Toronto finds itself in a sur­pris­ing sit­u­a­tion: The econ­omy stalled, but house prices didn’t

Tony Wong – Toronto Star

What hap­pens if you had a reces­sion and hous­ing prices didn’t really go down?

That’s the sce­nario Toronto could be in by the end of 2009, as econ­o­mists scram­ble to revise forecasts.

Com­ment: Could find our­selves in? But prices are up 6% over last year, sales vol­ume is up 27% and year-to-date sales are up 2%. Are we not already in a posi­tion where the Toronto real estate mar­ket did not go down?

Toronto hous­ing econ­o­mist Will Dun­ning is fore­cast­ing that the aver­age price of an exist­ing home in the Greater Toronto Area will be $378,700 by the end of this year. His pre­vi­ous fore­cast was for prices to decline to $358,100, or about 5.6% from 2008. That’s in line with the esti­mates of about a 5% decline from most major hous­ing analysts.

“The fore­cast has been raised sub­stan­tially,” Dun­ning says. “For the past three months, resale activ­ity has been much stronger than I had been anticipating.”

A $378,700 price is spit­ting dis­tance of the $379,347 aver­age price recorded at the end of 2008. Dun­ning says this year’s aver­age price could sur­pass last year’s.

Com­ment: It already has. As of mid-August, the aver­age sales price was $385,603 for the year to date. That is 1.6% higher than the 2008 aver­age and 1.8% higher than the esti­mate. Guess the “experts” need to revise upwards yet again…

Under that sce­nario, prices would have increased every year since 1996 – a total of 13 straight years.

Com­ment: So small growth every year for 13 years… isn’t that the very oppo­site of a bub­ble? I remem­ber when every­one said there was a Toronto real estate bub­ble. Boy were they ever wrong. Cal­gary and Van­cou­ver were bub­bles – and look what hap­pened there! We did not have one here – and what do you know? Not a sin­gle neg­a­tive year since 1996. If that is  not tes­ta­ment to the strength of the Toronto real estate mar­ket, I do not know what is. And peo­ple call me a booster…

Not bad, con­sid­er­ing that con­sumers have been repeat­edly told this is the biggest eco­nomic down­turn in North Amer­ica since the Great Depression.

Com­ment: Guess that turned out not to be true, as well, eh? And where that even came from, I have no idea. The Great Depres­sion started in 1929 and lasted for years, into the 1930s and even 1940s in some places. We had 9 months of rough times. Hardly com­pa­ra­ble. I would think that those who per­se­vered through that hor­ri­ble time would be greatly offended that we even attempt to com­pare this to what they went through.

“These kinds of price increases are not what we expected at all,” says Sal Guatieri, senior econ­o­mist with BMO Cap­i­tal Mar­kets. “Given the eco­nomic back­drop, no one expected hous­ing to bounce back the way it has.”

Com­ment: I expected it. I pre­dicted it. But I am not an “expert” so it didn’t matter.

Those who remem­ber the pre­vi­ous reces­sion won’t soon for­get a hous­ing down­turn that lasted for seven years. Aver­age prices plum­meted from $273,698 in 1989 to $198,150 at the bot­tom in 1996.

Com­ment: Seven years? And we had a few months? Again, where the hell do peo­ple get off mak­ing these com­par­isons? Here we are, about a year after every­thing went wonky, and prices are up 6%. Last time, prices fell 38% over 7 years. Not quite the same sce­nario, ya think?

It is almost incon­ceiv­able to think this reces­sion may not see even one year of retreat­ing prices. But it’s possible.

Com­ment: Pos­si­ble? It has already hap­pened. Unless the bot­tom falls out in the next cou­ple of months – which it most cer­tainly will not.

“I guess if you make things afford­able enough, it will gen­er­ate demand.

“And all that impact on afford­abil­ity has been on the backs of lower mort­gage rates,” says Guatieri.

