Toronto Real Estate Market Booms Despite Warnings

Today’s News

The head of the Bank of Canada, Stephen Poloz, has warned real estate investors not to bank on current housing prices to continue their upward slope, despite recent trends. As the market continues to rise, so too does the risk of a “sharp correction”, which could result in financial stresses and mounting household debt slipping into default. He cautioned consumers against risky real estate investments, and warned them not to pin their hopes to the market continuing this trend. Any type of correction could result in the loss of value in a number of homes throughout the Greater Toronto Area, which could result in many homeowners dealing with mortgages that are several times the value of their homes.

Market Continues To Heat Up

The Toronto real estate market continues to heat up, breaking existing records despite warnings that current sales levels are not sustainable. Almost 13,000 homes were sold during the month of May, up 10.6 per cent from last year. The average price per home has also risen by 15 per cent over last year’s costs. The Toronto Real Estate Board says that that the competitive nature of this year’s market is due to a shortage of homes, and an excess of buyers. This has resulted in “strong upward pressure on home price” throughout the Greater Toronto Area.

Toronto Real estate Board

While the number of homes sold, and the cost per home, has risen, the number of new listings has dropped by six per cent in comparison to last year’s numbers.

TREB Housing Market Charts

OECD Warns Federal Government

The competition is generally focused on single homes, semis, and townhouses throughout the city. Experts speculate that the reason for the sky-high prices and increased sales is due to the number of foreign buyers, who see Canadian properties as safe real estate investments. This has lead to calls for federal intervention from the Organization for Economic Co-operation and Development, a Paris-based think tank that focuses on economic issues. They’ve warned the government that something needs to be done about the market, including the introduction of new regulations aimed at reducing the risks associated with rapidly rising real estate prices.

In a report released earlier this month, the OECD cautioned the federal government about the market in Toronto and Vancouver, saying that any type of correction to current prices could be a threat to the financial stability of the entire country. This echoes concerns they voiced in November of 2015.

These warnings haven’t escaped the notice of some of Canada’s leading banks. Chief Executive of Bank of Nova Scotia, Brian Porter, has said that they are “concerned” about rising housing prices, in Toronto and Vancouver and that they have taken their “foot off the gas” in terms of lending in those two markets.

New Rules Put Into Play, But Have Been Ineffective

Bill Morneau, the Finance Minister, has put into place some new rules and regulations, including raising the down payment required for a home over $500,000 by ten percent. This tax adjustment was made in February, prior to the record-breaking month of May, proving that it is relatively ineffective in deterring home buyers. CIBC deputy chief economist Benjamin Tal said that these measures are “obviously…not helping, especially not in Toronto and Vancouver”. Some worry that this might not be enough to control the market, but others believe that it is taking the wrong approach.

Economist and strategist for Gluskin Sheff and Associations, David Rosenberg, believes that these rules will “price out a generation of young people” from being able to afford their homes. He acknowledges that the market, if left as it is, is unsustainable, but cautions against tight restriction on real estate investment. Foreign investors are largely undeterred by such measures, and won’t be discouraged from entering the marketplace by a higher down payment. Instead, these measures deter first time home-buyers who may be worried about qualifying for a mortgage from purchasing their first home.

Instead, Rosenberg believes the solution lies in providing more supply, not trying to cut off demand. In the past year, thirty per cent fewer residential building permits were approved in Toronto and Vancouver, two of the hottest markets in the country. This is despite the increased demand for homes in those areas, and the reduced supply. By encouraging the construction of new homes, including the single family homes, semis and townhouses, the growing demand can be met.

The Real Issue Is Supply And Demand

The fact that so few homes are on the market is the problem that needs to be addressed, not determining who is purchasing the ones that already exist. Rosenberg suggested that the government make it easier for new homes to be built, by putting more of a focus on zoning regulations and less on real estate taxes.

Other experts have also weighed in, offering potential solutions to the growing market. Tal and TD economist Diana Petramala have both speculated that introducing a tax that would target those foreign investors would be the “sharpest, bluntest tool” that could be used. Tal does not want to place heavy restrictions on the types of properties that can be purchased, such as those that are in place in Australia, but does think that a capital gains tax or a tax on flipping houses would cool the hot market. Petramala is also in faovur of these measures, but did warn about introducing them too quickly into the market, lest they cause the very crash that is the main concern.

The OECD also raised concerns about the rise of household debt, advising that “in relation to household incomes, both house prices and household debt are high”. The fear is that homeowners will take on debt they will not be able to afford to pay, causing an economic crash similar to the one that happened in 2008-2009.

Chief economist at the Bank of Montreal, Douglas Porter, suggested taking a broader view of the situation. He recommended raising property taxes as home values increase, but also making it tax deductible as to avoid punishing current homeowners. While the moves the government has made so far have done little to address the growing housing market, he, like Rosenberg, believes that there “is more than just the foreign investment component going on”. The fact that detached homes have not been constructed with the same frequency as in prior years has effectively cut off available supply. The lack of “meaningful job opportunities” in the area has also played a major role, meaning that only the wealthy have been able to invest in real estate in Toronto.


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