It has been widely debated for years whether the Greater Vancouver and greater Toronto real estate markets will endure a widespread correction. Unless investment and lifestyle mentalities change significantly, they will not.
(A) People keep wanting to move to these places at any cost.
e.g. Hippies in Vancouver who just want to smoke weed and work at Starbucks. It’s not uncommon to meet people nearing or into their 30s still riding the bus in the rain but they will pay $2,000/month in rent, or ask Mom and Dad to pay for their $550,000 shoebox condo.
In West Vancouver a little while ago the average home price was $3.5M, but average household income around $83,000. These people are bred from old money, work as just something to do, and will just stay there. The region of greater Vancouver average home price is around $650,000- but average household income around $65,000. It doesn’t make financial sense but people will stay at any cost. They are the type to tell you money does not matter. This keeps the demand for housing up.
(B) Seeing homes as investments rather than their intended purpose- as roofs over their heads
Cash-on-cash returns on many properties in GTA, GVA, are not very good after factoring in illiquidity, maintenance, high property taxes, and high transaction costs. In GVA some people pay $10,000-20,000+ a year in property tax alone. We talk about how something like 15% YoY is crazy but that’s before deducting any of those aforementioned costs. Afterwards, there are many equities that will net you similar returns.
i.e. Some people view real estate as simply another stock, but one that they can actually touch.
Real estate is also less volatile (outside widespread market corrections, where aside from gold mostly everything else also depreciates) compared to things like stocks. Or if it is, the information is not as transparent. The average person is not very disciplined or financially literate, and will simply click “SELL” when he/she wakes up to see a significant portion of the portfolio decline by a couple percent. Even if a given house does get worth less in one month compared to another, he/she probably won’t notice. Lack of volatility is something a lot of people will pay for.
And there you have something else people will pay for- tangibility. Psychologically, something you can touch is more pleasing than something you cannot.
There is a lot of financial nonsense in the investing world and a common one is people accepting a lower return for something that they can touch or follows a more linear appreciation curve.
People just park their money in these places as an avenue of diversification away from equities, but the market will look for “adequate” returns.
Now is it stupid, IMO it is. But the average person is not very bright, disciplined, or inclined to do their research, for that matter.