Robin Wiebe – The Globe and Mail

Competing views of the Canadian housing market portray it as either 1) an overvalued bubble about to burst or, 2) only slightly overheated but having basically sound economic underpinnings, and thus likely to cool gently. The Conference Board of Canada’s new publication, Housing Briefing: Bubble Fears Overblown, lands in the latter camp.

Comment: And anyone who looks at the data and does not just spout crap to get their name in the paper knows it is the latter. How many years have the doomsayers called for collapse? Since around 2003 if my memory is correct. So they have been wrong for 11 years now. Maybe it is time to face facts and realize that things are simply going well. Why do we need bad news to sell papers? Good news is good, folks!

Mortgage costs, not just house prices, are the principal deciding factor for potential home buyers. This makes comparison of monthly payments to incomes and rents more relevant than similar comparisons using house prices alone. Slowly rising mortgage rates and a modest slowing in housing starts will gradually cool the housing market. But ongoing employment and population growth will continue to support housing demand.

Comment: THANK YOU!!! I have been saying that for years! Monthly costs determine affordability, not sale prices. Mortgage rates dictate monthly costs, which then dictate prices. You cannot compare income to price without the mortgage rate modifier.

Assessments that point to a housing bubble typically rely on two main indicators: The ratio of housing prices to apartment rents, and the ratio of incomes to housing prices. By both these measures, many markets in Canada do seem overvalued at first glance. However, this ratio doesn’t account for low mortgage rates.

Low interest rates since early 2009 have cushioned the impact of rising house prices, keeping the relationship of carrying costs to incomes and rents well within historical norms. For example, in Toronto, mortgage payments consumed less than 20% of average household incomes in 1993 and in 2013. Mortgage payments were roughly twice the average two-bedroom apartment rent in both years.

Comment: And the average Toronto property at the average mortgage rate in 2014 is within a couple hundred dollars of what it was in 1984.

In this context, Toronto’s affordability is mirrored nationally. The Bank of Canada’s affordability index has stayed virtually unchanged since the 2009 recession, and is actually slightly below its pre-recession level.

The Conference Board expects mortgage rates to rise over 2014, but not sharply, given Canada’s relatively slow economic recovery. This suggests that a slowly cooling housing market – a “soft landing,” rather than a “bubble popping” – lies ahead. It will take until 2017 or 2018 for mortgage interest rates to rise by about two percentage points.

Comment: And everyone forgets that interest rates are tied to the economy. They are low now beause the economy is sluggish. They actually dropped first back in 2011, after 9/11, when stock markets dropped. But if & when they do start rising, it will be when the economy rises. A rising economy takes people with it – more jobs and higher pay. So higher rates will have less of an impact, as people will generally be able to afford them. Go back through time, rising mortgage rates did not equate to sales falling off.

Moreover, the Conference Board’s current view is that more prudent mortgage underwriting in Canada than in the United States, headlined by the very small number of sub-prime loans here historically, has prevented the stockpiling of high-risk mortgages by lenders. Over the past two years, the proportion of mortgages in arrears has generally fallen across Canada. A relatively low proportion of arrears is likely to persist, since national employment is growing – albeit slowly – and interest rates are not forecast to spike.

Comment: Mortgage defaults have been in the 0.34-0.35% range for decades. Literally since the founding of th CMHC after WWII. Not like the US that saw some areas with 30% default rates following the 2008 financial scam.

If there were a downturn centred on markets in Ontario and Quebec, national resale prices would be expected to decline slightly. But none of Canada’s six largest cities appears significantly overbuilt by past standards. In general, housing starts are in line with demographic requirements. Nationally, and for each of six metropolitan areas (Toronto, Ottawa, Montreal, Calgary, Edmonton, Vancouver), the data show no obvious overbuilding, although Toronto is an important borderline case.

Comment: No, Toronto is not. With 30,000-50,000 new households being created every year in the GTA and only 28,406 new condo and freehold units built last year, we are not even keeping up with the minimum estimate. Never mind over building, I would suggest we are UNDER building. Especially with ever fewer freehold listings for sale, there is ever more pressure on new inventory to satisfy buyer demand.

Oversupply in Toronto’s condominium market remains a risk, largely because of an all-time high number of units under construction. Yet, Toronto developers seem unfazed by this volume. Condominiums are a logical choice for Torontonians who want or need to live downtown, and a tight rental market increases interest in condos. This analysis concludes that the Toronto market will ultimately cool and increases in the average resale price will slow, but a big price drop will likely be avoided.

Comment: Things may flatten, but prices will not fall. The rate of increase will fall, but we will continue to see overall positive annual price growth.

In short, steady employment and population growth will help offset the effects of interest rate increases, maintaining manageable housing demand. Thus, a soft landing for the Canadian housing market appears to be the most likely scenario.

Comment: I think you mean no landing. A hard landing would be a sudden collapse, a serious drop. A soft landing, to me, means a gradual slowing leading to decline. Simply slowing the rate of growth indicates to me no landing at all. Just small increases. Maybe we need a new term?

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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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