Bloomberg Economics has released data suggesting that the Canada housing bubble will eventually pop, leading to a big drop in home prices. Along with New Zealand, Canada is highly susceptible to a housing price correction in the near, but unknown future. This is due to the high price-income ratio and abnormal price-rent ratios having been a hard reality for some time now.
Policymakers may already be considering changes after the Government of Canada finally introduced a tax on foreign buyers. Foreign investors have proven to stand as major competitors to Canadian residents in need of decent, affordable housing. Many people simply can’t outbid investors from overseas. While sold condos across the country sit empty, Canadians struggle to get a grip on property in their own cities.
New Zealand has had similar problems with the housing market and has, in turn, banned all overseas purchases on housing.
The tax on foreign investors hasn’t been enough to stabilize the market, according to Bloomberg economist Nira Shah.
“While this all should help contain the housing bubble, the dashboard suggests house prices still remain substantially elevated,” said Shah in an email to the The Toronto Star.
Good chart from Bloomberg on housing valuations in different countries based on a combined measure of price-to-income and price-to-rent. The most stretched and vulnerable to a house price correction are New Zealand, Canada and Sweden. (Bloomberg)
Don’t celebrate too soon, however, because central banks will now be lowering interest rates as of today. This could mean a global rise in housing prices, which means Canada won’t be the only one with this problem. This is the first time in over a decade that the U.S. Federal Reserve has set out to cut rates, which is a move that is meant to stimulate the economy, Bloomberg reports.
The Bank of Canada’s key interest rate has been 1.75 since 2018. Economists are predicting a cut of a half a percent in the Federal Reserve.