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Tag Archives: td bank

Home prices 10% overvalued, TD estimates

The Canadian Press

Canadian home prices are likely about 10% overvalued given the expectations for rising interest rates, TD Bank said in a report Monday.

Comment: At least there is finally an explanation of “over valued”. Even if it makes no sense. How are prices today evaluated based on what might happen in the future? Using that same argument, you could make the case that houses are way UNDER valued because inflation will cause everything to rise in price by 50% by 2024. Today’s prices as compared to what gas might cost in a decade makes about as much sense.

Toronto Real Estate Prices
However, the bank also noted that the overvaluation in markets like Toronto, Vancouver, Montreal and Ottawa is likely more significant than in others across the country.

“These markets will likely feel the pinch from modestly higher interest rates over the next two years more so than others,” TD economist Diana Petramala wrote in the report.

Comment: Maybe. We all heard that in the summer, when mortgages went up 0.60%. But then the market just kept going, rising even. Then everyone clung to the faulty theory that interest rate guarantees were driving the market. Then the last rate guarantee came and went in late October and the market kept on chugging. I think we all need to come to grips with the fact that the Toronto real estate market, at least, is driven by lack of supply and lots of buyers, many acting with more emotion than logic. Interest rates do not factor as much into it as we may have thought.

She noted that Montreal, Quebec City and Ottawa have been flooded with an overhang of inventory of unsold condos.

Comment: Flooded? Montreal has around 1,876 unsold condos – how is that a flood? There are 1,934 unsold condos in Vancouver. While yes, there are only 15,000 condos being built in Montreal, it means that 87.5% of their new condos are sold. Context…

“Home prices have weakened in the second half of 2013 as a result and we expect that softness to persist in 2014,” Petramala said.

Comment: House prices have weakened? Rising by 10% is weakening?

“Toronto is poised to follow their lead, as the number of new condos scheduled to be completed in 2014 and 2015 is elevated relative to history.”

Comment: The number being built is elevated relative to history. Demographics have changed, the past 10-20 years have seen a major shift from the suburbs to the city. Add to that the lack of new rental construction and we have 2 major reasons for condos in Toronto. So, yes, things are different now than they were in the past, but so are a lot of things. We use cars instead of horses, we don’t churn our own butter, we have smart phones, etc. Everything changes folks!

The Canadian housing market and worries about a real estate bubble have been key concerns for policy-makers for several years. Recent indicators have suggested the market may be headed for a soft landing instead of a bubble bursting, but concerns have persisted.

Comment: Finally everyone sees reality and notices that there is NO evidence for a bubble at all.

“Our forecast is consistent with this imbalance unwinding gradually over the next few years through a combination of moderate income growth and a modest home price correction,” Petramala wrote.

“While 2014 is likely to see stable prices on average, prices are expected to edge down by 2% in 2015-16 as the over-building challenge increasingly weighs on the market and as borrowing costs grind higher.”

Comment: I will go on record right now and say that prices will not fall in 2015 or 2016. Not nationally and certainly not in Toronto. And overbuilding… again… Not possible, not when some 59,000 out of 60,000 new condos being built in Toronto are already bought. Okay, maybe 1,000 extra are being built, I will grant you that. But over the 3 years (likely more like 4 or 5 years) it will take at a minimum to complete those condos, there will also be 250,000-260,000 resales. So, in Toronto, we are talking about 1,000 out of 320,000 as being a problem. Just think about that for a minute. This is what the “experts” and economists are crying wolf about.

The Canadian Real Estate Association reported last month that sales through its multiple listings service totaled 457,893 homes for 2013, up 0.8% from 2012.

The national average price for homes sold in December was $389,119, up 10.4% from the end of 2012. Excluding Greater Vancouver and the Toronto region, the year-over-year increase was 4.6%.

Comment: And that trend is going to reverse, from +10% price growth to -2% by the end of next year? Uh huh…

The TD report noted that overvaluation can be measured in several different ways with vastly different results.

“The home price-to-rent ratio points to an overvaluation of 60%. However, this measure is skewed by rent controls. It is difficult to know whether prices are too high, or if its rents that are too low,” TD said.

Another indicator, the home price-to-income ratio suggested overvaluation as high as 30%, but TD said that depends on how income is defined and what is included.

Comment: Sure, you can measure many things in many different ways and get many different results. Compare price to income, monthly mortgage to monthly income, gross income or net income, mortgage rates to savings interest, annual rent to price, monthly rent to monthly mortgage payments, etc. Who is to say which one is right? I always use the simplest measure. Going back 30 years, with then-average prices and mortgage rates, adjusted for inflation, results in a monthly mortgage payment around $2,200 whereas today it is around $2,400. Monthly costs have risen 9% while incomes have risen around 50%. Thus, homes are more affordable now than they were a generation ago. And thus they cannot be over valued. Heck, with average rents for 1-bedroom condos in the $1,800 range in Toronto, buying seems to be an affordable option.

“Our preferred index of assessing housing overvaluation is affordability — the percentage of income an average household would have to devote to mortgage payments if they purchased an average priced home and took out a conventional mortgage,” the report said.

“While interest rates are not likely to return to their historical norms, the current low level of interest rates is also not sustainable. Looking forward, we expect a modest increase in interest rates.”

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.