So I came across this data which tries to get point that even during peak US housing bubble residential Real estate investment as a % of GDP in Canada is almost 3% higher. This surely means that Canadian Residential real estate may well meet the same fate of the US. (Just time may be unclear).
Canadian Residential Investment Reached 9.43% Of GDP
Residential investment has recovered much faster than other segments of GDP. Residential investment represents 9.43% of GDP in Q3 2020, up from 7.71% during the same quarter last year. This is not only the highest rate seen in at least 60 years, but it’s also very high for any country. For context, the U.S. residential investment peaked at 6.7% in 2006 during the housing bubble. The current rate in the U.S. is just 4.3%, having also sharply accelerated faster than GDP in the third quarter. Just not nearly as much as Canada.
Forecasting Is tough especially about future. However there are a lot of differences between the US housing bubble of 2007 versus the Canadian residential market. I will try to lay down some facts and some of my opinions which would suggest that anyone expecting a big crash like 2007 of US residential market in Canada might be mistaken unless big underlying changes happen to Canada especially related to immigration.
Securitization and consequently off-balance-sheet loans in United States in 2007 was rampant. Banks would loan knowing that they do not have to carry the loans on their balance sheet. but it’s not the case currently in Canada on a scale which was done in United States in 2007. If RBC or CIBC is making a home loan almost surely they’re keeping it on their books.
NO NINJA LOANS – No income no jobs no assets you still get a home loan. This was frequent in US especially for sub prime loans. in Canada it is not true. try going to RBC and say you do not have a income but you want 7 700 K loan. You will get a surprise.
No Freddie Mac no Fannie Mae no AIG No Ginnie Mae equivalent in Canada. The Freddie and Fannie played a big role in exacerbating the housing problem because of the implicit guarantee they had to provide which was directly from government. very very less or rare is like that in Canada. Canadian government isn’t really standing behind the Home Loan and saying hey if you default as a consumer we will pay. unless if you buy CHMC insurance which cost around 30,000 CAD.
Immigration is perhaps the biggest Driver of the real estate with high number of Indian and Chinese high earning high income potential making Canada their home as a permanent resident. Canada is perhaps the only developed country where if you’re below a certain age and know English you can basically fill a form and get a permanent resident certificate and just take a flight to come here. Try doing that with United States. Express entry is designed to get the most highest income potential people who know English and who are going to do high-level of high quality jobs when they get into Canada. There is no Mexico kind of immigration in Canada.
Amount of new permanent residence targets and actual value per year as a proportion to the total population of Canada is huge. Approximately 300 K to 400 K new permanent residence are coming every year in Canada. All in the big productive age with advanced English and almost surely you’re going to work in knowledge sector. On the other hand for United States total new permanent residence granted was just around 600k. mind you United States population is almost 9 times that of Canada. On top of that it is not changing. they are going to even increase more number of people being granted the permanent resident card in the future. this is in stark contrast to United States which laughably has around 65,000 H1B quota. and for the last four years with Trump in power God the number of people who have actually lost H1B renewal capability and L1 rejections you would be surprised how many people have been basically kicked out of United States. Unless some Canadian government completely reverses stance on immigration the housing prices are not going to collapse.
Hi income earners from UAE and Singapore and United States are entering Canada because this is the easiest to get in vs all developed countries with basically knowing English and filling up a form. got your H1B or L1 renewal rejected do the PR. Got your EP pass from Singapore rejected get the PR. UAE never gives a permanent residence so after three years if your employment visa was not renewed fill up the form come to Canada get the final passport after around 3 to 4 years. all these countries UAE Singapore and United States be far more for the same amount of work than literally any comparable company which does the same work in Canada does. Specially Singapore and you UAE they do not even have that high taxes so that people were coming from those two countries they have a lot of cash 600 to 700 K Canadian dollars is easy to save if you have been working in UAE or Singapore for around 6 to 7 years. Even United States if you working anywhere in United States the amount of money which you can save for a period of 6 to 9 yearall these countries UAE Singapore and United States be far more for the same amount of work than literally any comparable company which does the same work in Canada does. The people who are working in UAE Singapore United States or even UK they have absolutely no chance of getting the actual passport of that country unless the stars align. but Canada allows those high earners to get permanent resident card and passport passport by basically knowing English and filling up a form. brilliant. these people are smart hard-working intelligent and our top of the food chain at least in terms of knowledge work. These guys are going to buy the home they’re not going to just become a plumber or electrician when they come here. This quality immigration will always support the home prices.
Then there is a lot of money which is coming from Chinese investors who have just become rich in the last decade or so by the boom in China. There are real stories where half of a condo that is almost 50 or 70 units were directly booked by a group of Chinese investors. They are not going anywhere. none of the countries are so open to outside money coming directly into the real estate. lot of efforts are being taken to cool down the real state and control the foreign inflow of money.
Virtually unlimited supply of software engineers from India who have close to zero chance of getting an on-site opportunity. Indian outsourcing companies like Tcs infy hcl are really reluctant now to send their stuff to developed countries. This directly means the million plus people who are actually working as a software engineer in all these companies have only one chance to go to Canada if they want on site and they can do it independently that’s the best part. Good to not have to depend and beg to a company that please send me on site. all these knowledge workers who come to Canada are going to get a passport Canadian passport. And of course they’re going to buy home. In fact if you go to any of the large banks IT department you’ll be surprised to see close to 70% plus people there are Indian software engineers and it’s growing. All these people are going to buy your home what about the price maybe.
Canada has basically four large cities only but United States is really United States huge with huge amount of opportunity and vast areas which are actually populated. Canada is much more concentrated with the opportunities of income constricted in top four cities only. this means that new people were coming will go exactly in these four cities versus United States where immigration whatever values it be can actually be so widely spread out that they cannot support high house prices except key 7 to 8 cities.
There might be a number of other reasons as well but the above are the ones which I focus on.