Public Radio International

If you haven’t been to Toronto in a while, you might not recognize the place.

The skyline is starting to look a lot like Manhattan. And it’s not just the new buildings that resemble New York. So do the housing prices.

Comment: Come on, we are pretty far from NYC prices.

Real Estate agent Kevin McCarthy shows off “Museum House,” one of Toronto’s many new luxury towers. A 2000-square foot, two-bedroom and den suite is listed at $2.1 million.

“The finishes are of the highest quality. Features such as every suite has direct elevator access, and you step out your front door, and there are world class dining, and shopping, and theater, there’s everything here,” McCarthy said.

Good living… if you can afford it. The penthouse goes for a cool $12 million — though it is pretty awesome. McCarthy says apartments like this haven’t been staying on the market long.

Amy and Chris Poole are looking for something a bit more modest. They’ve been on the home hunt since October and are currently living in a small rental with their two-year-old daughter. Most of their possessions are in storage.

“This is not our furniture, this is a furnished executive rental,” Amy said. “We want our stuff, we want to unpack our belongings. We want our home, we want to plant our feet.”

The Pooles have lost out on four offers and backed out of three others. They say competition at open houses is so intense they’ve seen things get physical. Chris described a recent open house they attended.

“The listing agent is backed into the corner by the fireplace, and somebody is standing there being quite loud saying, ‘I’m going to work with you, I’m going to make sure we get this property, whatever it takes, 120, 130 percent over asking, I’ll do it,’ just to try and intimidate everyone else,” he recalled.”

Amy said that was the last open house they’ve been to.

“You just walk through and everyone is sizing each other up, giving each other bad looks,” she said.

Toronto prices are being driven by a perfect mix of factors — record-low interest rates, lack of inventory and a stable Canadian economy. The Canadian dollar has appreciated to the point where it is almost exactly equal with the American dollar.

Chris says he’s not willing to pay above a certain amount for a three-bedroom place. He and Amy are uncomfortable when I asked how high they’re willing to go. But Chris admits it’s over a million dollars, just a bit.

That’s a lot of money. And Chris is worried he’s potentially investing in a bubble, a bubble that could pop like the U.S. housing market did in the last recession.

Comment: Seriously. One more mention of the word “bubble” and I am going to have an aneurysm. With price appreciations averaging around 4% for the past 20-25 years, it is hardly a bubble. When prices spiked 127% in little over a year in the late 1980s – THAT was a bubble.

Home prices in Toronto have appreciated about 85% over the past decade. The market took a short, moderate dip in 2008, but has marched steadily upward since then.

Ask economists and housing experts where they see home prices heading in the next few years though and there’s no consensus.

“My forecast is, this year, probably price growth of 2% or 3%. 2013, probably a price decline of about 4%,” said Craig Alexander, chief economist with TD Bank.

Comment: Is that for Toronto or Canada as a whole? Those sound like national numbers to me. With Toronto prices current at around 10% annual appreciation, predicting that to fall to 2% in the next 6 months is pretty dumb. And to have that trend reverse by 14% to actual negative growth next year? I don’t think so…

“We’ve penciled in around 25% price decline,” said David Madani with Capital Economics, though he emphasizes, that’s a rough estimate spread over several years.

Comment: That is. Just. Plain. Stupid.

“We just don’t know,” said Phil Soper, president and CEO of Royal LePage Services, a real estate company.

Comment: Aha! The first honest answer.

The big fear in Toronto, and even more so in high-flying Vancouver, is this: Is Canadian real estate at risk of an American-style collapse?

Soper says no. He says Toronto’s market today is not like the U.S. housing market of a few years ago.

“The rate of price appreciation is much less than you see in the United States, or in countries, such as Ireland that had real busts,” Soper said. “The Irish situation, for example, from trough to peak, (was) four times as great a price appreciation as we see in Canada today.”

Comment: We have stable employment and solid banking. We do not have the sub-prime situation and crooked investment firms screwing everyone. That is the biggest difference.

Soper says the rise in home prices in big Canadian cities like Toronto has been slow and steady — Toronto is the tortoise that’s moved ahead of the hare. And now, real estate in greater Toronto is suddenly more expensive than metro San Francisco or the New York area. It’s hard to say that with absolute certainty though, as Toronto calculates home prices by average, whereas American real estate figures use median. Remember, this is also metro areas, so New York City, for example, is not limited to pricey Manhattan.

Comment: Toronto prices have risen around 4% annually (compounded) for the last 20-25 years. Slow and steady is exactly right.

Alexander, with TD Bank, doesn’t see an American-style meltdown here either. He says the US housing collapse largely happened because of problems within the American banking system.

“At the peak of the U.S. housing bubble about 40% of all mortgages being originated were sub-prime loans, in other words, high-risk, high-leveraged loans,” he explained. “In the Canadian context, the mortgages are all income tested, the sub-prime market is probably about 3% of the total market. We aren’t seeing a lot of high-risk lending going on.

Comment: And that is the major difference. Here you have to actually be able to afford the mortgage before the bank gives it to you. And they test borrowers against higher rates to boot! Even with our high prices, a recent study by a leading mortgage broker showed that the average applicant was only asking for $262,000 against incomes of $125,000. Safe as pie.

“In Canada it’s boring,” he said.

But Madani with Capital Economics wasn’t so sure that Canada and Toronto’s housing market is a boring story.

“We use the word bubble. We’re not afraid to use that word.”

Comment: I am not afraid to use the word “banana”. It means just as little. When there is no bubble, no evidence for a bubble, then using the word just makes you look like you do not know what you are talking about.

Madani sees a lot of common factors between what happened in the United States in the 2000s and what’s happening in Canada today.

“We see the run-up in household debt, which is now almost as high as it was in the United States. We see the same run-up in the homeownership rate, just like what we saw in the United States,” Madani said. “And then finally, of course, we’re also seeing the over-building and the new home construction, and this is particularly true in the condo market in cities like Toronto.”

Comment: Forgetting – of course – that the past 6 months has seen debt ratios drop as Canadians pay off their bills. Home ownership is lower in Canada because we do not see it as the same “right” as Americans. And over-building is simply not happening. When 28,000 condos complete in a year when 50,000 new households are completed – that is certainly not overbuilding. When 70-80% of condos are bought before the crane goes up – that is not overbuilding. When paranoid and cautious banks lend to condo builders because they have 70-80% of units sold with 20-25% down – then they feel pretty confident that we are not over building.

Toronto is putting up the most high-rise buildings, anything from 12 to 39 floors, of any city in North America: 132. By way of comparison, the top U.S. city is New York. It’s building 86 high-rise towers.

The Pooles, the young couple looking to buy a place, are well aware of all of the construction in Toronto.

“Standing from our balcony there, we can see 14 cranes,” Chris said.

Chris has heard the warnings that Toronto is building too much too fast. But he said he knows the other side of the argument.

“Maybe we are behind what London, New York, what San Francisco is all about. Maybe this is sustainable, maybe this is the way things are going to be for a while,” he said. “It’s hard to tell.”

Comment: Exactly. We may be building more, but they already have more. We are just catching up.

Most economists and real estate insiders do agree that real estate values in Toronto will almost certainly be higher in 20 years. So for a young couple looking to invest for the long-term, there’s really no bad time to buy. That is, if there’s something they can afford.

Comment: Considering that there have only been 4 down years since 1966, I would say that predicting higher prices in the future is a pretty safe bet.

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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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