American economist Paul Samuelson back in 1966 famously said of the predictive power of stock markets that \”Wall Street has correctly predicted nine out of the last five recessions.\” Nowadays, you could say much the same thing, in a different way, about the Canadian housing market.
At $1.11 million, Toronto\’s detached home is climbing further from reach
As the Toronto market continues to blaze, nowhere could it be hotter compared to the detached home category. In the city proper, the average sale price was $1.1 million, 18.2 percent higher than last year
Media and some economists happen to be dutifully predicting an accident in house prices each year since a minimum of since 2010. Yet each year, the market is constantly on the go up, seemingly defying gravity.
In Toronto, we\’ve all heard stories of termite-ridden shacks selling for $200,000 above asking. Bidding wars would be the norm. Nobody asks for an inspection before signing on the bottom line. Those of us old enough to remember the last Toronto housing crash, in 1989, find it all eerily familiar.
Certainly, those who think the end is nigh is going to be heartened by the recent surge in home prices.
The Toronto Real Estate Board on Wednesday released data that showed home sales in the Greater Toronto Area rose 6.3 per cent in May from the year earlier, and also the average home price rose 11 percent to nearly $650,000. In the city of Toronto, detached homes were selling to have an average of $1.A million, representing an 18-per-cent increase from a year earlier.
Similar stories are playing out across the country. Nationally, the Canadian Property Association reports that resale home values rose by 9.5 percent in the Twelve months to April 2015.
Vancouver, the country\’s priciest spot to buy a home, continues on a tear, and also the B.C. Real Estate Association said demand for housing within the province may be the highest since 2007.
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Even the Calgary market has witnessed renewed demand, and the Canada Mortgage and Housing Corp. expects residential prices to fall by only two.9 per cent in 2015. That\’s almost not a crash, especially in a city hard hit by crumpled oil prices.
Of course, for the bears, this really is all only more evidence that the crash is originating. There is no doubt that there is some froth early in the year market. But, if you look more closely, it\’s difficult to see where or how the sky is about to fall.
For something, we like to think that bubbles are inflated by irrational behaviour. But is there anything really irrational about Canadians buying homes for unprecedented prices? Well, no. They\’re only doing what makes sense: borrowing money when money is cheap.
Still, even with cheap mortgages, you have to pay. And, yes, thanks to rising prices, affordability has come under pressure. RBC said affordability within the Toronto market, for example, appears \”stretched relative to historical norms.\”
The Toronto Real Estate Board\’s affordability index shows that the share of household income which goes to mortgage, property tax and utility payments is about 35 per cent, the highest it\’s been in 20 years.
But even at that level, we aren\’t anywhere near where i was in 1989, when carrying a resale home ate up more than 50 per cent of income, according to TREB.
\”Historical norms,\” incidentally, are hard to see. In 1989, the Bank of Canada benchmark rate reached 12.61 per cent. People were cheerfully buying houses with mortgage rates in the high teens.
No, the largest threat towards the housing market isn\’t an interest rate increase. It\’s a good old-fashioned recession
Today, the overnight rate is 0.75 per cent. And you can have an 18-month mortgage in one southern Ontario bank for 1.49 per cent.
In 1990, the central bank raised rates to battle inflation, topping in May of that year above 14 per cent. It was successful C too successful C in eliminating inflation, which dropped well below its target of three percent as the economy slipped into recession. It took ten years for the Toronto real estate market to recover.
This is really a different world.
We started the year with the expectation that rates would increase soon. It\’s clear now?C even after the surprise January rate cut from the central bank C they won\’t.
The recent terrible GDP growth data for Canada, along with indications the economy might not pick up within the second half as BoC Governor Stephen Poloz expected, are raising expectations that the next change from the central bank is going to be another cut, not a hike.
Sure, rates will eventually go up, but that appears more and more prone to happen later instead of sooner.
When interest rate increases do come, they are unlikely to be dramatic. Because the U.S. has shown, economic recovery within the new world of low growth is really a precarious endeavour.
The U.S. Fed has virtually promised that it is interest rate increases is going to be low and slow, every time they happen.
We can get the same within Canada. Not that the BoC’s job is to protect house prices, but let\’s be honest: it serves nobody\’s interests to choke the main one segment of the economy that\’s building wealth for Canadians.
No, the biggest threat towards the housing market isn\’t an interest rate increase. It\’s a good old-fashioned recession C and, technically, thanks to last quarter\’s negative GDP growth, we\’re already halfway there.
If there\’s a reversal within the recent trend towards job creation, there could be big downward pressure on housing sales and values. However, the BoC continues to have tools at its disposal to free up money and stimulate the economy C which, of course, would be supportive of house prices.
I\’m not saying, mind you, that top real estate costs are all good. They are creating a real social problem, because people on the low end of the income curve simply cannot afford to possess a home.
I\’m not saying, either, the market won\’t correct C some day. But that\’s the thing about bears. They\’re very good at predicting a downturn may happen. They\’re just not very good at suggesting when.