In Toronto, Montreal, Calgary and Halifax, prices are outstripping incomes.

Susan Pigg – Toronto Star

Canada’s housing market is not in bubble territory and faces “very little risk” of a downturn, according to a new analysis of eight major urban centres released Monday by the Canada Mortgage and Housing Corporation.

Comment: Thank goodness. I am SO happy to FINALLY see major institutions declaring that the real estate market is healthy. I have been saying it for years, but people need official reports to really believe.

Its chief economist cautioned, however, that the “very positive assessment” is based on a “backward-looking” examination of housing prices and underlying fundamentals in Toronto, Vancouver, Calgary, Edmonton, Ottawa, Montreal, Quebec City, and Halifax.

Comment: Obviously, you cannot use data that has not yet occurred in the future, now can you?

“When we do this kind of analysis … it assumes that the world of the future will unfold much like it did in the past and, of course, there are dangers about driving while you are looking in the rear-view mirror,” CMHC chief economist Bob Dugan told reporters Monday.

Comment: But there are no major planned changes that would make things different.

The House Price Analysis and Assessment Framework, a first for CMHC and which it hopes to expand over time to look at other Canadian communities, evaluates house prices against four risk factors: overheating demand, price acceleration, over valuation (pricing) and over building.

It found that, overall, Canada’s housing market appears to be relatively healthy, despite some “moderate risk of overvaluation” in major urban centres like Toronto, where wages have lagged house price growth.

Comment: “Risk” of overvaluation, which means it MIGHT happen. It does not say there actually IS overvaluation.

The federal housing agency does, however, issue a “cautionary note” for Toronto – and Montreal – warning that “the number of (condo) units under construction is elevated in those centres.”

Comment: Sure, because people want them. New condos in Toronto are 98.6% sold by the time they are completed. It would seem that demand and supply are pretty well balanced.

Overbuilding remains a big enough risk in those two markets that developers need to “hit the appropriate balance” and be cautious in going ahead with too many new projects before the unsold inventory has been tackled.

Comment: Toronto has unsold inventory – condos built but not yet sold – in the 1,000-unit range. Piddly as compared to the 55,000 under construction and almost the same number again in pre-construction. Yes, there are pre-construction units that are not sold, but that does not count as inventory. Those projects will be 70-80% sold by the time construction starts and likely close to 100% sold by the time they are completed.

“At the national level, other than a modest amount of overvaluation, we do not detect the presence of other risk factors such as overheating, price acceleration, and overbuilding,” said CMHC’s Dugan.

“Risk of overvaluation is most evident in Montreal and Quebec, but the trend is improving. A modest risk of overvaluation is also present in Toronto, Calgary and Halifax. Across the 8 CMAs examined, there is no overheating or acceleration.”

Comment: That bears repeating – “there is no overheating or acceleration“

The modest overvaluation in Toronto, while largely the result of the disparity between average incomes and average home prices, isn’t the only concern, according to the report.

(Resale prices – for houses and condos combined – hit an average of $587,505 in October, up almost 9% year over year.)

“The level of units under construction relative to population is near historical peaks – inventories need to be managed.”

Comment: And as noted above, inventory is a tiny amount as compared to the almost 100% of new condos that sell by completion.

But the report goes on to note that the number of completed, but unsold, condos across Toronto, as well as the rental vacancy rate, “are both below their historical averages.”

Comment: Around 1.4% and 1.8%, respectively. Which would indicated demand is VERY strong for both.

There are currently some 16,210 unsold units in condo projects in the sales, construction or occupancy stages across the GTA, notes Shaun Hildebrand, senior vice president of condo market research firm Urbanation.

Comment: But unsold inventory only relates to completed and unsold units. Pre-construction units are not generally included in that measurement.

That’s been dropping from the spring 2013 high of 19,394 as developers have stepped up discounts, cash-back and other incentives to ease the backlog to its current record low, said Hildebrand. The number of unsold condos dropped 11% in the third quarter of this year alone, he says.

Some 84% of condos now in the sales, construction or occupancy stages across the GTA have been pre-sold, Hildebrand added. That’s a record high. And developers have an average of more than two years to sell the rest before the project starts occupying.

Comment: Around 70-80% by the time the crane goes up and over 98% by completion. There are very few unsold new condos.

Toronto does have some notable upticks that reduce possible risk to the housing market, says the CMHC report. House price growth has been moderating since 2013, plus incomes are increasing, as is the contingent of 25- to 35-year-olds, key first-time buyers.

Comment: And immigration is staying strong. Never mind the change in preferences, downtown over suburbs.

Canada’s most-watched and debated housing market, Vancouver, rates as a “low risk” in the CMHC study of house prices relative to underlying demographics and economic impacts, such as unemployment and interest rates.

Comment: Nope. Same as hockey, Toronto is the most talked-about.

In what will surely come as a surprise to many housing watchers, CMHC finds that Vancouver prices are “supported by local growth in personal disposable income and long-term population growth.”

Comment: Obviously, or they wouldn’t be what they are. How people don’t understand that, I don’t know. This isn’t the US, banks here go over borrowers with a fine-toothed comb. If you don’t have the scratch, they don’t give you the money. Period. Thus, prices MUST be supported by incomes, there is no other way.

Calgary, considered among the “Hot 3” of Canada’s housing markets (the others being Toronto and Vancouver) also rated as a low risk, with any overvaluation simply a result of modest gains in personal income.

Comment: If the oil industry ever tanks, Calgary is sunk. Like the recent plunge in oil prices, how does no one see that as a problem in Alberta?

Dugan acknowledged, however, that the Canadian market continues to send “mixed signals”: While supply and demand have been largely balanced across the country since 2010, house prices have risen an average of 6.9%, more than triple the average 1.9% rate of inflation.

Comment: Yet, house prices are part of the inflation calculation. If real estate prices rose less, inflation would be lower. Low supply and high demand will keep house prices outpacing inflation.

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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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