Larry MacDonald – Globe and Mail

The 12-month change in the Teranet-National Bank House Price Index has decelerated in recent months to 3.4%, led by declines in Vancouver (-1.4%) and Victoria (-1.7%). Some people interpret this weakness as a sign that a housing crash has started – see, for example, the Canadian Business article “Canada’s housing crash begins.” I don’t see a collapse in 2013 for several reasons. One is the highly supportive monetary environment.

Comment: And how anyone can turn a 1.4% decline into a crash, I have no idea. The spin is alive and well in the media… Heck, in Toronto we have a 4% sales volume decline coupled with a 7% price increase being touted as the beginning of the collapse. Yeah, I know, right?

In the case of the U.S. housing boom from 2003 to 2007, the overvaluation was pricked after the Federal Reserve dramatically tightened monetary policy to cool off an overheated economy. This catalyst is absent in Canada as 2013 commences.

Indeed, monetary policies in Canada, the U.S., Japan, China and elsewhere around the world are dialed to the opposite extreme. They are hyper-expansionary, with interest rates at record lows and printing presses running like never before.

Comment: I am not sure Canada is printing money, but the US is making the stuff like crazy.

This means that Canada and other countries should continue generating growth in jobs and income. Since higher employment and income typically support housing markets, prices are not likely to fall much in 2013. Or if they do, they shouldn’t stay down for long.

Comment: And if interest rates do rise, it will only be a sign of a strong economy, meaning people have good jobs and money. Which is always good.

The crash crowd says Canadian houses are overvalued on the basis of the price-to-income ratio. So they fear the process of mean reversion will take prices down by 25% or more. But with so much monetary stimulus in the system, the price-to-income ratio should also be normalized by income increases.

Comment: But the price-to-income model is flawed. The current average Toronto housing price of $497,298 costs $1,899.52 to service at today’s mortgage rate of 2.99% with 20% down. Go back 30 years to 1982 when mortgage rates hit 19.41% and house prices were $95,496 and you have a monthly mortgage payment of $1,212.22 – in 1982 dollars. Adjust for inflation and that mortgage would cost $2,610.77 in 2012 dollars. So housing is actually a lot more affordable now that it was 30 years ago. So the whole price-to-income ratio is moot. What matters is monthy mortgage-to-income, which has fallen. But the doomsayers do not want you to know this! People buy houses based on what it costs every month to pay the bill, that is where their purchase price comes from. Same with cars, that is why Honda advertises the monthly cost, not the sticker price.

Interest rates may begin edging up later in 2013. They shouldn’t threaten the housing market because income and employment will be climbing as well, creating offsetting demand for housing. Similarly, the one-off impact of a tightening in mortgage rules during 2012 should not be cause for a serious setback.

Comment: The new mortgage rules only serve to strengthen the market, weeding out those that were close to the edge.

There are other reasons for expecting a crash to be a no-show in 2013. Suffice it to say that the monetary cycle suggests a soft-landing scenario. This is not to deny there are pockets of extreme overvaluation or oversupply, where the risk of substantial correction remains. Cases in point could be Vancouver housing and Toronto condos.

Comment: Toronto condos will cool off, but they will not crash. Maybe some small prices drops, but mainly a flattening. There is no over supply, not when every new project sells 80-90% of their units before a crane goes not. Not when the vacancy rate for rentals is barely above 1%. The demand is there, trust me, if anything the supply is not enough!

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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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