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Monday, May 13, 2013

Is the Toronto Real Estate Market Too Expensive!?

Survey respondents: Canada market too expensiveBy Cameron French, REUTERS
A home up for sale in Toronto. (QMI Agency/Jack Boland) TORONTO - Canada’s housing boom will grind to a halt next year, stopped by price declines in the condominium-saturated markets of Toronto and Vancouver, according to a Reuters poll, raising the risk of a broader economic slowdown.
On a national basis, Canadian house prices are expected to rise 2.0 percent this year before stalling next year with a negligible 0.5 percent gain, according to median results of the poll, which was conducted last week.
House prices have increased 37 percent since their trough in January 2009, The Canadian Real Estate Association index showed. All 15 respondents in the poll said the market was expensive, by varying degrees.
“Home prices are overvalued by slightly under 10 percent nationwide (and) most of the overvaluation is concentrated in Toronto and Vancouver,” said Mark Hopkins of Moody’s Analytics, citing a common concern about the two hottest urban markets.
House prices in Toronto, Canada’s largest city and financial capital, are expected to rise 6.6 percent this year after rising al most 10 percent in 2011. But that will quickly fizzle into a decline of 0.2 percent next year, the first fall since 2008.
In Vancouver, the country’s most expensive market and until recently clocking the fastest annual price rises, they are expected to fall 1.6 percent this year and 2.5 percent in 2013.
Canada’s housing market avoided the U.S. sub-prime boom and bust that triggered the global financial crisis, in large part because its banks are more closely regulated and more conservative, requiring higher deposits for mortgage lending.
While property prices tumbled in the U.S., Ireland, Spain, and to a lesser extent, Britain, record low borrowing costs that followed the recession spurred another wave of home buying and property market speculation in Canada.
By early 2010, sales volumes and prices were rising by double digits on an annual basis. Figures from one industry group showed that since March 2009, the nadir of the financial crisis, Canada home prices have risen by nearly a third.
While the housing boom helped pull the country out of a shallower recession much faster than the United States, it has also fueled fears a major correction could be in the offing.
Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty have both expressed concern with the high debt loads Canadians have taken on to finance house purchases, enticed by rock-bottom interest rates.
Household debt levels are approaching those in the U.S. before the housing meltdown there, where prices fell by more than a third and still have not shown meaningful signs of recovery. Canada’s credit market-debt-to-income ratio hit a record 152 percent in the first quarter of 2012.
Some economists, like Bricklin Dwyer at BNP Paribas, worry that Canada’s economy, which has outperformed its peers in the G7, could take a big hit if the housing market were to turn suddenly. Recent experience around the globe shows that is what booming property markets often do.
“Whether or not Canada will face a hard landing will be determined by whether or not household risk was correctly priced in the first place. In other words, when Canadians show up to refinance their mortgages, if their interest rates jump and/or the terms of their loans change dramatically, then households could default at a rapid rate,” Dwyer said.
“If the demand for housing slows too quickly, then homeowners could quickly find themselves underwater and promoting a dangerous cycle as they try to unload their home.”
Unlike the Federal Reserve in boom times, The Bank of Canada said last week the housing market and the threat of a correction was one of the main risks to the Canadian economy.
“The continued high level of activity and stretched valuations in some segments of the housing market are of increasing concern,” it said in its semi-annual Financial System Review.
Housing starts are also expected to retreat through this year, according to the poll. Starts are expected at an annualized seasonally-adjusted 216,000 in the second quarter, falling to 190,000 by the fourth quarter. Annualized starts were 211,400 in May, down from 243,800 in April.
Rapid condominium construction in Vancouver and Toronto - where the skylines are now crowded with high-rises - has raised fears that the market could find itself saturated in supply and become the trigger point to a larger crash.
High immigration to both cities has fed the condo boom, but has also helped stoke fears that the market is partly supported by foreign investors who may pull out their money if the market starts to reverse.
Finance Minister Flaherty has tightened mortgage requirements three times since 2008 to cool the property market and the market has rallied on. But half of the respondents in the poll said the government probably won’t intervene again in the next twelve months.
“The government understands that we have a safe mortgage market and that further tightening would risk a policy-induced housing market slowdown that would have broader macroeconomic risk,” said property market analyst Will Dunning.
Reuters polled Canada’s big banks, independent analysts as well as international participants. Of Canada’s major lenders, National Bank Financial declined to participate in the poll, as did CIBC, saying they did not provide forecasts on Canada’s housing market. A few other primary dealers also declined to participate.

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