Analyst Issues Grim View for Toronto Real Estate Market

Toronto Real EstatePoor Outlook for Toronto Real Estate Market

The overpriced Toronto real estate market could join the Vancouver real estate market in an upcoming correction that could occur very soon as the oil rout continues to weigh on many aspects of the Canadian economy, according to Capital Economics.

“Housing corrections are under way in regions hit by the oil price shock and we still fear that Vancouver and Toronto are at an even greater risk of a correction than a year ago,” David Madani, an economist for Capital Economics, said to the Globe and Mail. (Source: “One very bearish view of Canada’s economy,The Globe and Mail, April 4, 2016.)

Madani has long believed Canadian housing markets are headed for trouble, the newspaper reported.

Figures for February show the average home value in the Toronto real estate market rose 15% to CA$685,278, while the Vancouver average was up 20% to CA$775,300. (Source: “Toronto home prices soar 15%, as sales post double-digit rise,” BNN, March 3, 2016.)

In Toronto’s 416 area, the average price of a detached home is now above CA$1.2 million. In the surrounding 905 area, it’s now CA$816,705, according to Toronto Real Estate Board statistics.

The average price of a detached home in the city of Vancouver skyrocketed 30% to CA$1.8 million in February from the prior year, as sales jumped 37%, according to the city’s local real estate board. (Source: “Chinese Buy One-Third of Vancouver Homes: National Bank Estimate,” Bloomberg, March 24, 2016.)

The average price of a home in Canada rose an astonishing 16% year-over-year in February, reaching more than CA$500,000, according to data from the Canadian Real Estate Association.

Madani expects lower residential real estate investment in the next two years, given the slump in business investment. Madani and Capital Economics made the prediction while providing a bearish view to the world’s 11th-largest economy.

In his recent “Key Calls for This Year” report, Madani projected growth of just 0.7% this year and 1.2% in 2017.

“With business investment expected to fall more sharply this year than last, we expect the economy to struggle badly in 2016, buffered by only a moderate improvement in non-energy exports,” wrote Madani.

The Bank of Canada lowered its economic growth projection for this year from two percent to 1.4%, when the bank revealed its quarterly monetary policy report in January. (Source: “Bank of Canada keeps key interest rate at 0.5%,” CBC, March 9, 2016.)

Madani also forecasts Canada’s unemployment rate to climb to 7.8% from its already elevated level of 7.3%. That compared with an average five percent unemployment rate in the U.S., the nation’s largest trading partner.

The grimy picture also touches the outlook for crude prices. Madani projects the benchmark U.S. West Texas Intermediate (WTI) crude price to finish the year at $45.00 a barrel, hitting $60.00 per barrel by next year, which is clearly higher than it stands today but it’s still a far cry from the commodity’s heady days.

WTI for June delivery was trading at $37.35 on Monday, up 21% from its one-year low of $30.79, last reached on January 20. However, it is down 43% from its 52-week high of $65.93 a barrel and 68% down from its 2014 peak of $114.00 a barrel.

Madani said new oil sands projects require prices between $60.00 and $80.00 per barrel to break even and closer to $80.00 to be profitable.

As for the Canadian dollar, Madani expects it will “prove fairly resilient,” ending this year at US$0.75 and next year at US$0.77.

On Monday, the loonie had recovered 13% from its record-low of US$0.68, touched on January 20, but 8.5% lower than its 52-week high of US$0.84.

Capital Economics also projects that the Bank of Canada will trim its benchmark interest rate again, bringing it from 0.50% to 0.25% and holding it there through next year.

The Bank of Canada cut its benchmark rate twice last year in an attempt to stimulate a Canadian economy that had been waylaid by slumping oil prices. It kept the rate unchanged at 0.5% in March.

David Madani has degrees in economics from the University of Victoria in Canada and Waikato University in New Zealand. In 2010, Madani left the Bank of Canada to join Capital Economics. Madani is Capital Economics’ Canada economist.