Monthly Archives: July 2014

Housing Bubble

What is meant by the term “Housing Bubble?”

When conducting research on the Canadian housing market, it’s impossible not to encounter information and news regarding the idea that the country is currently engulfed in a housing market “bubble,” one that is poised to burst at any moment. The topic is highly debated, generating speculation from dozens of independent analysts and financial institutions. Most of the articles we have found discuss the phenomenon for an informed audience, assuming the reader has some familiarity and knowledge on the topic. We at thought it would be a good idea to clarify what is meant by the term “housing bubble,” so that that those embarking on their homebuying journey, who don’t necessarily have an education in real estate, can better grasp what some believe is the direction the Canadian housing market is headed.

A fairly good summary of what a “housing Bubble” is can be found on Investopedia, a definition which highlights the delicate and volatile interplay between the market forces of supply and demand, and the risks involved in market speculation. Here’s the breakdown:

Canada Housing Bubble vs US

  • Investors and developers begin to build large quantities of housing units in a given location, fueled by the speculation that a high demand for units in that area will translate into a high number of sales at an elevated price.
  • In the time it takes for the supply of homes to reach the speculated demand (a process that takes years), the demand ca, and often times does, decrease dramatically, and for a variety of reasons (displacement of interest into another area is one example).
  • Once the excess supply has sat on the market long enough for investors and developers to panic, the end result is a dramatic slash in prices to boost sales and hopefully cut losses. This decline in home values, which affects all homeowners and not just newly built homes, is what is referred to as the “bubble bursting.”

The finger of blame for this process unfolding is traditionally pointed at low interest rates and the loosening of borrowing standards, which helps to fuel demand. Benjamin Tal, a well-known and highly respected economist at CIBC, recently commented on the lack of market information and statistics regarding mortgage debt levels, calling the situation “mind-boggling” and “unhealthy” (you can read more about it here). He argues that this information is needed in order to accurately calculate the extent of the adjustment the government must execute, one to correct what he believes to be an “overshooting” housing market.

Among those economists and analysts who believe that Canada is on the verge of having its housing market bubble burst, one of the more optimistically predicted outcomes, is what many refer to as a “soft landing,” The first step to understanding this possible future, is first accepting the fact that a market correction is needed in the form of a gradually increasing interest rate. In the “soft landing” scenario, such an increase, if timed out accordingly, will be easily absorbed by potential borrowers of mortgages and loans

Part of Tal’s issue with the lack of information available on mortgages is that it is impossible to determine with any certainty the amount interest rates need to increase in order to ensure the market’s soft landing. The reason Tal’s request for more information seems unreasonable to some, is the specific types of information about personal and corporate spending and borrowing that he deems necessary for proper calculations to be performed. Statistics such as the dollar value of mortgages that are originated every three months, the credit score of borrowers of those specific loans, and what the share of foreign investment is in areas like Toronto’s booming condo market, information some might be hesitant to give away.

In an article written by Tamsin McMahon of Macleans (read here), the author claims that Toronto home prices overall are increasing, but suggests that some neighbourhoods are more “bubble-prone” than others. McMahon’s analysis looked at TREB data om median house prices (adjusted for inflation) in 35 Toronto neighbourhoods in between 1996 and 2014, and revealed some pretty fascinating insights. Absolutely no neighbourhoods in Toronto saw home values drop in that time period, with neighbourhoods in the city’s centre doing better than those in the outer regions. Neighbourhoods such as Riverdale and the Junction went from “seedy to trendy,” with home prices escalating dramatically, up 170% and 136% in each community respectively. Of those neighbourhoods described as having performed “unimpressively” in the time period studied were Leaside and Mount Pleasant, only up 27% and 47% respectively, which is attributed to the large number of condo buildings in each community, which cannot take advantage of rising house prices.

Luxury Homes in Canada Having a Record Year – Sotheby’s

Luxury Housing - Canada

In the Huffington Post Canada’s most recent annual survey of the most expensive homes for sale in Canada (read here), for the first time, a city other than Toronto or Vancouver has taken the top spot for the most expensive homes available in the country. The Multiple Listings Service in the latter part of June listed a residence located in the foothills just west of Calgary, at a starting price tag of a whopping $37.8-million.

