The Vancouver and Toronto housing market has been sizzling during the pandemic housing boom. Despite a tepid slowdown in the first couple of months of the COVID-19 public health crisis, both cities have been soaring ever since. The word “bubble” has been widely used by the media when reporting on the red-hot Canadian real estate market. This is particularly the case when Toronto and Vancouver are in the headlines.

This bubble talk might not be a fitting descriptor for the Vancouver and Toronto real estate markets, according to the nation’s central bank.

Bank of Canada Confirms that Toronto Housing Market is NOT in a Bubble

The Bank of Canada (BoC) recently released its House Price Exuberance Index (HPEI) Indicator for the third quarter of last year. So, how does it work?

Officials have three classifications for the HPEI measurement. Anything surpassing 1.0 suggests the city’s housing market is exuberant, appearing red on the chart. If the HPEI is between 0.95 and 1.00, a bubble will potentially form and appear in yellow. Should the HPEI below 0.95, showing no signs of exuberance, it will be green.

Before the pandemic, the Toronto housing market’s HPEI was above 1.00, in the red zone, while Vancouver was in green territory. In the post-crisis housing sector, Toronto and Vancouver did not make the list of exuberant markets. Meanwhile, only two municipalities flashed red on the HPEI: Montreal and Hamilton.

The last time Hamilton was labelled with a healthy real estate market was in 2015. Since then, 15 of the last 25 quarters have received an exuberant ranking. Although the Montreal housing sector has witnessed significant price growth in the previous five years, the BoC slapped an “exuberant” label on the Quebec municipality.

“The Canadian housing market has been exceptionally strong during the COVID‑19 pandemic. In March 2021, national resales reached all-time highs and house price growth surpassed its previous peak. Strong demand fundamentals, shifting preferences for more space, and limited supply of single-family homes have together contributed to rapid house price growth,” the institution wrote in its analytical note.

“Sustained periods of rapid growth in house prices can create the expectation that prices will continue to rise, even if economic fundamentals cannot support these increases. Such extrapolative expectations can become self-fulfilling when the prospect of higher prices in the future raises housing demand today.”

Is this an accurate representation of the Canadian real estate market? Many homebuyers would suggest that it is not, pointing to the frothy valuations in detached, semi-detached, townhome and condominium units, particularly over the last 18 months. Plus, Swiss bank UBS recently warned that the two major urban centres were near the top of the global bubble lists.

It should also be noted that the Federal Reserve’s Exuberance Index, which is comparable to its Canadian counterpart, considers Canada’s real estate industry to be exuberant and situated in a bubble.

Will there be a slow-down in the Vancouver and Toronto housing market? The market fundamentals suggest not.

According to the Toronto Regional Real Estate Board (TRREB), residential property sales skyrocketed 28 per cent in 2021, buoyed by record demand and notably low inventories. The highly tight market led to an average selling price of $1.095 million last year, up from the previous 2020 all-time high of $929,636.

New residential listings rose 6.2 per cent in 2021, but this was less than the annual rate of sales activity.

“Despite continuing waves of COVID-19, demand for ownership housing sustained a record pace in 2021. Growth in many sectors of the economy supported job creation, especially in positions supporting above-average earnings. Added to this was the fact that borrowing costs remained extremely low. These factors supported not only a continuation in demand for ground-oriented homes, but also a resurgence in the condo segment as well,” said TRREB President Kevin Crigger in a news release.

Meanwhile in western Canada, the Vancouver real estate market experienced a 42.2-per-cent boost in home sales in 2021, totalling just below 44,000. This was 33.4 per cent above the decade average. Because of how tight the Metro Vancouver market is, the benchmark price of a detached home is more than $1.9 million, while an attached home is selling for about $1 million.

“Home has been a focus for residents throughout the pandemic. With low interest rates, increased household savings, more flexible work arrangements, and higher home prices than ever before, Metro Vancouverites, in record numbers, are assessing their housing needs and options,” noted Keith Stewart a Real Estate Board of Greater Vancouver (REBGV) economist, in a statement. “While steady, home listing activity didn’t keep pace with the record demand we saw throughout 2021. This imbalance caused residential home prices to rise over the past 12 months.”

Supply relief does not appear to be on the horizon, warns Canadian Mortgage and Housing Corporation (CMHC). In Toronto, housing starts tumbled seven per cent year-over-year in December. In Vancouver, housing starts were relatively flat, growing at an annualized rate of one per cent.

The next several months should be an interesting time in the Canadian real estate market amid rising interest rates, tighter mortgage lending standards, and swelling price inflation nationwide. Whether this will initiate a correction or not remains to be seen, but prospective homebuyers who find themselves on the sidelines might be on the edge of their seats, thinking 2022 could be the year to get their feet in the door, finally.

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