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.

Com­ment: Yes!

“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 10^th-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?

Risk Averse

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.

No Bub­ble

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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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.
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