Jason Heath – Finan­cial Post

On aver­age, a home in Canada costs 84% more than in the United States right now. The national aver­ages are $372,762 at home ver­sus $203,100 south of the 49^th par­al­lel. One might argue that some­thing has got to give.

Com­ment: Why? There is no con­nec­tion between their real estate mar­ket and ours. That is like say­ing that San Fran­sisco house prices are well over $1 mil­lion while Win­nipeg is $228,000 so the price of cheese has to change. There is no con­nec­tion whatsoever…

By ana­lyz­ing hous­ing starts in Canada, we can get a good indi­ca­tion of future trends in real estate. Warm weather through­out most of Canada was cred­ited with being the cat­a­lyst for a very strong month of March in new homes. April was expected to be lack­lus­tre, but those expec­ta­tions were blown out of the water with 244,900 hous­ing starts last month, com­pared to an esti­mate of 204,000. This was the best month in about five years, well prior to the onset of the 2008 reces­sion. These num­bers have some ques­tion­ing the sus­tain­abil­ity of starts as well as elic­it­ing fur­ther calls for a hous­ing bub­ble here in Canada.

Of par­tic­u­lar inter­est was that nearly two-thirds of new homes last month were mul­ti­fam­ily units, which includes con­do­mini­ums — a 27% increase year-over-year on a sea­son­ally adjusted basis.

Com­ment: Amaz­ing, peo­ple across Canada are look­ing for hous­ing den­sity, they want to live in urban cen­tres as opposed to sprawl. Not shock­ing. And with land val­ues ever increas­ing, devel­op­ers would bet­ter afford a small plot of land and build upwards. And prices in gen­eral are high, first time buy­ers can afford con­dos.

Cana­dian hous­ing also topped a recent global list pub­lished by the Econ­o­mist for 12-month price change, increas­ing 7%, while rank­ing high on a com­par­i­son of home prices to both rents and aver­age incomes. Over­all, the Econ­o­mist sug­gests that Cana­dian homes are 54% over­val­ued rel­a­tive to a 19% under­val­u­a­tion in the U.S.

Com­ment: Because we have one of the only economies not in the toi­let right now – that is a major rea­son. And com­par­ing rents and incomes to prices is moot, as I say every week. Monthly car­ry­ing costs are what mat­ter. And the aver­age house at the aver­age mort­gage rate – in Toronto – is around $2,200/month. Go back 30 years and it was $7,100 in 2012 dol­lars. And $2,200 is about the aver­age rent in Toronto for a 2-bedroom condo or apart­ment. Which means that hous­ing is actu­ally quite affordable.

So clearly it doesn’t take a sta­tis­tics degree to read the num­bers and unequiv­o­cally declare the Cana­dian hous­ing mar­ket is over­heated and in par­tic­u­lar, the condo mar­ket, right? Wrong.

Com­ment: Very wrong.

First off, CMHC’s recently released annual report stated: “Clear evi­dence of a bub­ble is lack­ing [and we] con­tinue 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.”

Fur­ther­more, aver­ages can be deceiv­ing and may not be rep­re­sen­ta­tive of a par­tic­u­lar local mar­ket. A lack of sup­ply in posh parts of the Greater Toronto Area, for exam­ple, has been dri­ving bid­ding wars and push­ing prices con­sid­er­ably higher in some neigh­bour­hoods. Per­haps peo­ple are keen to lock in today’s low mort­gage rates and are will­ing to buy a house in their desired neigh­bour­hood regard­less of the cost. In the short run, this dri­ves up aver­age prices. In the long run, does this really matter?

Com­ment: Not that much, prices rise for­ever, essen­tially. That is why gas is no longer $0.42/litre and choco­late bars are over a buck.

The big ques­tion based on Canada’s rel­a­tively high prices and April’s enor­mous inven­tory of new con­dos is whether the condo mar­ket is really expe­ri­enc­ing a bub­ble? One of the key con­sid­er­a­tions for the pur­chase of any home has always been loca­tion. And loca­tion is one of the main rea­sons the condo mar­ket is not in a bubble.

Com­ment: Enor­mous inven­tory of con­dos that are 95% bought and paid for.

What are many Baby Boomers going to do in com­ing years? Many will be sell­ing the two-storey houses where they raised their fam­i­lies and buy­ing con­dos, both for lifestyle rea­sons and also to bank some money to fund their retirement.

Com­ment: Such a rea­son­able thought!

What are many young fam­i­lies going to do in com­ing years? If they want to live in Canada’s big, expen­sive cities like Van­cou­ver, Toronto and Mon­treal, they’ll do what’s been done in the likes of New York, Lon­don and Tokyo for years — they’ll buy a condo.

Com­ment: So rational!

What are many new immi­grants going to do in com­ing years? In recent years, about 70% of Cana­dian immi­grants end up in the big three — Van­cou­ver, Toronto and Mon­treal. And they don’t buy houses in the sub­urbs. They rent con­dos in the city, so they can be close to jobs, resources and cul­tural cen­tres until they are established.

Com­ment: My dog, that makes so much sense!

Demo­graph­ics (Baby Boomers), fam­ily finance (big city hous­ing afford­abil­ity) and global mobil­ity (immi­gra­tion to the world’s new “Amer­ica”) make con­dos the loca­tion of choice for tomorrow’s Cana­dian home buy­ers. I live in a big house in the coun­try, north­east of Toronto, so con­dos aren’t for me. Am I sell­ing my rural house to buy a condo in the city? No. But prices of goods and ser­vices, homes included, are all about sup­ply and demand. There­fore, my feel­ing is that big city condo val­ues will con­tinue to rise in gen­eral and that house prices in some urban areas will fall as a broad trend, with aver­age home prices across the coun­try poten­tially flat in the years to come.

Com­ment: Oh man, he speaketh such truth!

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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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