March 8, 2017

Does Canada Really Have a Housing Market Bubble?

Rising prices in the Toronto and Vancouver real estate markets have led many to question whether or not Canada is experiencing a ‘housing bubble’. There are experts on either side of the argument, and most recently some of the big banks have asserted that we are indeed in a bubble. With so many factors driving up housing prices, one must be vigilant when using a term like ‘bubble’ – as every bubble must eventually pop.

Below, we look at what a bubble actually is and why we may – or may not be – in a bubble.

What is a Bubble?

At its core, a bubble occurs when a commodity has run up in price simply because it has kept running up in price. In other words, the price increase is purely speculative with no market fundamentals to support the change. In the case of the housing market, prices have increased 40% over the past five years with no economic reason to back up the dramatic increase, according to some.

We Could Be in a Bubble…

Those that argue that a bubble exists believe there is little evidence of a supply shortage – the reason many have cited for the sharp increase in prices. Toronto’s population growth is also the slowest it has been in 40 years, again refuting evidence that prices are a simple supply and demand issue. Bubble believers also point to the fact that condominiums are also seeing high price gains, with an abundance of supply. If supply is stable and demand is showing no dramatic increase, there must be another reason for the increase. Many point to the influence of speculative foreign buyers – further supporting the bubble argument.

… But We May Not Be

There are many that believe there is no bubble and that the housing market is working exactly as it should. Most notably, Toronto Mayor John Tory believes the rise in prices shows the market is healthy. A recent survey from the Toronto Real Estate Board (TREB) also found that listing supply in December 2016 is the lowest it has been in the last 15 years. Those that refute the bubble are inclined to believe that the idea was created as a way to induce panic. The definition of a bubble is a specific one, and points to the argument that price increases rise for no other reason than speculation. It’s a narrow theory and doesn’t consider external factors like a low interest rate environment and economic booms in large cities like Toronto.
After all, Vancouver and Toronto real estate markets are desirable, so is it really so far fetched to believe that prices are rising at a rapid pace?

The Verdict

All things considered, there is no denying that home prices have increased at an alarming rate over the past several years, leaving home ownership out of reach for many. The reason however, is not so clear. The story in Canada is too nuanced to conclude that we’re in a bubble – or that we are not. Only time will tell which school of thought will win out.

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