Housing Bubble: Toronto Real Estate Bubble “Will End Badly,” Analyst

Housing BubbleThe end of the ever-mounting real estate markets in Toronto and Vancouver will be “bad,” a BMO economist said of Canada’s current housing bubble.

“Odds are that if this kind of price growth (especially Vancouver) continues, it will end badly,” Robert Kavcic, a senior economist at BMO, said in a research note. “But that still looks to be sometime down the road,” he added. (Source: “Vancouver, Toronto home prices could ‘end badly,’ BMO says. (But not yet),The Globe and Mail, April 6, 2016.)

Supply shortage has sent Toronto and Vancouver home sales to their all-time highs.

Existing-home sales in Toronto surged more than 16% in March, capping a quarter that saw sales activity hit a historical high, according to monthly sales figures released by the Toronto Real Estate Board. (Source: “Toronto home sales at all-time high as supply shortage stifles buyers,BNN, April 5, 2016.)

The average selling price for all homes in Canada’s business capital jumped more than 12% in March to CA$699,745; while the average price for a detached home in the Toronto real estate market topped CA$1.17 million.

In Vancouver, nearly 5,200 residential properties were sold last month, a hike of 24% over February, and 56% above the 10-year sales average for the month, as numbers from the Real Estate Board of Greater Vancouver show. (Source: “Metro Vancouver home sales surge in March,BNN, April 4, 2016.)

The composite benchmark price for all residential properties across Metro Vancouver is CA$815,000, a 23% hike in one year, while the average price for detached properties soared to more than CA$1.3 million, up 27%.

Kavcic ruled out that the slowing economy or rising unemployment in the wake of the oil crunch will slow down those price gains: “Not likely anytime soon, with growth in B.C. and Ontario leading the country,” he said. (Source: The Globe and Mail, op cit.)

The unemployment rate in the world’s 11th-largest economy crept up to 7.3% in February for the first time in three years.

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.)

The Canadian economy has been slowing down since crude prices nosedived from a peak of $114.00 a barrel in mid-2014 to $36.00 a barrel currently.

A jump in interest rates would slow down real estate price gains, but Kavcic does not expect that to happen anytime soon.

Last month, the central bank kept its benchmark target for the overnight rate steady at 0.5%. The bank cut its benchmark rate twice last year.

Kavcic also expects that detached homes for sale might not increase: “Condo supply is coming to market in these cities, but detached supply…is drum tight and not changing,” he said. (Source: The Globe and Mail, op cit.)

He also rules out that recent measures introduced by the federal government would slow down price gains.

The federal government’s new rules requiring higher minimum down payments on certain properties came into effect on February 15.

The minimum down payment for new insured mortgages rose to 10% from five percent for the portion of the house price above CA$500,000. The five percent minimum for properties up to CA$500,000 remained unchanged.

The federal government had already restricted mortgage insurance to homes valued at less than CA$1.0 million, and the new rules leave the minimum down payment for more expensive homes unchanged at 20%.