globe and Mail, Canada’s average house price is $564,455.47.

“The dichotomy continues on the Canadian home resale market,” says National Bank economist Marc Pinsonneault, who also pins soaring high-rise condo prices in Vancouver and Toronto on the hike in average home price.

Pinsonneault believes that the seven housing markets outside of Toronto and Vancouver are currently either in the midst of or about to experience a correction.

But don’t put the ‘for sale’ sign on your lawn just yet. Falling markets in Halifax aren’t likely to impact Montreal and values in Calgary won’t affect Ottawa because the Canadian housing industry is regionally diverse. Even if the bubble burst in Toronto and Vancouver as pundits have been predicting ,the impact on the rest of the country would be minimal.

“Those markets behave totally differently,” Pinsonneault says. “As an economist, the Canadian real estate market seems to be Balkanized. If the bubble burst, as you say, there should not be much spill over to the rest of the country.”

Campbell says he has always believed that as well.

“What happens in Toronto and Vancouver when values stop growing is national headlines,” says Campbell. “It will negatively affect consumer confidence and that will drive consumers to tap the brakes a little bit in other markets but it doesn’t change the dynamic of the market overall.”

As for price declines, don’t expect to see U.S.-style drops of 30 per cent. Pinsonneault believes Vancouver could experience significant price reductions at the 10 to 20 per cent mark if foreign capital flowing into the city dried up. He said a correction in Toronto would mean a price reduction of around 10 per cent.

While well-thought-out real estate investments are still worthwhile, investors would do well to shed their stock-market mentality when it comes to real estate, says Campbell.

“People have brought the stock market to a non-stock market investment and they’re trying to time it and they don’t understand that values go up and down,” says Campbell. “Strategic investors and homeowners should be hoping and praying for a boring real estate market so they don’t have to ride the highs and experience the lows.”

source: Kelly Putter, Insight, 20 June 2016