Anshu Arora LLM, MSc, PMP

A new global real estate report suggests that real estate in Canadian metros Vancouver and Toronto is finally out of the bubble risk.Published Wednesday, the annual UBS Global Real Estate Bubble Index discusses deflating real estate bubbles worldwide.

Only two cities in UBS’s watchlist remained in the bubble risk category this year — Zurich and Tokyo — down from nine spots in 2022. Thankfully, no Canadian cities made the cut. “Between mid-2019 and mid-2022, real prices in Vancouver increased by 25% and by almost 35% in Toronto, while household leverage rose at a fast pace,” reads the report. It also notes that since mid-2022, the real estate markets in these cities have moved closer to balancing, removing Vancouver and Toronto from the bubble risk category to the “overvalued” category.

“A mix of increasing financing costs and higher mortgage stress test rates tipped the scales, and prices in Vancouver and Toronto have corrected by more than 10% in inflation-adjusted terms since mid-2022,” UBS researchers said. “But demand for living space in these cities is rising steadily, and the pressure is shifting to the rental market.”

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Canada’s housing minister says the federal government isn’t ruling out changes to its ambitious immigration targets, but maintains the country should also focus on what it can do to increase housing supply when it comes to addressing current housing challenges.

Fraser said he believes the federal government has “some work to do” with its temporary immigration programs, which currently operate on the basis of demand in an “uncapped way,” but doesn’t “necessarily” need to reduce the number of newcomers who become permanent residents each year. It’s common for almost half of those individuals to already be in Canada as temporary residents, he noted.

Before making any changes, however, Fraser said the federal government would have to consult with other levels of government — since deciding which institutions take in international students is within the purview of provincial governments — as well as institutions that have “a duty to play part of a role in housing the people who come here.” He also stressed that conversations around addressing the country’s housing crisis should not solely revolve around immigration.

“It's important that when we're looking at the answer to our housing challenges, we also focus on what we can do to increase the supply,” the minister said. “I think it's essential that we remember that immigration remains one of Canada's strongest competitive advantages in the global economy.”

Fraser introduced Canada’s ambitious immigration targets in November 2022 when he was the federal immigration minister, with a goal of bringing in 465,000 permanent residents in 2023, 485,000 in 2024 and 500,000 in 2025. At the time, he said the move was necessary to ensure Canada’s economic prosperity, by helping businesses find workers to fill in labour gaps and to attract the skills required in key sectors including health care, skilled trades, manufacturing and technology.

Academics, commercial banks, opposition politicians and policy thinkers, however, have been warning the federal government the country’s high-growth immigration strategy is exacerbating Canada’s housing crisis. In a July report, economists from TD estimated that if the current immigration strategy continues, Canada’s housing shortfall could widen by about half a million units in just two years’ time. The Canada Mortgage and Housing Corp. has estimated the country needs to build 3.5 million more homes by 2030 than it is currently on track for, to help achieve some semblance of housing affordability.

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Political leaders, especially at the provincial level, have focussed their attention on two related factors that they can control through legislation. First, they argue that local planning processes and regulations slow down approvals and drive up the costs of housing. Second, they say, NIMBY (not in my backyard) attitudes from residents limit density and slow down approval processes.

Those who study the history of housing in Canada identify inadequate government commitment and coordinationover the last several decades as a key factor in the contemporary problem. With governments at all levels largely out of housing production, housing starts fell far short of demand (driving prices up). In many cities, the supply of affordable social housing units contracted as local authorities lacked the financial resources to repair them. Some affordable options — such as single-room occupancies for low-income individuals — decreased in numbers as governments dismissed them as not offering ‘the standard of housing we want to see.’

Today, land ownership around most cities is controlled (or optioned) by a small number of local firms, some of whom have the ear of government to obtain favourable treatment. Because land is a finite good, the firms that control it have little incentive to release it at a rate that would bring prices down. If they hold the land longer, they may convince governments to increase permitted densities and thus enhance returns. Hence, developers have not built tens of thousands of already permitted units, waiting instead for future opportunities.

