Don’t compare the booms in Toronto, Vancouver real estate

Home price growth may be double-digits in both Toronto and Vancouver, but that’s where the similarities end, warns Royal LePage president Phil Soper.

“You can’t include Toronto in the same discussion [as] Vancouver, because the situations are dramatically different,” he says.

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Compared to this time last year, houses in the Greater Toronto Area rose 10.2%, and Vancouver’s rose 24.6%, while nationwide prices grew 9.2% year-over-year, Royal LePage data shows.

The typical Vancouver home now costs $1.1 million, while in Toronto, it’s $656,000.

Toronto’s growth is still within the realm of a strong market, Soper explains. “Over the long term, with homes in Canada having appreciated over the decades at about 5%, we typically see markets that range from flat to 10%.”.

But Vancouver’s situation is similar to the fast climb in housing prices that Calgary experienced from 2003 to 2005, when housing prices also increased by 30% a year. “What happens is they overshoot, and they tend to move into a period, in Calgary’s case, of a prolonged flat value,” he says.

“Prices in Calgary from 2007 – well before the global financial crisis hit Canada – just weren’t going anywhere. I would suspect that they’re headed for something like that in Vancouver. Rises of 30%-plus, particularly when you already have the most expensive prices in the country, clearly aren’t sustainable.”

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By the end of the year, the real estate company projects home prices will increase 12.4% nationwide, compared to the end of 2015. Soper says it’s the biggest increase since at least the early 2000s.

Company economists had predicted a mild slowdown in Toronto and Vancouver home prices toward the end of the year. They expected interest rates to rise by the end of the year, but as that becomes increasingly unlikely, Soper says not to expect any correction.

The federal government, the Bank of Canada and the Office of the Superintendent of Financial Institutions have all expressed concern in recent weeks about the affordability and sustainability, especially in Toronto and Vancouver.

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OSFI recently asked banks to take a sober look at their mortgage lending practices, something Soper says institutions are taking seriously.

“My expectation is that significant changes are already happening within our major financial institutions to review and tighten lending standards, [but] not a lot because they were already among the tightest in the developed world.”

He adds the default rate on the riskiest insured mortgages in Canada is low at about 0.3%.

Residents and politicians are concerned wealthy foreign investors who have family or business ties to Canada are the ones pushing up home demand in Vancouver, but Soper says there’s no reliable data to back that up – yet. Governments can gather data on owners, but the task is onerous, says Soper.

“It involves many levels of government – municipal, provincial, federal — and it involves banks and real estate companies,” he says. But until policymakers have the data, “everybody is working with guesses and opinions, and it’s dangerous to make public policy based on tabloid headlines.”

A survey found that 71% of Toronto real estate agents and 74% of those working in Vancouver said that purchases by foreign owners have increased since last year. The agents estimated foreign owners still make up less than 10% of the market in either city.

In the meantime, Vancouver is moving forward with a tax on vacant properties. Soper cautions that while taxation is appealing in a hot market, it’ll eventually be a drag, as investors could add up their tax burden and consider buying a home somewhere else.

If all of Canada were to tax foreign homeowners, he’s concerned other countries would reciprocate. He says the stereotype of a foreign owner right now is someone from China, but many Americans own vacation properties in Whistler, B.C., Mount Tremblant, Que., and Ontario’s Muskoka region. If Canada were to tax them it could provoke American governments to tax snowbirds, he says.

Read: OSFI intensifies scrutiny of mortgage lenders

Brexit

Fears that Britain’s withdrawal from the European Union could push up Canadian home prices are overblown, says Soper.

“The speculation that somehow someone who was investing in residential real estate in London would suddenly change their mind and start investing in Toronto is a stretch,” he says. “Most residential real estate investment is related in some way to the owner’s presence in the country.”

In the short term, it’s unlikely large numbers of people living in Britain will pick up their stakes and move to Canada, he says. That may change in the long term, however, if the U.K.’s international image is tarnished. In that case, other developed English-speaking countries like Australia and the U.S. would also stand to benefit from expatriates.

The British decision has encouraged central banks to keep interest rates low. Today, the Bank of Canada said it would be holding its key interest rate at 0.5%, and that it predicts Brexit will shave 0.1% from the Canadian economy. Lower lending rates for longer mean there’s no central bank policy in the way of the housing market continuing to heat up.

Residential real estate may not see Brexit-related investment, but there is an opportunity for commercial property.

Canada’s commercial real estate could seen an immediate boost from Brexit, Soper says, as wealthy investors decide to buy property here instead of the U.K as they wait for Britain’s exit negotiations with the EU to be settled.