Ottawa, March 24, 2014 – Overbuilding in Toronto’s condominium market poses a risk of a housing bubble in the city. But a new Conference Board of Canada analysis concludes that while the market is expected to cool and increases in the average resale price will slow, a big price drop will likely be avoided.
"Toronto developers seem unfazed by the high “under construction” volumes. During the six months ending January 2014, building permits for apartments, which are mainly condominium tenure, were double their volume during the equivalent year-earlier period," said Robin Wiebe, Senior Economist, Centre for Municipal Studies. "Past instances of large unsold new condominium inventories have not prompted prices to correct sharply in the resale market."
The resale market is balanced. Sales stabilized in June 2013, and rose on a year-over-year basis during each of the six months leading up to the end of 2013. Price growth remains healthy and a major price correction is hard to envision, given good employment and population growth in the Toronto area. The condominium market in particular is driven by a tight rental market and by long commuting times in the Greater Toronto Area, which increases the desirability of downtown living. These conditions suggest potential condominium investors can readily find tenants. All this is boosting the proportion of multifamily starts.
Viewed from this perspective, Toronto’s housing affordability remains decent. In 1992 and again in 2012, mortgage payments on the average MLS house consumed less than 18 per cent of average household incomes and were exactly twice the average two-bedroom apartment rent in both years.
Nationally, and in some local markets, Canadian house prices may be headed for a modest decline, but fears of a housing bubble are exaggerated.
"Mortgage costs, not just house prices, are the principal deciding factor for potential homebuyers," said Wiebe. "Mortgage rates are expected to rise this year, but not dramatically, because the Canadian economy remains in a slow-growth mode.
"The housing market may be undergoing a correction in some regions and market segments, but it is more likely to be a soft landing than a bubble bursting."
Fears of a housing bubble hinge on the ratio of house prices to apartment rents and house prices to incomes. The Conference Board's view is that while these ratios are high, they are also misleading. Better indicators of affordability are the ratio of mortgage payments to rents and mortgage payments to incomes, and neither presents much cause for alarm about a housing bubble.
The Conference Board of Canada's initial Housing Briefing: Bubble Fears Overblown provides assessments of six major Canadian markets—Vancouver, Calgary, Edmonton, Toronto, Ottawa and Montreal.