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.
“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.