Housing market stabilizes

While Canada’s highflying housing market continues to stabilize, it’s  increasingly evident that one city, Toronto, is a glaring exception.

In sharp contrast to price moderation in most cities and a significant drop  in Vancouver, where buyers are being priced out of the country’s costliest  market, Toronto buyers are on a spending spree – one that looks as if it won’t  end well.

New figures from the Canadian Real Estate Association show prices up by 10.5  per cent in Toronto over the past 12 months, the only major city with a  double-digit gain. In contrast, Montreal gained a modest 3.7 per cent and  Vancouver is down by 3.1 per cent.

On average, national home prices in March, influenced by the big Vancouver  market, edged down half a percentage point from an exceptionally high level this  time last year.

This is in line with the expected trend for a relatively flat market this  year, said Sonya Gulati at the TD Bank. TD predicts that national prices will  edge up 2.1 per cent for all of 2011 as sales flatten.

The bank calculates that the average national price is probably 10 to 15 per  cent above a sustainable level, but doesn’t foresee any big drop, Gulati  said.

Instead, it expects prices to drift down gradually once interest rates begin  rising, probably in mid-2013. Its forecast is for a decline of 3.6 per cent in  2013 and 4.3 per cent in 2014.

But this benign national picture conceals growing stresses in the country’s  biggest city.

Toronto, which accounts for about one-fifth of the whole housing market in  Canada, has defied predictions, with sales remaining strong in spite of surging  prices.

It’s not clear exactly why housing is “so out of control” in Toronto, says  John Andrew, a real estate professor at Queen’s University.

But one factor, he notes, is the severe squeeze on the supply of  single-family homes within easy commuting distance of downtown, which is helping  to supercharge their prices. And those who can’t pay up have flooded into the  less-costly condominium market, causing a boom that Andrew and other analysts  now find worrisome.

Craig Alexander, chief economist at the TD Bank, is so fascinated by the  frenzy of condominium construction that he counts the number of projects as he  drives through Toronto. “I would feel a lot better if I were counting half as  many cranes,” he says.

That’s understandable. Andrew calculates that Toronto now has 143 highrise  condo projects under construction, more than in any other North American city,  with more on the drawing boards.

“Is there enough demand for all those condos? It’s hard to imagine,” he  says.

Worse, many purchasers appear to be foreign investors looking for rental  properties as a haven from uncertainty in financial markets.

“When it’s an investment property, people are pretty quick to dump it when  things get ugly,” Andrew points out. That could presage a hard landing once the  pool of tenants thins out and rising mortgage interest rates squeeze investment  returns.

Douglas Porter, deputy chief economist at BMO Capital Markets, is similarly  worried. While the national housing market looks increasingly stable, “I do  think Toronto could have a fairly serious correction in the next couple of  years,” he says.

In the rest of Canada, however, conditions look far healthier. With sales and  price gains flattening out, it’s likely the growth rate of Canadian mortgage  debt will dip significantly, Porter believes.

Since mortgages make up the biggest chunk of the worrisomely heavy debt load  carried by Canadians, this could ease the pressure for federal officials to hike  interest rates early or squeeze the housing markets with tougher borrowing  rules.

And behind the scenes, there’s an encouraging demographic trend that’s likely  to keep housing demand from falling off a cliff, believes Stéfane Marion, chief  economist at the National Bank.

He points out that the group aged 20 to 44, the prime source of new housing  demand, is growing faster in Canada than any other large industrial nation.

Over the next five years, this cohort will grow by 3.7 per cent in Canada, 42  per cent faster than in the U.S., with immigration and the maturing of baby  boomers’ children providing a new bump in housing demand. Even Quebec, the  slowest growing of Canada’s big provinces, will show a gain of 2.3 per cent.

By contrast, most other big industrial nations are suffering losses in this  age cohort as their populations stagnate. The hardest-hit, Italy, Japan, Germany  and Spain, will see this group shrink by seven per cent or more.

Canada’s demographic boost won’t immunize us against a severe shock, such as  a new recession, but short of that, it could keep the housing market healthier  than some expect.

 

© Copyright (c) The Montreal  Gazette
 

By JAY BRYAN, The GazetteApril 17, 2012

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