Big bank increasingly bearish

by |

Well, this may be the first time in recent memory a big bank economist has used the feared B-word in relation to real estate.

Bubble.

“Let’s drop the pretence. The Toronto housing market—and the many cities surrounding it—are in a housing bubble,” Doug Porter, chief economist for BMO Bank said in his latest report. “Everyone may have a slightly different definition of what a bubble is, but most can agree it’s when prices become dangerously detached from economic fundamentals and start rising strongly simply because people believe they will keep rising strongly, encouraging more buying.”

It gets worse.

Porter is comparing Toronto’s current real estate plight to the crash experienced in the '80s.

“Prices in Greater Toronto are now up a fiery 22.6% from a year ago, the fastest increase since the late 1980s—a period pretty much everyone can agree was a true bubble—and a cool 21 percentage points faster than inflation and/or wage growth,” he said. “And, the ratio of sales to new listings was a towering 93.5 in the region last month adjusted for seasonality (and was above 100 in Hamilton, Kitchener and the Niagara Region).”

A normal sales to new listings range, according to Porter, is 40-60, with anything above considered a seller’s market.

Across Ontario, months of inventory has fallen below 1.8 when above five is considered the norm.

“The data simply reinforce an obvious message that has very much been in place for many months now, and by all accounts is still going strong as we speak—the market is far too hot for comfort,” Porter said.

As for Porter’s opponents, he shoots down their number argument – that there is a supply shortage contributing to the hot market.

“But we would remind that housing starts in Toronto and Vancouver have been chugging along at almost 70,000 units per year recently, an all-time high, while overall Canadian starts are above demographic demand at 200,000 units in the past year,” he said. “And, we are seeing near-20% price gains in Toronto condo prices, where supply constraints are not a major issue.”

So, are we currently in a housing bubble in Toronto?

The scary thing is that you never know until it pops.

“Toronto and any city that is remotely within commuting distance are overheating, and perhaps dangerously so,” Porter said.

  • DM on 2017-02-16 11:23:51 AM

    Smaller areas cannot build a detached home for under 350k. the work force is mostly service, so high wages are not in the picture. Buy a vacant lot for 80,000.00, development fees are 31k and water connection about 10k. so before shovel in ground costs are 121k. then take a 185 dollars per sq foot to build a 1200 sq foot home without finished basement you have over 350k in just costs. That is not a bubble that is reality here where I live. now service industry employees do not qualify for mortgage with new rules. I agree Toronto is hot and also surrounding areas of Toronto but where are the higher paying jobs ... CITY!

  • James on 2017-02-16 11:34:42 AM

    Bubble? Is this the same bubble they have been crying about for the last 6 years? It is time to face the fact that Toronto is a world class city that attracts people from all over the world and this pushes up prices. Try to buy a home in Paris or London and tell me then we are overpriced. Look at NYC. Is that also a bubble? I think not. There is not bubble my friends. It is simply supply vs demand. That's it. Nothing else. More people want to buy here than people who want to sell. This drives up the price. As long as demand for Toronto is greater than the supply, the prices will keep going up. So the real question is - will demand continue to be greater than supply? Of course it will. Look at how many immigrants come to the city every year. Look at the foreign money from China and Russia that is flowing into safe Canada. As long as these happen, expect Toronto price to go up.

  • Nick Mitskopoulos on 2017-02-16 4:18:30 PM

    James.... well put!!

Broker news forum is the place for positive industry interaction and welcomes your professional and informed opinion.

Name (required)
Comment (required)
By submitting, I agree to the Terms & Conditions