Is Canadian Real Estate at Risk of Overheating?

Should You Talk to a Lender First or a Real Estate Agent?

Had it been asked one year ago, if the Canadian real estate market was at risk of overheating, the answer would probably have been “absolutely not.” In fact, when the COVID-19 pandemic began in March 2020, and the majority of Canadian households and businesses went into lockdown, years of economic and employment gain were at risk of being reversed. This led many to assume the Canadian real estate market would also take a big hit.

However, assumptions are not always correct. With the first quarter of 2021 behind us, Canadian real estate is booming. With double-digit price growth across the country, the question now is, when will this red-hot market cool off?

Will the Imbalanced Market Finally Collapse?

Usually, when housing demand is through the roof, it is viewed as a good thing. However, in the overwhelming majority of Canadian housing markets, while demand is high, the supply is staggeringly low – record breaking low in some areas of the country. This discrepancy between supply and demand has led to an imbalanced market. Cliff Stevenson, Chair of CREA states:

“Seeing how many homes were bought and sold in March 2021, one could be forgiven for thinking the market just continues to strengthen, and maybe to some extent it is. The real issue is not strength in housing markets but imbalance. That demand has been around for months, but with the shortages in supply we have across so much of Canada, a lot of that demand has been pressuring prices. So the big rebound in new supply to start the spring market is the relief valve we need the most to get that demand playing out more on the sales side of things and less on the price side. That said, it will take a lot more than one month of record new listings, but it looks like we may finally be rounding the corner on these extremely unbalanced housing market conditions.”

Further contributing to the imbalanced market is the price-to-income ratio – a metric used to determine if real estate is overvalued. This ratio in Canada is the highest it has been in 40 years, with the average house price being seven times greater than the average household income.

As we take a closer look at this statistic, it is clear that major Canadian cities have crossed the threshold. The price-to-income ratio in Vancouver is 12:1 and in the GTA it is 10:1. This could indicate that Canadians may experience financial difficulties in the future when it comes to paying their mortgage. The only solution to this problem is for the market to balance out, whereby housing prices world return to normal levels.

Canadian Real Estate Seeing Unsustainable Double-Digit Increases

The first quarter of 2021 drove home the fact that the Canadian real estate market is in an unsustainable pattern. In March 2021, the average Canadian home price reached $716,828 – an astonishing 32% increase when compared to March 2020. In fact, just this past month Toronto saw the average home price surpass $1 million for the first time in history. Keep in mind that the average income did not increase at the same pace as the average home price.

Even with the substantial increase in prices across the country, home sales also jumped up 76% in March 2021, compared to March 2020, with the MLS system logging 76,259 transactions. While some argue that comparing March 2021 to March 2020 is misleading, due to the pandemic and resulting economic uncertainty, the increase is still well above the norm.

What’s in Store for the Canadian Housing Market in the Coming Months?

As the first quarter of 2021 comes to a close, it is forecasted that home sales will remain strong throughout the summer and fall, largely due to people working from home, wanting more space (inside and outside), and record low interest rates.

With supply continuing to fall drastically short of demand, eventually the number of transactions could level out. It is projected that 2021 will finish as a strong sellers’ market, however 2022 is unlikely to see anywhere close to the number of transactions that we’ll see in 2021.

Can’t wait until an eventual cool down? As a current homebuyer navigating this competitive, ultra-hot market, ensure you have the guidance of a trusted Pilon Group Agent to help make your homeowner dreams a reality.

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