Canada's Housing Market Faces Reality Check: Reluctance to Accept Lower Valuations Stifles Sales
Internal government documents reveal a challenging housing climate in Canada. A recent real estate conference highlighted a reluctance among Canadians to acknowledge declining property values, hindering sales activity across the country. This disconnect between seller expectations and buyer realities is impacting transaction volumes, creating a sluggish market.
The "Politeness" Problem: Valuation Disconnect in Canadian Real Estate
Bryan Reid, executive director of MSCI Inc., observed a reluctance in Canada to accept the new economic reality of lowered vacancy and traffic impacts on asset values. This resistance, he argues, is stifling sales. Reid noted that owners often believe their property is worth more than buyers are willing to pay, anticipating worst-case scenarios.
"I was joking, but I do find Canadians very polite... I would say this is something we have seen globally. We track 35 international markets, and price discovery has been very hard." - Bryan Reid, MSCI Inc.
This disconnect leads to fewer transactions and a "vicious cycle" where the market struggles to normalize. Reid also pointed to the practice of "extend and pretend," where lenders prolong debt obligations instead of foreclosing on properties.
Global Trends and the Impact on REITs
John Worth, executive vice president of research at the National Association of Real Estate Investment Trusts (REITs), noted similar valuation challenges south of the border. Publicly traded REITs are trading at significantly lower implied values than the prices private property owners are asking. Julian Schonfeldt, chief investment officer of Canadian Apartment Properties, expressed frustration with the "politeness" surrounding appraisals, which often lag behind market realities.
Schonfeldt stated that appraisals based on outdated conditions are hindering trades, with buyers and sellers unable to agree on realistic prices. He further commented that appraisals adjust upwards quickly when markets rise but remain stubbornly high during downturns, leading to a decline in liquidity.
Navigating the Market: The Perspective of Healthcare REITs
Mike Brady, president of Northwest Healthcare Properties, Canada’s largest medical office REIT, believes his company's publicly traded shares trade at a discount to their net asset value. This suggests that the market is not fully reflecting the underlying value of their real estate holdings.
Decline in Transaction Activity
Transaction activity in Canada’s real estate markets has significantly decreased since its peak in 2022. In that year, commercial property transactions valued at $5 million or more across Toronto, Vancouver, Montreal, Calgary, Ottawa, and Edmonton exceeded $50 billion.