A new report released July 8th by Sotheby’s International Realty Canada, a biannual study on market trends for pricey pads in Canada’s largest markets, appears to reinforce the Huffington Post survey, generating quite a bit of buzz among market analysts online. According to the report, sales of houses valued at $1-million and more in Toronto, Vancouver, Calgary and Montreal rose by 32% over the first half of last year. Calgary, widely regarded as the biggest winner so far in 2014, saw a 17% increase in the sale of luxury homes versus last year. And what comes as no surprise, immediately following the release of the report, Sotheby’s announced that it’s doubling its presence in the city. A move that is dramatic, considering two years ago, the luxury real estate agency had no office there at all (read here). Ross McCredie, chief executive officer of Sotheby’s Canadian business, in an interview with the Globe and Mail, said that the sale of $1-million+ homes head doubled in the past year, making the decision an easy one.

But that’s not to say that the luxury housing market isn’t still red hot in Canada’s other major metropolises. Toronto, the country’s largest city, and the city with the highest selling price, saw a 34% jump in sales (up to 3,956 in the six months ending on June 30 from 2,947 last year), of all luxury homes types, including condominium units, townhomes, and houses. The same Sotheby’s report also noted that the demand for luxury real estate in Vancouver is also skyrocketing, with buyers purchasing 40% of available $1-million+ homes and condominiums in the first half of 2014, with the biggest jump in sales — at an increase of 51% — coming in the $4-million-plus category of single-family homes (read more here)

Katia Dmitrieva of Bloomberg argues that the increase in sale is largely due to escalated demand for high-end real estate in Canada, as low mortgage rates and international buyers spur demand and boost prices (read here). Potential homebuyers are exploiting a relatively low of mortgage rate, that has been fixed at 4.8% since May. Sotheby’s analysts expect the high-end real estate market to gain momentum in the latter half of the year, citing a strong economy, increased consumer confidence and mortgage lending rates at historical lows.“These are historically low interest rates and people are confident that they can afford borrowing with the equity in their homes,” McCredie, mentioned in the same interview. “People are realizing that a big chunk of their net worth is in real estate and they’re renovating to increase that. You also have a lot of wealthy international buyers. Canada’s seen as a stable and safe place to invest.”

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Toronto Housing Market: Cooling Off or Reaching Equilibrium?


There is some consensus among real estate speculators online that the Toronto housing market in particular is poised for a major cooling-off period with regards to sales. TREB and CREA statistics both illustrate an extremely prosperous Spring, with home sales in the GTA surging in April and May, which is likely the result of expected homebuyers stalling their purchases until Winter temperatures subsided.

Opinions are divided as to the factors contributing to the predicted sales slowdown. There are some analysts who suggest that any visible slowdown in GTA home sales this summer is a naturally reoccurring phenomenon that we should come to expect every year. According to some, typical seller behavior involves prepping a home for sale in January and February, ensuring that it is show-ready for the busy Spring months. Looking at overall sales trends the past few years, a slowdown in Summer sales is normal after this spring buying surge, with sales picking up again in the Fall. There are others that suggest that 2014, in terms of GTA home sales, presents an interesting case study, or exception to the observed sales trends of last year. Some argue that any noticeable cooling off period in sales is actually the market attempting to reach equilibrium and return to “normal” levels. It is inaccurate to suggest that sales are plummeting, when drawing comparisons to sales in April and May, which were statistically some of the strongest months Toronto has ever seen.

The best indication of this slowdown in home sales, according to Susan Pigg of the Toronto Star (read here), is a noticeable reduction in the number of multiple bidding wars, as ”buyers take a breather and sellers start to feel just a little less cocky.” This “breather” potential homebuyers are taking is essentially an exercise in patience, with buyers walking away from homes that are too pricey, waiting weeks or sometimes months to see whether natural market forces will drive the price down, possibly due to lack of interest.

Carolyn Ireland of The Globe and Mail (read here) suggests an alternative explanation for the visible cool-down in home sales, arguing that potential homebuyers are still eagerly house hunting, but are far more reluctant to play by what she refers to as the “offer night” rules. As opposed to Pigg, who suggests that prospective buyers are being “scared off” from buying a home because of high prices that are only further escalated due to aggressive bids, Ireland suggests that many are still throwing offers into the ring, but are not overly eager to do so. Rather than place a bid the first available opportunity, once again, buyers are exhibiting patience, waiting to see how prices fluctuate based on demand and availability of homes nearby. Ireland discusses the importance of timing, arguing that playing the “waiting game” is advantageous for homebuyers, who could see the price of their dream home go down as time goes by and other homes in the area go on the market. The listings boom in the Spring has an effect on the psychology of the prospective homebuyer, making them less desperate to find a home and immediately place a bid.