Thursday, December 9, 2010

Growing Toronto Housing Bubble

Yes, coming to a City Near you! The overheated housing market is causing a housing bubble and the impending fall of real estate values because of housing affordability.

No matter how many times this headline is repeated it does not become the truth. No matter the sources that post on this topic the inherent facts within the Toronto real estate market continue to defy the media pundits calling for it's demise.

I have three simple answers; inflation, immigration and consumer confidence.

Here are my sources of rebuttal;

Canada’s residential housing sector is landing safely after a wild ride over the past three years, Toronto-Dominion Bank said in a report on Thursday.

Looking ahead, the economics unit of Canada's No. 2 bank said it expects improved home sales and a higher average price next year, largely because housing affordability will likely be extended as uncertainty lingers about the global economy.

The media and some analysts remain glued to the idea that the Canadian housing market is a bubble ready to implode à la the U.S., Ireland, Britain, and Spain, where prices have dropped 22% on average. The latest concerns were fanned by an article in The Economist that suggests the Canadian market is 24% overvalued based on a comparison of prices and rent. Rent captures the stream of income derived from housing, and thus, in theory, is an appropriate valuation metric. However, in practice, it is important to note that statistical agencies often have difficulty measuring effective rents. Moreover, the downward trend in interest rates in the past three decades would normally favour ownership over renting and, hence, encourage a higher price-to-rent ratio today than in the past (Chart 1). Perhaps for these reasons, of the 20 countries reviewed by The Economist, the median overvaluation was 20%, and only four countries were overvalued by less than 10%, casting some doubt on the appropriateness of this metric.

So let us turn our attention to Toronto Real Estate;
Although this is a bit slower than last year, these are very strong numbers. The number of homes for sale has dropped dramatically and we’re down to only 15,K units right now. In the GTA as a whole, we currently have less than 2 ½ month’s supply of homes for sale. This is still considered a “Seller’s Market”.
Prices are rising 2-3 % ahead of inflation, net migration within Canada and new immigration to Canada will bring us approximately 60,000 new households and there is confidence in the continued growth and security of living in Toronto. [Canada]

I believe that 2011 will be a year modest growth and continued stability with Toronto real estate prices. I am more concerned about hydro rates, insurance and gas prices increasing my costs of ownership and conducting business.

What are your thoughts?

No comments: