By Paul Vieira
OTTAWA -- The U.S. may be experiencing its biggest housing boom in decades, but one country has been outpacing its peers in home-price growth: Canada.
Just like in the U.S., the U.K., Australia and elsewhere, Canada is experiencing a housing craze fed by the Covid-19 pandemic and the demand for more space, rock-bottom interest rates, and demographics, with millennials moving into their prime-buying years. Yet Canada has seen a more dramatic price run-up than all Group of Seven countries. According to housing data collected by the Federal Reserve Bank of Dallas, nominal house prices in Canada rose at an annual rate of about 16% in the fourth quarter from the previous three-month period, outpacing the U.S., the U.K. and elsewhere.
While in the U.S. there are few concerns about a bubble or a 2008-style crash, that's not the case in Canada, where some analysts and economists worry about real estate's outsize role in the country's economy that could be exposed in the next downturn. Canadian housing as a share of gross domestic product was 9.3% as of the fourth quarter of 2020, up from 7.5% a year earlier and from 6.6% a decade ago. In the U.S., housing is 4.6% of GDP, and the U.S. level at the height of its housing boom reached only 6.7%, according to data from BMO Capital Markets.
In addition, starting in the third quarter of last year for the first time since data were collected in the 1960s, Canadian investment in real estate outstripped business investment in nonresidential structures, machinery and equipment as a share of GDP. While money is going into real estate, economists point out that houses don't produce the goods and services to meet domestic and foreign demand, and expand an economy's long-term potential.
Real estate in Canada has become "just one giant consumer durable," akin to a car or a home appliance, said David Rosenberg, an economist and head of forecasting firm Rosenberg Research.
Economists add that overinvestment in housing is a drain on people's savings that might otherwise be directed into entrepreneurial activity. High home prices also reduce the share of income available for consumption, squeezing corporate margins further.
"There is a misallocation of capital -- essentially money is going into the wrong things," said Karl Schamotta, chief market strategist at Cambridge Global Payments, which helps companies manage foreign-exchange holdings.
Business investment per worker in Canada badly lags behind the U.S. and other large economies that are members of the Organization for Economic Cooperation and Development, according to research from the C.D. Howe Institute, a Toronto think tank. That's because investment tends to flock to where returns are plentiful and reliable, and right now in Canada, Mr. Schamotta said, that's real estate.
John Pasalis, president of Toronto real-estate brokerage Realosophy Realty, says he has been "sounding the alarm" on a housing bubble in the suburbs and exurbs surrounding Toronto, where prices have shot up over 30% in just eight months.
The boom is now hitting farther afield than the run-up in 2016 and 2017. An area where it is boiling now is Ottawa, the capital. House prices have climbed by about 25% in a year, fueling bidding wars that were once unheard of.
"The expectations for this market are just crazy right now," said David Gourlay, who sold a townhouse in November for nearly double the purchase price seven years ago and upgraded to a detached home in western Ottawa to accommodate his wife, daughter, newborn son and dog. He said for sellers in this market, "you have to decide: How much more do you want over your list price?"
But buyer Emma Cormier was downbeat about her nearly yearlong home-buying quest. About two weeks ago, she and her partner offered 50,000 Canadian dollars, equivalent to about $40,000, more than the asking price of C$380,000 for a two-bedroom home in the Ottawa area. The house sold for C$601,000.
"We absolutely had no chance," said Ms. Cormier, a 31-year-old project manager.
But this past weekend, Ms. Cormier's luck turned. She and her partner bought a four-bedroom house about 37 miles southeast of the capital, with enough space for her two dogs to roam. "It's unheard of right now that we only had to offer C$40,000 above asking," she said of her purchase.
Mr. Pasalis said Canada's fiscal and monetary policies have encouraged the ramp-up in real-estate spending. While governments around the world last year doled out roughly $12 trillion to minimize the economic damage from restrictions in place amid the pandemic, Canada has been especially generous, with spending that accounted for roughly 19% of its total economic output. Government outlays during the pandemic helped lift after-tax household income last year by 10%, versus 2019, according to Statistics Canada.
The country's central bank has indicated it believes monetary stimulus will need to remain in place, and the federal Liberal government is also contemplating a fresh fiscal stimulus, of about 4% of GDP or C$100 billion.
Robert Asselin, senior vice-president of policy at the Business Council of Canada, a lobby group, said higher house prices have been one of the unintended consequences of the government's aggressive fiscal policy. He said he wants the government to pivot from stimulus to measures that attract business investment.
"The economy needs productive investments," he said.
Bank of Canada Gov. Tiff Macklem said last month that there were early signs of "excess exuberance" in the country's housing market and that officials would be monitoring trends closely. A spokesman for Canada's finance department said officials there were also keeping tabs on the "health and stability" of the housing market.
Sal Guatieri, economist at BMO Capital Markets, said housing in Canada has been largely affordable outside some major cities. But that's changing now, he said, given the current price runup outside of urban centers.
"There is an imbalance in the economy," he said. "An unhealthy imbalance."
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
03-24-21 0916ET
