The Huffington Post Canada

Canada’s housing market is seriously back. Or so it would appear this month, anyway.

Comment: Seemed that way in July. Now August. And even a little bit back in June. Now we have the hot fall market ahead of us. Wanna put some money on it?

The country’s two most closely-watched housing markets – Toronto and Vancouver – posted jaw-dropping double-digit increases in sales in August.

The Toronto Real Estate Board reports a 21% increase in home sales compared to August, 2012, while Vancouver reported a stunning 52.5% jump in home sales during the same period.

Comment: That is after a 16% jump in sales in July, in Toronto (and 40.4% in Vancouver, for that matter).

Toronto house prices rose 4.4% during that period, to an average of $518,145, while Vancouver saw house prices drop 1.3% year over year, though that is a much slower rate of decline than was seen in earlier months, and prices are up 2.3% since the start of the year.

Other parts of Canada – particularly in the West – saw impressive home sales gains, with Calgary posting a 27.5% gain, Victoria posting a 20.7% gain, and Edmonton racking up a 9.9% gain.

Granted, these numbers are made more impressive by the fact that August of last year was particularly weak for home sales; it was just after Finance Minister Jim Flaherty implemented tighter mortgage lending rules.

Comment: Same as the dismal numbers in August 2012 were made more drastic because of the mortgage rule changes. But August 2013 and August 2012 have the same rules, the same playing field. So the numbers are actually pretty fair to compare.

“Canadians have fully brushed off last year’s mortgage tightening moves,” BMO economist Doug Porter said in a client note.

“Let’s just say the results are pretty much diametrically opposed to the calls of a housing market crash that so many pundits were calling for at the start of the year.”

Comment: Yup! And bang on what actual real estate people, like me, were calling for. I predicted this a year ago, check my words.

But Porter noted that “sales may have been juiced by people rushing to beat rising mortgage rates.”

Comment: Maybe, maybe not. We will have to see how the fall market goes, when old pre-approvals expire.

Fixed-rate mortgages have been rising in recent months, due to rising bond yields driving up the banks’ cost of lending.

A recent analysis estimated that just a 1% interest rate hike would cause home sales in Toronto to fall about 15%, with prices dropping 6%.

Comment: And yet, when rates rose 0.6% from June to August, sales and prices both rose, with August posting near-record numbers. By the analysis above, an increase in rates of 0.6% should have seen sales fall by 9% and prices by 3.6%. Yet, that did not happen.

The Bank of Canada, however, signalled this week that it plans to keep its key interest low for a long time yet.

But some economists are starting to worry Canada’s four-year-long run of ultra-low rates is distorting the housing market and setting it up for a fall when rates eventually rise.

Comment: But the most sales ever in a year was 2007, before the financial crisis and record low rates. Kinda disproves that theory, doesn’t it? And prices have been rising since 1996, almost 17 straight years now. Most of that time before this 4-year run of ultra-low rates.

The C.D. Howe Institute this spring urged the Bank of Canada to start raising rates immediately, before household debt and corporate risk-taking grew too far out of control.

Comment: But household debt has been falling. Not by much, mind you, but it has stopped rising.

But Prime Minister Stephen Harper’s advisers reportedly dismissed those concerns, arguing they went against the advice of other economists. They argued that raising rates while rates in the U.S. and elsewhere remained low would be bad for Canada’s economy.

The Economist last week declared Canada’s housing market to be one of the most “bubbly” in the world, arguing prices are overvalued by 74% compared to rental rates, and by 30% compared to incomes.

Comment: A UK magazine knows our real estate market better than we do? How are home values “over valued”? Please explain me that one. Since 1967, incomes have risen 108% and monthly mortgage costs by 75% – doesn’t that mean houses are more affordable now than they were 46 years ago? And Toronto house prices should sink to $125,000? Toronto average income in 2010 was (somewhere between $95,812 according to the City, $68,100 according to StatsCan and $40,704 according to the University of Toronto’s Cities Centre – so we take an average) $68,205. In 1970, the average Canadian wage (can’t find Toronto data, but it would be higher than the national average) was $5,683 in 1970 dollars, which is $34,125 in 2013 dollars. So, incomes have almost exactly doubled, an increase of 99.8%.

Houses cost $29,429 in Toronto in 1970, which is $176,718 today, vs. current prices of $503,094. That is an increase of 184.7% – certainly a larger increase than incomes. So, if take the same income rise and apply it to housing prices, we should get $352,729 – which means a price drop of 29.8%. Fine, but not the 75% they claim is needed. So sure, if you want to play with absolute prices vs. yearly incomes, then yes, housing has risen faster than incomes. But, if you take monthly payments, that $176,718 house in 1970 would have cost you $1,674 at the August 1970 mortgage rate of 10.40% – which was 58.9% of your $2,844 gross monthly income. Today’s $503,094 house at 3.54% costs $2,396 – 42.2% of your $5,684 gross monthly income. Mortgages could rise to $3,348/month to be equal to what it cost in 1970.

So how is housing “over valued” again? I think The Economist needs to stick to reporting on their own country.

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

Laurin Jeffrey is a Toronto Realtor 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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