Sunset behind a Condo by Veggiefrog
There are two strongly opposing views on the situation in Canada’s housing market. The first is that everything is just fine and there is no need to worry. The main proponent of this view is the Royal Bank of Canada, which named its latest report “Booming Toronto condo market does not imply a bubble”. On the other hand, Jim Flaherty, Canada’s finance minister, has already undertaken some actions to calm the markets because of fear of the bubble. Mark Carney, governor of the central bank, supported these measures.
So who is right?
There is No Bubble
According to RBC, there is no bubble at all. The bank agrees that booming construction might raise some concerns, but in the broader context, these observations are“less worrisome.” According to the Canada Mortgage and Housing Corporation, in May 2012 there were 44,100 condos and apartment complexes under construction. The Toronto region has never witnessed that much residential construction — or at least not since the ‘70s, when statisticians started to track this indicator. On the other hand, only a few newly built apartments are not occupied. Unoccupied condos represented around 7.5 per cent of the all units completed in the previous year. That’s almost half the average since 1980.
There are several explanations for this. The main is that although many new properties were built, this number still hadn’t exceeded demographic requirements. The growth of the population is faster than the growth of the real estate market. This would explain increasing prices as well. The bank denies the existence of the bubble, but it expects prices to fall a little bit (by 2 to 7 per cent from its quarterly peak). It also admits the possibility of the creation of a two-tier market, in which some prices will go down (condo prices) and some will stay resilient (single-family houses).
There is a Bubble
Toronto Condo by NMinTO
As finance minister Jim Flaherty said:
“In Toronto in particular, what I’ve observed and heard about from developers is continuous building without restriction. It’s distorting the market, quite frankly. And for that reason, we’re taking the steps we’re taking.”
By “steps” (which took effect July 9th), he meant a reduction of the maximum amortization period for government-insured mortgages (from 30 to 25 years). He decreased the amount of money owners can borrow when refinancing their property (from 80 to 65 percent) and decreased the maximum gross debt service ratio to obtain Canada Mortgage and Housing Corporation insurance (from 44 to 39 percent). Households now cannot spend more than 39 per cent of their income on mortgage payments, heating, and property taxes. Mr. Flaherty told The Globe and Mail’s editorial board that Toronto developers would keep building as long as they can find buyers for the properties, which “will lead to a crash,” Mr. Flaherty said.
The Situation Today
There were 2,098 properties sold in Vancouver in July. The number might seem all right, but compared to the previous year it has declined by more than 18 per cent (2,571 properties were sold in July 2011). This number is the lowest since 2000. In spite of declining sales, price rose by 0.6 per cent from a year ago. Still, it’s not easy to draw a conclusion from these statistics, since these changes could just mean that the new government regulations are working and they has slowed the growth. In spite of this development, some developers are still enthusiastically continuing with construction. “Despite talk of tightening credit to condominium developers, 7,343 units started construction in the second quarter of 2012, the highest level in over a year,” Ben Myers, executive vice president at Urbanation, a condominium market research company, said.
Only Time Will Tell
It’s probably too soon for any reliable predictions. We can see that the market in Vancouver is cooling down, but it’s hard to say what will come next. There are three possible developments. Cooling might be just a temporary result of the new rules, and it might not last more than several months. The other possibility is that the market will stabilize and we will not see any price spikes in the near future. The last option, however, is that the new rules came too late and demand will fall more than it was predicted to. We can only guess now, but by the end of the year we will be able to say which of these paths we’re walking.