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After comparing the trend of the housing market in the United States and Canada, a North American economist found that the main reason for the madness of the Canadian housing market is not low interest rates, but the belief that house prices will only rise rather than fall, but warned that the Canadian housing market is out of touch with reality. There will be retribution soon.
For anyone, especially home buyers, it is not surprising that house prices in Canada have been rising steadily. Over the past two decades, house prices across the country have risen by 375%, and prices in hot markets such as Toronto and Vancouver have risen by 450% to 490% respectively.
According to the Canadian Real Estate Association, the average price of a house is now 686650 yuan. In Ontario, this figure jumped to C $887290, while in British Columbia, it was C $913471.
Even in smaller markets, such as Tillsonburg, 200km southwest of Toronto or Bancroft, more than 200km north-east, property prices have risen sharply as pandemics drive workers and families from remote areas out of big cities to less crowded neighborhoods and accelerate home purchases.
House prices in Canada have risen much faster than any other developed market in the world, and have spawned a new economic term to describe the local real estate market: “housing inflation”.
However, experts are shocked by the wide gap between Canadian house prices and other important factors, such as income and people’s ability to afford high house prices.
“House prices in Canada are completely out of line with fundamentals,” said David Doyle, economic director of Macquarie Group Group, a global financial services firm.
While much of the Canadian real estate boom is due to low interest rates, and low borrowing costs have reduced the burden on large mortgages, Doyle has another explanation.
‘Canadians have a mentality at work that house prices can only go in one direction: they will always rise,’he said.
This is best illustrated by what Doyle’s research team did recently when comparing real house prices and real incomes in Canada and the United States.
Doyle explains that disposable income and house prices in Canada and the United States have been at a fairly similar rate and kept pace for decades since the 1970s.
However, by the late 2000s, although both the United States and Canada had low interest rates, the two countries walked out of a very different curve.
In Canada, the red line representing house prices deviates completely from income and from the chart of the United States.
The Canadian and US markets split after 2008-09, when the US suffered a severe stock market and real estate crash, blamed on the subprime mortgage market. In short, too many Americans have taken out loans and mortgages for homes they cannot afford.
As Doyle explained, the crash of 2008 and 2009 had a significant impact on the psychology of US investors. “in the United States, people don’t think of housing as a safe asset.”
Canada’s real estate market is largely unaffected by the crash and has not suffered the same adjustment.
“in Canada, what happened in 2008 / 08 / 09 reinforces the belief that house prices never fall, they only go up,” Doyle said.
So, Doyle says, while low interest rates have fuelled Canada’s housing boom, this is only part of the problem, mainly because of Canadians’ belief that house prices will only rise, not fall.