Canada Housing Bubble Talk Dismissed
Andrew Mayeda and Chris Fournier – Bloomberg
The head of Canada’s biggest bank and one of the country’s leading developers said the housing market is not in a bubble, even as one economist said Toronto is caught in a “condo craze.”
Comment: Yes, condo craze. Based on nothing but restrictive Greenbelt policies, opposition to sprawl, increased interest in urban living, hatred of commuting and more. Not that the rental market is now the condo market because there are no new rental buildings. Not that houses are expensive, forcing many first time buyers into more affordable condos. No, it is just some silly “craze”…
Canadian housing starts rose to the highest since September 2007 last month, led by multiple-unit projects, Canada Mortgage & Housing Corp. said yesterday. The annual pace of home starts rose 14 percent to 244,900, Ottawa-based CMHC said.
Participants at Bloomberg’s Canada Economic Summit in Toronto said talk of a housing bubble is overblown.
“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” said Gordon Nixon, chief executive officer of Royal Bank of Canada “Frankly, I’d like to see the rhetoric come down a little bit.”
Comment: I love this man. In a brotherly kind of way of course…
A residential real-estate boom in the world’s 10th-largest economy has prompted senior policy makers such as Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty to warn that Canadians may be taking on too much debt.
Comment: Sort of. They are also cautioning against borrowing to buy cars and TVs. The debt issue has more to do with consumer debt than mortgage debt.
Carney told lawmakers April 24 that high levels of household debt remain the greatest domestic risk to Canada’s economy. In an appearance before a parliamentary committee, he reiterated that a rate increase “may become appropriate,” and warned Canadian families to exercise “caution” with their debt levels.
Comment: Because mortgage debt is secured against a tangible asset. Credit card debt to buy a TV or fridge is not.
Carney has kept his key lending rate unchanged at 1% since September 2010 in the longest pause since the 1950s.
Comment: Not for long! The economy is booming, there is no reason to keep it so low any more. Watch for a 0.25% hike by this fall at the latest.
10 percent overvalued
Housing prices in Canada are probably about 10 percent overvalued, economist Paul Fenton said at the Bloomberg summit.
Comment: Based on what? I love these general comments with nothing to back them up.
There doesn’t seem to be a sense that there’s been overbuilding, and housing doesn’t pose a systemic threat to the function of the nation’s financial system, said Fenton, senior vice-president and chief economist at Caisse de Depot et Placement du Quebec.
Comment: There is no overbuilding in Toronto when we need around 50,000 new residences each year but are building less than 30,000.
The 244,900 housing starts last month released yesterday beat economists’ expectations. The highest forecast in a Bloomberg economist survey with 21 responses was a 222,600 rate.
Comment: So the “experts” were wrong about something else? Is anyone surprised by this?
“Wow. This report reflects unbelievable strength in Canadian housing starts, and all of the gain was in multiples again which reflect the ongoing condo craze,” Scotia Capital economist Derek Holt said in a research note.
Sales of new condominiums in Toronto reached 6,070 units in the first three months of the year, a record for the first quarter, market research firm Urbanation Inc. reported May 7. As many as 40 new projects with more than 11,000 units could come on the market in the second quarter, a trend that may cause inventory of unsold units to approach a record set in 2008, Urbanation said.
Comment: So the record for unsold inventory was set 4 years ago? That means it has gone down since then? Meaning there is no huge pile of unsold condos being added to every year? Why do people lead us to believe otherwise?
Condo builders “tend to be risk averse,” insisting that 70% of a project is presold and buyers put down at least a 20% deposit, according to Jim Ritchie, senior vice president of sales and marketing at Tridel, a Toronto-based real estate developer.
Comment: No, the banks that lend them the money for construction, they are the ones who want the pre-sales. And it can be 80% of units and 25% down for some projects.
“It’s all about managing risk,” Ritchie said. There’s a market for condos because average house prices in Toronto’s 416 area code are about $830,000 (for the average two-storey detached – you can get semis and towns for $300–350,000 as well), compared with $400,000 for a new condo (which average $360,000), he said.
Almost 60% of people buying condos in that area are either single or couples without children, said Ritchie, who said concerns about foreign buyers are overdone, given about 95% of purchasers are “locals who have social insurance numbers and local addresses.”
Comment: And they would know, new condo buyers have to provide photo idea and SINs to for tax purposes.
RBC’s exposure to the condo markets in Toronto and Vancouver isn’t “significant,” Nixon said. “Part of the reasons for that is firstly a lot of the condo buyers in those markets are cash buyers. At the margin there’s certainly a significant foreign component to them, and I think to some degree the banks are a bit slightly more cautious,” he said.
The increase in housing prices in Canada is unsustainable, said Finn Poschmann, vice president of research at the Toronto– based C.D. Howe Institute. It’s difficult for market participants to tell a bubble has formed before it has deflated, he said.
Comment: And the 6–8% average annual price increase we have seen for the past 16 years is also simply not a bubble, that is the main thing.
“The big question people ask is, is Canada’s housing market in a bubble? Our answer to that is no,” said Jim Murphy, chief executive officer of the Canadian Association of Accredited Mortgage Professionals. The association’s research suggests growth in mortgage credit is below average, he said.
Canada’s housing agency said yesterday there is no compelling evidence of a price bubble based on factors such as household income and interest rates.
“Clear evidence of a bubble is lacking,” Canada Mortgage & Housing Corp. said in its annual report. “CMHC continues to monitor very closely housing prices and underlying factors such as demographic and economic fundamentals and financial conditions across all major urban centers, including condominium markets.”
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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.