Thursday, February 09, 2012

Canada's Housing Market in 2012 - bubble or balloon?

A client of mine just sent me this Great article below about Canada's Housing Market

I've been worried about a bubble or a balloon in our local market since about 2003 when many of us thought "prices can't go higher" and sure enough they just kept marching upward.

Since I've been plugged into the real estate market and prices since the early 80's it's difficult for me to comprehend after a rise each year since 1995 of 6 to 10% that prices can continue to escalate. It is the opposite of the old school thinking of 7 year economic cycles that we used to experience and intuitively, we all know that prices cannot continue to rise indefinitely.

So where is the peak? Nobody knows for sure, but I don't think we are there yet in the GTA

It's a little disconcerting to see prices so high. If interest rates begin to increase, as they are suggesting by the beginning of 2013 then it could start a slowdown.

In Toronto we lack listings. There has been a low amount of listings since January of 2009 and the demand just keeps on increasing, hence the multiple offers on properties that are priced well.

We are looking to purchase a bungalow in an average area of Oakville, one was listed on Monday this week for $579,900 and it sold firm by Wednesday for $620,000 I heard there were 11 offers, silly!

Any worry is as the article below states "Vancouver's ratio of home prices to incomes is the highest in the English-speaking world" and that is some cause for concern.

I was surprised to read that Toronto is building more than 75 skyscrapers compared to New York, they just don't seem to be able to build condos fast enough in Toronto for the past decade or so.

Time will tell what happens with the market. Personally, I don't see interest rates rising much more than .5% by the end of 2013 and I don't see a plethora of listings coming on the market either for the next 3 to 6 months, this only means that demand will eat up any new supply and prices will likely continue to increase for at least the next 3 to 6 months in the GTA.

All the best!

Canada's Housing Market

Look out below

After years of lecturing America about loose lending, Canada now must
confront a bubble of its own

Feb 4th 2012 TORONTO from the print edition


IN FEW corners of the world would a car park squeezed between two arms of an
elevated highway be seen as prime real estate. In Toronto, however, a
75-storey condominium is planned for such an awkward site, near the
waterfront. The car park next door will become a pair of 70-storey towers
too. In total, 173 sky-scrapers are being built in Toronto, the most in
North America. New York is second with 96.

When the United States saw a vast housing bubble inflate and burst during
the 2000s, many Canadians felt smug about the purported prudence of their
financial and property markets. During the crash, Canadian house prices fell
by just 8%, compared with more than 30% in America. They hit new record
highs by 2010. "Canada was not a part of the problem," Stephen Harper, the
prime minister, boasted in 2010.

Today the consensus is growing on Bay Street, Toronto's answer to Wall
Street, that Mr Harper may have to eat his words. In response to America's
slow economic recovery and uncertainty in Europe, the Bank of Canada has
kept interest rates at record lows. Five-year fixed-rate mortgages now
charge interest of just 2.99%. In response, Canadians have sought
ever-bigger loans for ever-costlier homes. The country's house prices have
doubled since 2002.

Speculators are pouring into the property markets in Toronto and Vancouver.
"We have foreign investors who are purchasing two, three, four, five
properties," says Michael Thompson, who heads Toronto's economic-development
committee. Last month a modest Toronto home put on the market for C$380,000
($381,500) sold for C$570,000, following a bidding war among 31 prospective
buyers. According to Demographia, a consultancy, Vancouver's ratio of home
prices to incomes is the highest in the English-speaking world.

Bankers are becoming alarmed. Mark Carney, the governor of the central bank,
has been warning for years that Canadians are consuming beyond their means.
The bosses of banks with big mortgage businesses, including CIBC, Royal Bank
of Canada and the Bank of Montreal, have all said the housing market is at
or near its peak. Canada's ratio of household debt to disposable income has
risen by 40% in the past decade, recently surpassing America's (see chart).
And its ratio of house prices to income is now 30% above its historical
average-less than, say, Ireland's excesses (which reached 70%), but high
enough to expect a drop. A recent report from Bank of America said Canada
was "showing many of the signs of a classic bubble".

The consequences of such a bubble bursting are hard to predict. On the one
hand, high demand for Canada's commodity exports could cushion the blow from
a housing bust. And since banks have recourse to all of a borrower's assets,
and Canadian lending standards are stricter than America's were, a decline
in house prices would probably not wreck the banks as it did in the United

However, the Canadian economy is still dependent on the consumer. Fears
about the global economy have slowed business investment, and all levels of
government are bent on austerity. The Conservative government's next budget
is expected to put forward a plan to close the federal deficit, now 2% of
GDP, by 2015-modest austerity compared to Europe's, but still a drag on the
economy. Few new jobs are being created. Assuming there is no setback in
Europe's debt crunch, slowdown in America or drop in commodity prices, GDP
is forecast to grow by a meagre 2% this year. If consumers start feeling
less well off, Canada could slip back into recession.

The inevitable landing will probably be soft. Increases in house prices and
sales volumes are slowing, and the 2015 Pan American Games in Toronto should
prop up builders. "The national housing market is more like a balloon than a
bubble," says a report by the Bank of Montreal. "While bubbles always burst,
a balloon often deflates slowly in the absence of a 'pin'."

Moreover, the government is trying to cool the market. The banking regulator
is increasing its scrutiny of housing in response to concerns about
speculators. The Canada Mortgage and Housing Corporation, a government
mortgage-insurance agency, says it will have to start reducing its new
coverage because of legal limits. And the finance ministry has cut the
maximum term of publicly insured mortgages from 35 years to 30. Some bank
managers are calling for it to be reduced to 25, the historical norm.
Canada's reputation for financial sobriety is not entirely unwarranted.

However, the state has refused to use its most powerful tool. To protect
business investment, the central bank has made clear that it plans to keep
interest rates low. As long as money stays cheap, the balloon could get
bigger-perhaps big enough to become a fully fledged bubble after all.

from the print edition The Americas

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