Com­ment: Not quite. If the econ­omy is not good, mort­gage rates go down. As the econ­omy improves, rates go up. But if the econ­omy is doing well, that means peo­ple have jobs and money. Which means they can afford higher mort­gage rates. Heck, 20-some-odd years ago, mort­gage rates were close to 20% (as peo­ple like Garth Turner like to keep remind­ing us) yet peo­ple were still buy­ing houses. So why would a small jump to 8% kill every­thing? Rates were at 8% 10 years ago and peo­ple still bought houses. Higher rates will sim­ply not hurt the real estate mar­ket, his­tory proves it.

Accord­ing to a Des­jardins Bank report released yes­ter­day, afford­abil­ity is dete­ri­o­rat­ing as aver­age prices rise in Ontario.

Still, the provin­cial mar­ket remained afford­able despite the increase in prices. The bank warns, how­ever, that “if this trend holds, the market’s jour­ney into afford­able ter­ri­tory will be short lived.”

Com­ment: What jour­ney into afford­able ter­ri­tory? Houses have always been afford­able, that is why we have a real estate mar­ket. Peo­ple didn’t just dis­cover buy­ing and sell­ing houses last Tuesday.

Guatieri calls the hous­ing cli­mate “bizarre” and wor­ries that some con­sumers may be stretch­ing them­selves to get into the market.

Com­ment: Why is it bizarre? Maybe the “reces­sion” was just not as bad as we were told by all the dooms­day­ers and naysay­ers. If every­one was broke and unem­ployed, they would not be buy­ing houses, sim­ple as that.

“You have to won­der (if) in two or three years mort­gage rates go back to nor­mal lev­els whether they will still be able to afford the prop­er­ties,” says Guatieri.

Com­ment: I hear this all the time, what exactly is a “nor­mal” mort­gage rate?

The rebound’s strength is even more sur­pris­ing, since the year began with sales down by 50% in Jan­u­ary. The mar­ket started to show pos­i­tive ter­ri­tory in May, with a 2% increase, then posted two con­sec­u­tive records, a 27% increase in June and 28% in July.

Com­ment: And then another 27% in August. Funny, though, the pat­tern above is the usual one. Sales are low in the win­ter and then get bet­ter through the spring, peak­ing in the sum­mer. Just like what we saw. But since there was a “reces­sion” going on, we had to read some­thing sin­is­ter into it. Could also be that peo­ple were scared by all the bad news and bad spin on nor­mal news, thus they waited. When they saw that things were being blown com­pletely out of pro­por­tion, they came out into the sun and started act­ing like nor­mal again. A lot of the sales increases came from the months with lower num­bers. I bet if we move some num­bers around, we would have a pretty nor­mal year.

Data for the first two weeks of August show that this year’s cumu­la­tive exist­ing home sales have sur­passed last year’s sales at the same time.

Guatieri says the bub­ble of the 1980s was dri­ven partly by spec­u­la­tors, while afford­abil­ity with double-digit inter­est rates was “stretched to ridicu­lous levels.”

Com­ment: That was a bub­ble. Prices pretty much tripled in some areas, in about a year. And with mort­gage rates in the dou­ble dig­its, it was a recipe for dis­as­ter. But with low rates and prices ris­ing a bit more than infla­tion, there is sim­ply no dan­ger now.

This time hous­ing prices are still grow­ing faster than income lev­els, but afford­abil­ity was not as stretched thanks to a low-interest-rate pol­icy by the cen­tral bank.

Most econ­o­mists think the party will have to slow at some point.

“Over longer peri­ods, growth of employ­ment is the crit­i­cal fac­tor, as it gen­er­ates a need to expand the hous­ing stock,” says Dun­ning. “With employ­ment hav­ing fallen since last fall, there is lim­ited need for new hous­ing activity.”

Com­ment: Except for immi­gra­tion and migra­tion. Toronto gains around 100,000 peo­ple a year from other coun­tries. Never mind peo­ple mov­ing within Canada. Those peo­ple all need some­where to live. And kids grow into adults and want to buy houses and con­dos. It is not just jobs that drive the hous­ing market!

Com­ment: Just remem­ber, the main point is that the news is good. Sales are up, prices are up. And there is no fore­see­able rea­son for that to change any time soon.

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