Barely has the year — and a whole new round of bidding wars — begun and the first of the big banks has weighed in with a warning that Toronto’s housing market is 10 to 15 per cent overvalued.
So is Vancouver’s, says TD Economics in a report released Monday, noting that both cities have been seeing “frothier conditions” than the rest of the country, where house prices remain about 10 per cent overvalued, largely because of low interest rates.
“Toronto and Vancouver make up 40 per cent of the Canadian housing market, so that’s what’s really driving the overvaluation measure,” said TD economist Diana Petramala in an interview.
A spike in interest rates or a “negative economic shock” could potentially send resale home prices tumbling by 25 per cent, Petramala notes. But it’s far more likely there will be a “gradual unwinding of excesses” in the Canadian market as interest rates slowly rise, along with incomes, over the next few years.
It’s likely to be 2015 until Toronto, and much of the country, start to see any real downturn in sales and prices, according to TD.
While Toronto home prices jumped 6.8 per cent in 2012 and 5.4 per cent in 2013, they could rise just 2.7 per cent this year and slip by 1.2 per cent in 2015, when interest rates are expected to start climbing, the report forecasts.
Petramala notes that “prices ended 2013 on a much higher note than we had been expecting as households faced an unusually low level of homes for sale.”
That has played out in the old City of Toronto, in particular, in an unexpectedly feverish start to 2014, with a simple Junction Triangle row house going for $210,000 over asking price in a flurry of 32 bids.
“The one concern we have is that we’re seeing more strength in Toronto’s house prices than expected,” says Sal Guatieri, senior economist with BMO Capital Markets.
Even all those new condos coming on the market haven’t been enough to hold down housing prices, says Guatieri, noting that resale condo prices were up almost 4 per cent in December, year over year.
“We thought, if anything, Toronto house prices would fall somewhat last year. But underlying demand is pretty strong, net migration is pretty healthy and the number of echo boomers aged 30 to 34 is growing quite rapidly at the moment and they are a prime homebuying cohort, especially for condos.”
The housing market is “overshooting,” but “it’s not a market that is crashing,” says Benjamin Tal, deputy chief economist at CIBC World Markets.
He continues to believe that the market will slow to a soft landing and that real estate numbers to be released this week detailing January sales and prices (those from the Toronto Real Estate Board are due out Wednesday) could start to provide a more “realistic” picture of the health of the housing sector.
“This market will be tested when interest rates start rising, and that means it won’t be tested for a while.”
The Canadian housing market and worries about a real estate bubble have been key concerns for policy-makers for several years.
Recent indicators have suggested the market may be headed for a soft landing instead of a bubble bursting, but concerns have persisted.
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