Canada's Condominium Magazine
Rising housing prices in Toronto and the surrounding area bring out a wide range of opinions and explanations from observers such as bankers, ratings agencies, politicians and urban planners. Everyone agrees that home prices have gone up rapidly, but that is about all they agree on. An economist at BMO says the city is in a real estate bubble. The mayor says no it’s not. So does the city’s chief planner. And the international ratings agency Fitch classifies the entire country’s real estate market as unsustainable. All of them speak of supply and demand, which drive every market, but how do they play out in this one?
First the banker. Doug Porter of BMO wrote that the high prices in Toronto, which he bluntly calls a housing bubble, are not due to a shortage of supply, as is often said, but rather to “sizzling” demand, including from non-resident investors, fueled by low interest rates and robust population growth. The ratio of sales to new listings was 93.5 last month, Porter wrote: a range of 40–60 is considered balanced.
In dismissing a supply shortage as a cause for the housing heat in Toronto, he points out that housing starts have been at an all-time high recently. Further, even the condo market in Toronto has seen price gains near 20 per cent, and there is no shortage of supply in that sector.
Porter compares what is going on today in Toronto’s residential real estate market to what occurred in the 1980s, when housing prices rose rapidly then collapsed, and borrowers faced double-digit interest rates on their mortgages.
Is that about to happen again? Not likely, he says. Speaking to BNN, Porter said there was no “obvious” factor about to deflate the bubble he warns of. Higher interest rates are not going to happen. The Bank of Canada, he said, is unlikely to do anything. And the underlying Toronto economy is actually “firm” though not outstanding. Is it perhaps a question of changing the psychology of the market, the mentality that the market is rising because it is rising?
Policymakers have few options, especially given that housing markets in the rest of the country are generally “well behaved,” according to Porter. One possible lever could be a milder version of what BC did, he suggested, referring to that province’s foreign investors’ tax. In the end, the “deep divergence” between the rest of the country and Toronto will continue to “confound and bedevil” policymakers. Nevertheless, Porter said that the time for action is now.
Politicians tend to be circumspect when confronted with potentially damaging problems, and Mayor Tory is the very definition of circumspection. The housing market is “robust” and the rapid rise in housing prices indicates a “reasonably healthy” market, one that is working as it should, not a troubled one. Yes, rising prices are cause for concern inasmuch as they make it harder for some people to buy a home, but they are no reason to be pushing “panic buttons.” He is contemplating no “knee-jerk” measures to cool the market. In his conversations with politicians at all levels, as well as people in the private sector, the mayor said no one has told him there as any kind of “panic-inducing situation.”
What we should be doing, the mayor said, is acting responsibly to increase the supply of affordable housing. That, he said, must be done in partnership with the other governments, politicians’ code for, don’t blame me if it doesn’t happen.
Like her boss, the city’s chief planner Jennifer Keesmaat sees the Toronto housing market as strong and healthy. Brisk sales and high absorption rates are evidence of that, she said. The problems really are on the supply side, and they include a shortage of skilled labour and cranes to build the housing. She also said she had heard from developers that banks were pulling back on construction loans. These are the factors that are constraining supply, she told BNN, and as long as demand continues to outpace supply, the situation is not going to change any time soon.
As for Fitch, its latest Global Housing and Mortgage report says that markets in Canada, Norway and New Zealand, where home prices have risen at an unsustainably rapid pace, are expected to moderate in 2017. The report gives the usual reasons to explain why home prices in these countries have become increasingly expensive relative to household income: extremely low borrowing costs, readily available credit, steady economic growth, and limited housing supply. As for solutions, the Fitch report concludes, much as Porter of BMO did, that a “fundamental excess demand” for home purchases is overpowering the ability of governments to control prices.