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Category Archives: Real Estate Bubble

Toronto’s record house prices to rise further by 2017

Slumping oil and improving U.S. economy could boost housing markets across much of province, economist predicts.

Susan Pigg – Toronto Star

Toronto’s record house prices could soar a further 17% by the end of 2017 as the lack of supply in the face of unrelenting demand continues to drive prices far beyond the rate of inflation, says the chief economist of Central 1 Credit Union.

Comment: Kind of what I have been saying for a while now.

Long-time housing watcher Helmut Pastrick says those who caution that Toronto’s market is in bubble territory and about to burst are based on “inadequate models” that ignore some key basics.

Comment: And they ignore the basic definition of a bubble. The rise has not been that rapid, there is no decline, it is not based on speculation.

“The principal drivers of home prices are market demand and supply fundamentals. Toronto’s population is growing and supply is limited. Prices will keep rising until the next economic recession, whenever that is.”

Comment: Thank dog someone gets it!

Toronto house prices
Barring any unforeseen global crises, that’s at least two years off, predicts Pastrick, who’s studied the housing market for 40 years, 18 years as chief economist with Credit 1, the umbrella organization for about 130 credit unions in Ontario and B.C.

Comment: Heck, even with the global crisis that began in 2008, Toronto real estate prices did not suffer. There were maybe 3 months of indecision, but that was it. And today’s low interest rates are a product of that almost-recession, which is feeding the current price growth. Financial instability following 9/11 brought interest rates way down, which is when this currenly cycle really got kick started.

Ontario housing markets, with the exception of Toronto, have largely underperformed since 2001. But that’s now likely to change in the face of the “economic seismic shift” of slumping oil prices that may be a drag on the Canadian economy but a boon for Ontario exporters and manufacturers, says the economic forecast being released Thursday.

He anticipates that Toronto home prices, which averaged $573,183 in 2014 could soar to $670,000 by the end of 2017. Ontario house prices, which averaged $430,984 in 2014, could hit $496,000 during the same time.

Comment: Easy. The average price across all housing segments in the 416 was $620,000 as of mid-March. Another $50,000 in 33 months? I would say it is certain.

Southwestern Ontario, and especially communities with a strong manufacturing base such as Windsor and Sarnia, are likely to see an uptick in jobs and economic growth which could play out in strong house sales and above-inflation price increases to the end of 2017, he adds.

Regional markets around the GTA — such as Kitchener-Waterloo, Barrie, Hamilton and the Niagara Peninsula — could also see a surge in sales partly as a result of Toronto’s tight market. That could translate into house price gains in the 16% range over the next three years, says Pastrick.

The Canadian Real Estate Association recently predicted that low oil prices could result in a 1.1% decline in national home sales through 2015, but a 2% increase in average prices.

Comment: But take Calgary and Regina out of that mix and sales and prices rise much more. And average is just that – and it includes 89% of the country that is NOT Ontario.

“Ontario’s housing market is poised to expand at a more robust pace in conjunction with improved economic prospects due to a faster growing U.S. economy, the weaker loonie, and energy savings from lower oil prices,” Pastrick says.

“Upward pressure on housing prices will continue, though it will ease later in this three-year forecast when listings come onto the market at a faster pace.”

Comment: IF listings come on the market faster. If they don’t, that $670,000 could be $700,000 or more.

That last part, however, may be wishful thinking. Toronto realtors have been anxiously awaiting a surge in listings for the last few years, anticipating that the increase in equity would encourage more homeowners to sell and move up, boosting the supply for first-time buyers who too often find themselves caught up in bidding wars that have further driven up prices.

But most have been staying put, citing fears they won’t be able to find an affordable replacement and the high costs of land transfer, real estate and other transaction costs.

Comment: Exactly. It is much easier to stay where you are than try to move. Why sell when you can’t find somewhere to buy?

Many have been opting to renovate and even expand existing homes instead, which Pastrick predicts could see renovation spending continue to grow at about 7% annually.

“Looking beyond 2015, higher interest rates are coming, but at a moderately rising pace.”

Comment: That is what people said last year. And the year before. Even now, a rather large 40% increase in mortgage rates wouldn’t even take us to 4%. That isn’t going to do a whole lot. June 2013 saw rates hit 3.6% or so, didn’t slow anything down at all.

What Pastrick is severely underestimating, however, is the fact affordability is severely stressed, given that house price gains have far outpaced wage increases the last decade, says Hilliard MacBeth, an Edmonton-based investment advisor whose book, When the Bubble Bursts: Surviving the Canadian Real Estate Crash, was released this week.

Comment: But as he pointed out, those models are based on incorrect data. Mortgage payments today are not that far off what they were 30 years ago, within $100 in inflation-adjusted dollars. Mortgage payments as a percentage of income have actually fallen from 34% to 31%. No one wants to talk about the real costs, the monthly payments vs. monthly income, because those numbers don’t support the doom and gloom scenario. I think we are all waiting for this fall, when Mr. MacBeth’s 50% price drop prediction is due… I hope he gives refunds to anyone who buys his book.

“The gap has been filled so far by people going further and further into debt. But at some point, people just can’t take on anymore debt, even if the banks and CMHC (through the Canada Mortgage and Housing Corporation’s insurance fund) work as hard as they can to make it possible for people to go further into debt.”

MacBeth believes the condo sector remains the most vulnerable to a downturn because of oversupply and warns that could contribute to as much as a 40 or 50% drop in house prices over time.

Comment: Oversupply? Right… when 98.6% of new condos are bought and paid for. When there are over 20,000 new condo sales in 2014. How about the 40,000-odd resale condo sales? Yeah, that sounds like it might turn around tomorrow.

That could happen in two very different ways, he stresses: A U.S.-style housing market meltdown triggered by a recession, or the route many housing bears have come to believe is the more likely scenario — slumping sales that result in a soft landing, where prices slow and even drop over time until wages can catch up.

Comment: The US housing meltdown was not caused by a recession, it was caused by fraud and criminal lending and investment practices. The resulting collapse of the housing market and many big banks is what caused the recession. If he doesn’t understand those basic fundamentals, he has no right to advise anyone on anything financial.

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.