Housing has long been seen as a vehicle for household wealth accumulation, but as interest rates fell in the wake of the financial crisis, it offered a secure investment opportunity for pension funds, insurers, and real estate investment trusts. Small-scale housing projects increasingly gave way to large-scale, high-rise towers. Companies often bought affordable apartment properties, evicted tenants for renovations, and then relet units at higher rents. During 2022 and 2023, investors bought a significant proportion of homes sold, contributing to escalating prices: in some cases, they turned single-unit homes into multiple-unit accommodations.

Despite the growing value of the real estate sector, housing starts failed to keep up with demand. In 1976, CMHC reported over 273,000 housing starts for a population of under 24 million; in 2022, only 240,600 housing starts served a population of nearly 40 million. In 2023, at a time of increasing demand, CMHC reported a decline in housing starts. Industry analysts blamed high interest rates and significant construction labour shortages for the decline. By some accounts, Canada is short 80,000 construction workers and faces more retirements in the next decade.

Housing is a perpetual front-burner issue in Vancouver, given elevated prices for homes and the most expensive rental prices in Canada. So it’s no surprise to see billions for housing in the latest provincial budget. But throwing money at the problem isn’t going to move the needle on housing affordability (and availability) unless governments cut the red tape that got us here in the first place. The fundamental problem is that there aren’t enough units of housing being built in British Columbia’s Lower Mainland to ease pressure on housing prices and vacancy levels. And the housing that’s being built is being built too slowly, in part due to long and uncertain permitting processes.

The spike in housing prices in Vancouver over the past decade has been well-publicized. The median detached house price in Vancouver is roughly 12 times the median income, which makes Vancouver among the most expensive places on Earth to buy a house. And while there was an uptick in housing starts in Vancouver over the past decade, it didn’t keep up with employment growth over that period, which attracted more people to the region. Despite the lagging supply of new housing in Vancouver, there appears to be a total lack of urgency. A 2017 study found that it took on average 18 months to secure housing permits in Vancouver. Moreover, Vancouver faces a dual squeeze on both upward and outward development. Most of Vancouver’s land mass is zoned for single-detached housing. This means that growth in the number of housing units within the city will have to mostly come from upwards development, which is for the most part prohibited. And even when dense developments are proposed, they are often met with opposition for aesthetic reasons. In short, the deck is stacked against building new housing units, and even when city hall approves new units, they endure a long and uncertain regulatory gauntlet.

While it’s unsurprising the B.C. government plans to throw money at housing, it won’t move the needle on housing affordability. Instead, provincial policymakers should encourage municipalities to cut the red tape that’s strangling housing construction.

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Recent announcements of new policy from all levels of government have not proved to be effective in accomplishing their objectives and, in some cases, have been retracted for reconsideration or rapidly amended soon after release.

The common thread here is that these policies sound great from a podium but do not deliver positive outcomes. In some cases, they even generate negative unintended consequences that cause further damage.

Case in point, the federal foreign buyer ban will do virtually nothing to address the housing crisis. Even the most preliminary data analysis shows that this demographic makes up less than one per cent of sales in the B.C. housing market, which is far too small to influence anything.

Furthermore, this policy sends a dangerous mixed message to the world when Canada is desperate for skilled immigrants to meet dire labour shortages in key industries. The policy is already starting to foster negative outcomes, and the federal government has already announced five amendments to the regulations to address concerns raised by the housing sector. Over the past year we’ve also seen:

An announcement of large-scale reconstruction of the Royal B.C. Museum, only for it to be suddenly put on hold, with a new round of public engagement.

Then came a restructuring of provincial autism funding, which was quickly withdrawn after outrage from parents of autistic children.

The problem is a lack of process when the government is crafting policy.

On the housing front, the provincial government’s announcement in November 2022 to invalidate strata corporation bylaws that set minimum age restrictions under 55 was intended to provide more opportunities for young families to access these units. In an entirely foreseeable outcome, the policy backfired when strata councils voted to make their entire projects “55-plus,” resulting in the exact opposite of the policy’s intention. As a result, media reported on young families fearing eviction, and the government recently announced an amendment to create additional exemptions to address this unintended outcome.

In times of crisis and uncertainty, Canadians look to their elected representatives for leadership. We rely on governments to create and implement policies that improve our lives, protect our rights, and build a brighter future for our children. But the current approach to public policymaking is failing us.

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