January’s house price results, released yesterday by Teranet, revealed that Canadian house values continued their upward march, posting a new all-time high after registering 0.4% growth in January, with prices also up 4.5% over the year and 31% above their April 2009 trough:
In real terms, Canadian house prices also hit a new peak, with prices 21% above their April 2009 trough:
Price performance across the major markets was mixed, however, with solid growth recorded in Vancouver (+1.1%) and Toronto (+0.5%), whereas values in Montreal rose by only 0.2%. Price momentum is also strongest in Vancouver, whereas Montreal is relatively weak (see next chart).
For a number of years now, Canada’s housing market has been the strongest performing developed market, which has also made it the world’s most overvalued according to the Economist, the OECD, and Deusche Bank (see below table).
One of the reasons for the stronger price growth in Canada is that it is very open to foreign investors, which has led to a rush of “hot Asian money” (HAM) into markets like Vancouver and Toronto. According to Zero hedge:
“Canada, for example, is very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market far more easily than in Japan, with its closed system. “
Now the Canadian Government looks to be removing this pillar of support to the Canadian housing market, announcing that it will scrap its controversial investor visa scheme, which has allowed waves of rich foreigners (mostly Asians) to immigrate to Canada. According to the South China Morning Post:
Tens of thousands of Chinese millionaires in the queue will have their applications scrapped and their application fees returned..
The surprise announcement was made in Finance Minister Jim Flaherty’s budget, which was delivered to parliament in Ottawa on Tuesday afternoon local time.
…the scheme spun out of control when Canada’s Hong Kong consulate was overwhelmed by a massive influx of applications from mainland millionaires…
“For decades, [the scheme] has significantly undervalued Canadian permanent residence, providing a pathway to Canadian citizenship in exchange for a guaranteed loan that is significantly less than our peer countries require”…
All told, 59,000 investor applicants and 7,000 entrepreneurs will have their applications returned, the budget papers said. Seventy per cent of the backlog, as of last January, was Chinese, suggesting more than 46,000 mainlanders will be affected by yesterday’s announcements.
Household debt in Canada recently hit an all-time high of 164% of disposable incomes and the country’s unemployment rate is stuck at a stubbornly high 7% – above the United States. And with this crackdown on HAM, the odds of a Canadian housing market correction have increased.