Did this bank miss the mark?

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One major bank may have wanted to hold off on its prediction for one Canada’s hottest housing markets until after the Bank of Canada announcement.

"If interest rates average 2.50 per cent in 2015 I am really not sure how cool GTA property sales will get," Ron Butler of Butler Mortgage wrote on MortgageBrokerNews.ca "If the rates move up -- not very likely -- cooling will occur likewise if unemployment spikes but failing those brakes; things will likely be as busy as last year. Someday property values will reverse and sales will crater but not likely this year."

The comment was in response to a TD Bank report that stated the Toronto housing market will start to cool this year.

“While the GTA housing market has shown few signs of slowing this year, one thing remains certain: Housing booms don’t last forever,” TD Bank wrote in a special report, entitled GTA Housing Boom Masks Growing Structural Challenges released Monday. “The million-dollar questions are: When and to what extent will the downswing take place? TD Economics’ baseline GTA housing forecast is a tale of headwinds and tailwinds, with the former likely to win out and cool the market beginning in 2015.”

The condo market is expected to lead the way toward a correction, with 60,000 new units expected to be built in the next few years. TD estimates that the market will be oversupplied by 25,000 units.

“The impact of increased supply of condo rental units is expected to only partially offset by rising rental demand,” the report states. “In this environment, the cost of condos will likely exceed what an investor can earn on the rent.”

Average resale price growth is expected to drop from its current mark of five per cent to near zero this year. However, the bank assures brokers and industry players that the housing correction will be much less severe than what some organizations have predicted.

“This relatively benign view is at odds with some predictions that have been bandied about in international media pointing to massive price over-valuation on the order of 40- 50 per cent … those expectations are built on spotty analysis,” the report states.
  • Ron Butler on 2015-01-20 11:44:28 AM

    If interest rates average 2.50% in 2015 I am really not sure how cool GTA property sales will get. If the rates move up (not very likely) cooling will occur likewise if unemployment spikes but failing those brakes; things will likely be as busy as last year. Someday property values will reverse and sales will crater but not likely this year.

  • James Robinson on 2015-01-20 12:00:36 PM

    I agree with Ron and would add that it looks like there is a whole new generation of renters who may never be able to move into homeownership given the increasingly challenging mortgage rules. Also, the widening gap between the prices of condos and single family homes will result in more families becoming permanent condo dwellers as they will not be able to afford the leap to a house...this is not a bad thing and really aligns Toronto with most other major metropolitan areas in the world. To me this all means that the demand for condos both as investments and principal residences, will continue in the immediate future. The market will correct when rates rise.....but this realistically may not happen until (if ever) the major world governments get their own financial books in order and slow down their pace of borrowing.

  • JSydneyH on 2015-01-20 4:50:14 PM

    I have been suggesting to my clients that this low rate environment is the 'new norm' for several years now; I was thrilled when Stephen Poloz used the very same words a couple of months to describe our environment today.

    Never in our history have the global economies been so interconnected; never in history has the decision by a single central bank ever impacted on the global stage like the Swiss currency decision.

    If we have never been here before, how can people justify higher rates by saying 'historical normative rates'?

    Eventually the market will achieve balance ... but it will not have anything to do with the direction of rates.

    There are many factors driving the market today - yes, rates are part of it; so is the fear of job loss which drives people to hold firm to what they have, as do political decisions made over 40 years ago that only today we are seeing the impact on the GTA market.

    Only one central bank moving that one lever - interest rates - may not have the desired effect anymore. In fact, it might be the proverbial straw.

  • Ron Butler on 2015-01-20 5:02:57 PM

    Respectfully JSydneyH, if you think that low interest rates have no positive effect on property sales and the concurrent ongoing increase in property valuation then all I can say is: you are wrong. I do agree there is likely a "new normal" and I do not suggest that rates will suddenly return to 5.95% - 7.45% anytime soon but even a change in 5 - year fixed rates to 3.95% would have a big negative effect on GTA home sales and property values.

  • JSydneyH on 2015-01-20 7:04:16 PM

    Ron, obviously we disagree on the impact of low interest. The current ongoing escalation in property valuation may have been triggered by low interest rates, but the fear of job loss has been a stronger influence on the number of listings available for sale which is the key driver of price escalation (limited supply with constant demand = price increase) right now. All things being equal, remove the issue of job security and the supply of new listings would be near normal levels. I'm not saying prices would not be higher now: I'm merely suggesting that supply is having much bigger impact on prices than the interest rates at the present time.

    I think the effect of lower rates has played itself out for the time being, and the only thing it can do now is reduce the demand - a little - when they do go up in 2017 or beyond.

    I find it interesting, Ron, you focus on low interest rates as the key driver in the market. Low rates have had limited impact - outside the GTA or GVA - on either the number of sales, the number of listings or the prices of houses because for the last three years, these markets have had the same low rates yet sales and prices have remained stable or actually fallen a little.

    Other factors in addition to rates drive the GTA market. Political decisions such as the Greenbelt Act, the Landlord Tenant Act, the Places to Grow Act and the Ontario Municipal Act, have all shaped the GTA market place. Many of these acts were implemented over 25 years ago, and the cumulative impact of these decisions have given rise to higher demand in an increasingly crowded space (within a 60 minute commute). Vancouver is familiar with this, and now we're learning that lesson the hard way.

    I guess if all you have is a hammer, everything looks like a nail.

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