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| Housing starts (Photo credit: Wikipedia) |
On average, a home in Canada costs 84% more than in the United States right now. The national averages are $372,762 at home versus $203,100 south of the 49th parallel. One might argue that something has got to give.
By analyzing housing starts in Canada, we can get a good indication of future trends in real estate. Warm weather throughout most of Canada was credited with being the catalyst for a very strong month of March in new homes. April was expected to be lacklustre, but those expectations were blown out of the water with 244,900 housing starts last month, compared to an estimate of 204,000. This was the best month in about five years, well prior to the onset of the 2008 recession. These numbers have some questioning the sustainability of starts as well as eliciting further calls for a housing bubble here in Canada.
Of particular interest was that nearly two-thirds of new homes last month were multifamily units, which includes condominiums — a 27% increase year-over-year on a seasonally adjusted basis.
Canadian housing also topped a recent global list published by the Economist for 12-month price change, increasing 7%, while ranking high on a comparison of home prices to both rents and average incomes. Overall, the Economist suggests that Canadian homes are 54% overvalued relative to a 19% undervaluation in the U.S.
First off, CMHC’s recently released annual report stated: “Clear evidence of a bubble is lacking [and we] continue to monitor very closely housing prices and underlying factors such as demographic and economic fundamentals and financial conditions across all major urban centers, including condominium markets.”
Furthermore, averages can be deceiving and may not be representative of a particular local market. A lack of supply in posh parts of the Greater Toronto Area, for example, has been driving bidding wars and pushing prices considerably higher in some neighbourhoods. Perhaps people are keen to lock in today’s low mortgage rates and are willing to buy a house in their desired neighbourhood regardless of the cost. In the short run, this drives up average prices. In the long run, does this really matter?
The big question based on Canada’s relatively high prices and April’s enormous inventory of new condos is whether the condo market is really experiencing a bubble? One of the key considerations for the purchase of any home has always been location. And location is one of the main reasons the condo market is not in a bubble.
What are many Baby Boomers going to do in coming years? Many will be selling the two-storey houses where they raised their families and buying condos, both for lifestyle reasons and also to bank some money to fund their retirement.
What are many young families going to do in coming years? If they want to live in Canada’s big, expensive cities like Vancouver, Toronto and Montreal, they’ll do what’s been done in the likes of New York, London and Tokyo for years — they’ll buy a condo.
What are many new immigrants going to do in coming years? In recent years, about 70% of Canadian immigrants end up in the big three — Vancouver, Toronto and Montreal. And they don’t buy houses in the suburbs. They rent condos in the city, so they can be close to jobs, resources and cultural centres until they are established.
Demographics (Baby Boomers), family finance (big city housing affordability) and global mobility (immigration to the world’s new “America”) make condos the location of choice for tomorrow’s Canadian home buyers. I live in a big house in the country, northeast of Toronto, so condos aren’t for me. Am I selling my rural house to buy a condo in the city? No. But prices of goods and services, homes included, are all about supply and demand. Therefore, my feeling is that big city condo values will continue to rise in general and that house prices in some urban areas will fall as a broad trend, with average home prices across the country potentially flat in the years to come.
Jason Heath is a fee-only certified financial planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto.
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