Daniel Tencer – The Huffington Post Canada

Economists are coming out with warnings that Canada’s real estate juggernaut is about to come to an end (Scotiabank’s Adrienne Warren is just the latest) and others keep fretting about Canada’s record-high household debt levels, but Toronto residents don’t seem to be listening.

Comment: Actually, only TD has come out with the most outlandish and unbelievable report on Toronto condos. It has been dismissed by many authorities. So this would be the second. It is not exactly a tidal wave of negative opinion – for once.

Home sales in the country’s largest metro area roared back to life in the first quarter of 2014, according to data from Realnet Canada, with total sales jumping 60% from the same period a year earlier. Condo sales were up 68% and low-rise homes up 51%.

Comment: They were never dead. Sales have been hot in maybe 50 of the past 60 months. And prices have risen in every single month. Are we trying to compare a hot spring to a less-hot winter again? Winter is slower than spring EVERY SINGLE YEAR. And I point this out every single spring. Sorry, wait, I just realized that they are quoting RealNet – which monitors NEW SALES. Not resale. Yes, new sales were slow last year, there were fewer new condo launches. This is not new, we have known about this for quite some time. New condo sales jumped 80% in January and March set a record for most new condo sales ever in a month. And unsurprisingly, there are tons of new condo launches.

And numbers from the Toronto Real Estate Board show the city’s housing market has passed a major milestone: It now costs more than $1 million to buy an average single-family home – $1,012,172 to be exact.

Comment: And now we throw resale numbers into the mix, just to confuse things. Comparing new condo sales for Jan-March to detached home prices for April 1-15 makes no sense. It is done only to cloud the issue and try to create a perception that is incorrect.

Prices for standalone homes soared by a stunning 19.2% in the past year. By comparison, condo prices were flat, up 0.2%, to an average of $386,874. These two markets appear to be diverging completely, with warnings of overbuilding in the condo market and warnings of a shortage of standalone homes. Even though sales and prices of single family homes are way up, total sales are actually below the 10-year average – there simply aren’t enough single family homes for everyone who wants one.

Comment: Yes, detached home prices soared, but that is because there are fewer new listings every month. So the pressure and competition for each listing only grows and grows. Not that it is a good thing, but there is a very definite and understandable reason for it. Condo prices may have only risen 0.2% in the first half of April, but they rose 6.0% in the previous 3 months. Choosing 2 weeks of data over 3 months of data is the worst example of cherry-picking. And yet new condo sales have jumped 68% and resale condos are up 7.6% in Q1. Can we stop with the “overbuilding” BS please? Cranes go up when 70-80% of a projects are pre-sold. Once the building is completed and registered, 96.5% are sold. And those sales rise ever year. And even if 3.5% go on MLS, sales on resale units are rising at more than double that rate. How is that overbuilding? One last one, with only 28,406 new housing units (house and condo) built in 2013 and at least 30,000 new households (up to maybe 50,000) being created, we are not even satisfying the minimum estimated demand for new housing stock. So again, please explain “overbuilding” to me.

A sharp steepening in price growth, like in Toronto’s standalone house prices, should raise concerns about a housing bubble. As this chart from BMO economist Doug Porter shows, bubbles tend to be marked by an unreasonable acceleration in price growth. Here, Toronto house prices can be seen rising very sharply before the housing bubble burst of the early 1990s:

Comment: But this chart shows 2 totally different events. In the late 1980s, prices jumped from around $160,000 in 1985 to around $350,000 in 1989. That is almost a 120% increase in only 4 years. The next rise starts around 1996 at $230,000 or so (according to the graph). It is now at around $440,000, part way through the year. That represents an increase of 91.3% over 18-1/4 years. So 2/3rds the growth in almost 5 times as many years. Not quite the same thing – look at the slope of the trend lines! You are trying to say that 30% per year is the same as 5% per year. Never mind the fact that the graph and data are provided by Haver Analytics, whoever they are. Historical TREB data shows that the average price in Toronto was actually $109,094 in 1985 and hitting a high of only $273,698 in 1989. Your numbers are WAY off. TREB also shows that 1996 had an average price of $198,150 and the average as of April 15th was $583,697. How can we trust a graph with data so incredibly WRONG? Even so, using the correct data, 1985-1989 saw prices rise 150.1% (even more drastic than the faulty graph) for an annual increase of 37.7% as compared to 1996-2014’s 194.6% jump, or 10.7% annually. Two different events, separated by almost 30 years, being illustrated with numbers that are not even close to correct. Right…

But in the case of Toronto’s standalone housing market, the recent price spike may just be the result of the increasingly severe shortage of new single-family homes.

Comment: Might? What else would explain it? Listings have fallen around 50% for detached houses in the past 2+ years. What else has changed during that time? Mortgage rates have remained the same.

Land use policies favouring high density development, growing suburban commute times and other factors are prompting developers to build townhomes and condos rather than single-family homes, and the number of standalone houses being built around the GTA is on a long-term downward trend.

Comment: Don’t forget demographic trends and a preference to living downtown as opposed to the suburbs. Builders cater to buyers, to what the consumer wants.

Toronto’s real estate board notes that, even at these price levels, the average household can still afford a mortgage on an average house – but, of course, they mean a mortgage on an average condo.

Comment: No, they mean the average property. They are taking the $583,697 average price, with rates in the 2.99-3.19% range. At the middle 3.09% and 10% down, the income needed is around $100,000. That is not a huge stretch for 2 people. Heck, the average income reported by CAAMP for Toronto mortgage applicants is around $122,000. So TREB is correct, the average person can afford the average mortgage on the average property price.

And that affordability depends on mortgage rates remaining at rock-bottom levels. As numerous economists recently predicted, with the U.S. economy on the rebound and Canadian fixed-rate mortgage rates dependent on U.S. bond yields, Canadian mortgage rates are likely headed up soon.

Comment: And they they just went down 15 points. And the Bank of Canada has promised to keep rates low into 2015. So no, they are not likely headed up any time soon.

And when that happens, we likely won’t be seeing any more 19% price hikes. And as BMO noted in a recent report, with Canada more dependent on real estate jobs than any other G7 country, a housing slowdown could be bad news for the economy.

Comment: It depends on how many – or few – new detached home listings we see over the next 12 months.

So make sure you can actually afford that mortgage when buying into Toronto’s million-dollar home market.

Comment: Um… that is kinda what the banks do. Canadian banks tend to only lend money to people they are sure can afford it. This is not the US!

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto real estate agent with Century 21 Regal Realty.
He did not write these articles, he just reproduces them here for people who
are interested in Toronto real estate. He does not work for any builders.
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