Higher than expected home prices renew concerns of Canadian bubble
Gordon Isfeld – Financial Post
As home prices continue their steady ascent, the volume of debate over the too-hot or just-about-right market is also getting turned up.
Politicians and monetary policy-makers are warning consumers to tackle their debt loads now, while many analysts argue that is already happening and house prices are still in a healthy range.
Comment: It is happening, there is proof. Canadians, as a whole, are taking on less debt and are paying down what they have. Couple that with rising incomes and our debt-to-income ratio is falling. Just what the finance minister ordered!
Few are suggesting a market crash is imminent, but this week’s spate of strong housing data has renewed concerns the market is dangerously close to overheating and heading for a bubble.
The latest salvo came Thursday, with Statistics Canada data showing new home prices climbing 0.3% in March — the 12th monthly increase in row — and just above forecasts. When compared to 12 months earlier, prices were up 2.6%.
Comment: Wow, that rate of increase is actually 0.65% less than the long-term inflation rate. And exactly the same as the current inflation rate. That means prices have actually not risen at all.
The biggest gains in March were in the Toronto and Oshawa region, where prices were up 0.6% in March — due to favourable market conditions and increased demand — and 6.2% higher on the year.
On Monday, StatsCan reported housing-permit values rose 4.7% in March, way above expectations, and following a 7.6% increase the previous month. But it was Tuesday’s closely monitored new home construction report that really got tongues wagging.
Canada Mortgage and Housing Corp. said housing starts jumped 14% in April from the month before to 244,900 units. Most of that activity was once again in the frenzied condo sector.
Comment: And the warmer than usual weather would not have anything to do with that, would it? Not that builders could get a head start and begin more projects sooner because the weather allowed them to. Naw, more likely just another sign of the real estate apocalypse.
That report “led to more than a few gasps and coffee stains upon release, highlighting just how high the heat has turned up in certain markets,” said BMO Capital Markets economist Alex Koustas.
“That being said, the new home price index has been relatively well-behaved, reflecting more balance on a national level.”
Comment: So really, if we don’t twist the numbers, things are overall just fine. Uh huh.
Yet, some market watchers believe home prices are overvalued by as much as 15%, while others see the gains as moderate.
Comment: No one has any basis for their “overvalued” numbers. Why 15%? Why not 22%? Or even 8.2% The market is what the market is – free and open. Prices are set by 100s of 1,000s of buyers and sellers and realtors every year. There were 456,749 sales across Canada in 2011. With one buyer and one seller, each with their own Realtor, there were 1,826,996 people involved in the national real estate market last year. Almost 2 million independent opinions on what properties are worth. Thus, house prices are exactly where they should be, at market value.
“The [market] is still healthy,” said Laura Parsons, mortgage specialist at Bank of Montreal.
“Vancouver’s market is so much different than most of other markets, and [in] Toronto … new housing prices are up substantially but it’s because of a lot on condo development — and affordable condos.”
Comment: What? New housing costs are not up. In fact, new condos fell by 1% per square foot in Q1.
As for household debt, Ms. Parsons said: “I’ve never seen so much discussion around trying to save on costs and paying more attention to their debt load.
Comment: And it is working. People are reducing their debt load. Good news, end of story.
“I think if we really had to cut back on our budget every month to afford a mortgage, I think there’s room there.”
The Bank of Canada, which has kept its trendsetting interest rate at a near-record low of 1% since September 2010, says household debt remains the biggest threat to the domestic economy.
Household debt-to-disposable income is running at about 152.9%.
Along with Finance Minister Jim Flaherty, central bank governor Mark Carney has urged consumers not to get in over their heads because rates will eventually start going up.
Last month, Mr. Carney told the House of Commons finance committee that the average home price in Canada is now about 4.75 times people’s income, while the historic average is around to 3.5 times income. He cautioned Canadians to use “prudence and caution” with their family budgets.
Comment: Yet again, that ratio is flawed. People buy a house based on the monthly cost, not the purchase price. Without getting into the details, the average house in 1982 at the current mortgage rate would have cost around $7,100 in today’s dollars. The same average house at today’s rates is around $2,800 a month. That is the ratio that matters.
Contact the Jeffrey Team for more information – 416-388-1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.