BNN.ca Staff

Economists at TD Bank say Canada’s real estate market is set for a pullback, led by the country’s two hottest markets, Toronto and Vancouver. A new report from TD predicts resale activity will fall by 15.2% and average prices will drop by 10.2% over the next two years.

Comment: Sales activity is already down, has been for a while. It has to do with fewer listings, not a problem with the market. This is one of the main drivers of price increases. Low inventory means a sellers market and more bidding wars. Thus, prices rise quickly. If inventory stays low and sales activity is down, then I do not see how prices can drop. The inverse has proven to be true year after year.

“A combination of more subdued job and household income growth, rising interest rates, the recent tightening in borrowing rules for insured mortgages and fewer first time home buyers are expected to be the chief culprits behind the slowdown,” TD says.

Comment: The tighter mortgage rules do not affect the average person. If down payment minimums are pushed to 10%, that will make a difference. But the past couple rounds of changes have done nothing. In fact, they have spurred the market as people go scared and jumped into buying without knowing what the changes meant. Many mortgage brokers stoked the fears, which added to it. They did nothing to slow things down.

Vancouver’s real estate market will fare the worst in the next two years. TD predicts a 25.4% peak-to-trough decline in sales and a 14.8% pullback in prices by 2013.

Toronto home prices will fall 11.7% by the middle of 2013.

Comment: Starting when? Prices are still rising as I type this, when is the increase going to begin to slow down? When will it level out at 0%? When will it begin to drop? We have less than 24 months to see this drop. But need a benchmark to measure the drop against. Is it against prices right now? Even if so, that means that the current average of around $512,450 for the 416 will drop to around $452,000. That just takes us back a few years. This is not a crash by any means, nor a bubble popping. Let’s just be straight about that. Heck, I would love for prices to drop 10%, that would help my business immeasurably. I just do not see it happening.

But within the real estate sector, condo prices will fall more sharply than those of single family homes, the report says.

Comment: Easy to see, they are being built all over the place. There are almost no new houses being built in the 416. Though I see condo prices leveling off, not dropping. And I see house prices continuing to rise. As I have said many times, the only brakes I see coming are the triple-threats of interest rates/starter home prices/boomer house prices. When rates get high enough (not saying they will any time soon) and 500sf condos hit $400,000 to start, combined with children of baby boomers not being able to afford their parents’ homes. When 2 or 3 of those things happen, then things will slow down. You need the interest rates to make carrying costs high, starter condos not being worth their price in the eyes of first time buyers, plus move-up homes priced too high for most. That slows down the bottom of the food chain, the middle and the top. Only that will slow the whole thing down. It is not as simple as saying rates will rise, or that there are too many condos being built. You need to understand what drives the market and allows it to function. It is a food chain. Take out a couple of major components, and the whole food web collapses. But you need to know why certain segments are vulnerable and what the triggers are. Shouting from the rooftops is simply fear mongering and does no one any good. Give reasons, sound rationale, that is what good arguments are made of.

“Increasingly, Canada has become a tale of two markets,” the authors write. “On one hand, there is the multi-residential component, which tends to be more prone to sharp up cycles and down-cycles. This is in contrast to the singles component that is usually less volatile.”

The report highlights the growing trend of investors focusing on the real estate sector in order to offset low returns from interest-bearing assets. But the better-than-market returns on real estate may be coming to an end.

“Looking ahead, the economics in favour of investment properties are likely to become less attractive, particularly in the condo segment,” the authors write.

Comment: Not necessarily. As long as investors are buying condos with 25-35% down, their carrying costs are low. Put tenants in for 10 years and they have an asset that is essentially paid off. That is still very attractive. They are not buying to flip as much any more, they are listening to the old “buy, hold and prosper” mantra.

And while many economists and the Bank of Canada warn that one of the biggest threats to the real estate market is higher interest rates, the economists at TD say other factors should also be seriously considered.

“In our view, a disruption in employment in Canada due to an unanticipated global shock is probably a higher risk scenario than a spike in interest rates at this stage.”

Comment: And what “global shock” is going to disrupt our employment market? The economic crisis sure as heck didn’t do anything. What else is going to happen? We have sovereign debt crises in many Euro countries – isn’t doing anything to us. Civil wars, terrorism, general unrest. All been going on for years without hurting us. This is even less likely than interest rate hikes.

The report by TD comes on the heels of growing concern about the country’s real estate sector. Mark Carney, Governor of the Bank of Canada, recently warned in a speech that certain segments of the country’s real estate market are showing bubble-like characteristics. In Vancouver, the current average home price is almost 11 times the average household income.

Comment: Not even I can argue that Vancouver real estate is way out of whack. They are about double what we are here in Toronto – but it has no effect on us in any way. Calgary spiked and crashed without most Torontonians even knowing that it happened at all.

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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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