It’s no secret that Toronto has one of the developed world’s most hyperactive housing markets right now.
The city is the undisputed leader in North America for high-rise construction, an impressive (some would say alarming) fact considering it has a fraction of the population of cities like New York and Mexico City.
The frenzied pace of development has brought with it concerns among market analysts that Toronto’s condo market has gone too high, and is headed for a crash.
One sign the situation has grown extreme is that The New York Times is starting to pay attention. The grey lady of U.S. journalism, which rarely takes time to comment on Canadian economic matters, rang the alarm bell in an article on Tuesday.
The article notes that there are 55,000 condo units under construction in Toronto at the moment (by some analysts’ estimates, this is three times what population growth would require) and that condo prices in Canada’s largest city have soared 25 per cent since 2009.
“For Toronto, this is crazy,” the Times concludes.
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To be fair, the article is hardly hysterical in its prognostications, noting that prices have held up despite many observers' predictions of a housing crash in Canada.
Most recently, it was Nobel Prize-winning economist Paul Krugman who — also writing in the pages of The New York Times — noted that he’s “worried” about Canadians’ debt levels due to years of soaring house prices.
Krugman himself pointed out that predictions of a Canadian housing crash haven’t come true — yet.
But “there is no question that the housing market in Canada is overshooting,” CIBC economist Benjamin Tal told the Times. “Now the cocktail party conversation in Canada is: ‘Will this lead to a U.S. style crash?'”
Tal is by no means a pessimist about housing — he changed many people’s minds about a housing crash last fall with a report arguing that Canada doesn't have the same housing affordability problems that U.S. households saw when the housing bubble popped south of the border.
But affordability could soon be a bigger problem. Thanks to rising yields in the bond market, which are linked to the fixed-rate mortgage market, the major banks have been hiking rates on popular five-year fixed-rate mortgages.
In an article declaring a “grim prognosis” for Toronto’s condo market, the Globe and Mail noted Monday that mortgage rates are on the whole up 0.65 percentage points in the past few months, and are back up above three per cent.
Further rises in bond yields could prompt further rate hikes, even without the Bank of Canada moving to raise its benchmark overnight lending rate. That, in turn, could mean a softening of the housing market, and higher mortgage payments for Canadians.
After a year or so of declines, housing starts picked up in Canada this spring, prompting many of the prominent bank economists to declare the housing market has experienced a “soft landing” and won’t crash.
But it’s debatable whether any sort of “landing” has even occurred yet. While optimists like Scotiabank predicted a 10-per-cent correction in house prices (the pessimists predicted something along the lines of 25 per cent), so far house prices are still rising.
According to the Canadian Real Estate Association, house prices were up 3.7 per cent in May, compared to a year earlier; that growth rate is slower than the rapid, double-digit price increases seen in recent years, but house prices are still growing faster than income and overall inflation.
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