Canadian Real Estate Market is Hot but For How Much Longer

The Canadian real estate market is hot right now. The average sale price of a detached house in the city of Toronto reached $965,000 this past April, while the average sale price of a detached home in Vancouver is between $932,000 (east) and $2.2 million (west). Industry experts warn that the market risks overheating and potentially collapsing in the near future.

A new Bank of Montreal report finds that home ownership in Canada is a lot costlier than initially thought. According to the financial institution’s “Fall Home-Buying Report,” 43 percent of potential homebuyers can expect to pay an average of 21 percent more than when they first started browsing the market – in fact, only five percent of those surveyed reported a price decrease.

Toronto homebuyers noticed the biggest gap between what they had planned to spend and what they ended up paying for. A majority of Torontonians expected to pay approximately $630,000 for a home, but the current state of the housing market – demand surpassing supply and monthly skyrocketing prices – they really spend roughly $100,000 more.

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This is close to what other housing markets in Canada are experiencing: Calgary (19 percent), Montreal (17 percent) and Vancouver (16 percent).

Martin Nel, vice-president of Personal Banking Products at BMO, noted that housing prices in the Great White North have gone up 18 percent over the past four years.

In addition to housing costs, potential homebuyers are also revising their personal preference regarding the type of home they wish to acquire. A majority (55 percent) change their home preference after the first assessment of the market. At first, these Canadian homebuyers want either a detached house or a condo, but later they lean towards moving into a semi-detached home or a townhouse.

“By shifting toward semis and townhomes and away from detached and condos, buyers appear to want their cake and eat it too — a backyard for the kids to play in, but also something that won’t break the budget, notably in Vancouver and Toronto,” said BMO senior economist Sal Guatieri.

Land transfer taxes the answer?

Despite Toronto Mayor Rob Ford running an election campaign on reducing or eliminating the land transfer tax – a tax that is applied by the government whenever a property is transferred from one owner to another – in 2010, it is being discussed by officials that the tax could be used to cool down some of the country’s hottest markets.

Although Prime Minister Stephen Harper doesn’t foresee a housing crisis, he has warned that many households are too indebted and are vulnerable in the event of a rate hike. Nevertheless, several high-level officials at the federal level of government are mulling over the idea, particularly Canada Mortgage and Housing Corp. (CMHC) chief executive officer Evan Siddal.

Toronto’s land transfer tax stands at 0.5 per cent on the first $55,000, one per cent from $55,000 to $400,000 and two per cent over that – former New Democratic Party Member of Parliament and 2014 Toronto mayoral candidate Olivia Chow has suggested raising it on million-dollar homes. There is a push, however, to eliminate it entirely.

The Ontario Real Estate Association (OREA), which has pegged the tax as costing the average household $4,000, recently established a campaign that highlights the negative effects of the tax.

“Municipalities across Ontario are looking to the province for new revenue tools or taxes,” said Costa Poulopoulos, the association’s president, in a statement. “One of the tools being considered is a second [i.e., municipal, in addition to the provincial tax] land transfer tax on home buyers, similar to the tax imposed by the City of Toronto. This tax carries a huge cost – no Ontario city can afford the kind of job losses Toronto has experienced because of the municipal land transfer tax.”

In the meantime, low mortgage rates will continue to fuel the aggressive Toronto, Calgary and Vancouver real estate markets. It is projected that there won’t be any declines in home sales until mortgage rates start to rise.