Are Canadians in Denial, eh?
The Canadian real estate market is booming, but there are signs all might not be well. Some of those same indicators were present when Arizona’s real estate market tanked, so we in Arizona know them when we see them. Read on and see if you know how to diagnose a market that may be in trouble.
Are they drinking Kanadian Koolade?
Home prices in my home town of Toronto are much more expensive then in Phoenix. Historically that has always been so, but the difference is particularly noticeable now. The tight supply of properties for sale and competition between buyers has pushed the median sales price to $405,000 (about $424,000 in U.S. dollars), by summer of 2011. In comparison, in that summer the median sales price in the Phoenix metropolitan area was $108,300.
Doesn’t this disparity indicate that the Toronto market is overvalued? Or does it just show how good a bargain real estate is here in the Phoenix metropolitan area (Canadians take note, buy before prices go up)? I think both.
Some Toronto area brokers do agree that prices are out of whack. Mary Di Felice, a broker at Re/Max 2000 Realty says “There are warnings that the market is overheated and poised for a market correction”. But in the same sentence she adds “but if current demand is not satisfied and interest rates remain low there are no real indicators of a slowdown.” So there if there is a problem, she isn’t able to predict when the trouble is coming.
Others unable to see when the party will end include the Royal Bank of Canada. It’s senior economist, Robert Hogue, wrote that Toronto’s “affordability remains near their long-term averages, indicating to us that the cost of owning a home in the Greater Toronto area has not reached perilously high levels at this point.”
All Aboard the Kool Aid Train
The Canadian Real Estate Association and the government are drinking it too.
Gregory Klump, CREA’s Chief Economist, believes that the Canadian housing market isn’t overheating. Further the national housing agency, the Canadian Mortgage and Housing Corp, says in its first-quarter 2012 report that Canada’s hot housing market is due for a soft landing, with stable prices, sales and new construction through 2013.
Analysts say the CMHC’s opinion is “the best of all possible outcomes for the Canadian housing market”. History would suggest that such an ending is unlikely, and continued increases in price and volume (or even maintaining their current rate) are unsustainable.
One thing fascinating about booms is the way people rationalize why they should continue – when we know they can’t. You be the judge – are Canadian commentators trapped in this same loop?
Signs of trouble?
Although sales activity rose in more than half of all Canadian markets in 2011, CREA reports that activity was down in over half of all local markets in January 2012 from the previous month in 2011. The “Big 3″ cities of Montreal, Toronto, and Vancouver, which resisted general softening in 2011, led the declines, proving that even they weren’t immune to the reduction of sales.
Plus borrowers have taken on a lot of mortgage debt, and we know that loan defaults are a critical ingredient to a crash. David Ferrari, Broker-owner at Re/Max Realty Enterprises in Toronto noted “[w]e have a very debt-leveraged society, and in many cases homeowners continue to leverage their equity as much as possible. Therefore, even a small increase in interest rates could have a devastating impact on the ability of many homeowners to maintain mortgage payments.”
On a single family home, for example, the typical Toronto homeowner pays 47% of household gross income toward mortgage payments, property taxes and utilities, and in Vancouver it is 72.1%. That certainly appears to be too high when compared with a maximum debt to income ratio of 43-45% on non FHA loans that has been required by Arizona lenders in recent years.
The Bank of Canada has noticed the record levels of mortgage debt, and have warned Canadians not to take on too much of it. But the percentages noted for Toronto and Vancouver above indicate that the warning may have come too late.
Despite all of the above signs, is the Canadian real estate market different, and not on the implosion path traveled by Arizona? Next blog I will discuss those distinctions, and whether they may be enough to head off disaster.
– N. Mark Kramoltz © 2015