“Bubble, Bubble, Toil and Trouble. Leave this Island on the Double.”

This quote, attributed to the 3 witches in the opening scene of Macbeth, has actually been incorrectly attributed to Macbeth for years.  The actual words spoken by the 3 witches was “Double, double, toil and trouble.  Fire burn and caldron bubble.”  The former quote came from the hit Disney cartoon many years ago, Ducktails.  Both quotes are very apropos to the Toronto and Vancouver housing market discussions ongoing weekly.  The 3 witches might be the various economists of late who have been analyzing the Canadian housing situation.

The latest bubble discussions arise from the RBC Economics Research Department in a report released in late July 2012 by Robert Hogue, Senior Economist.  Mr. Hogue states ”booming Toronto condo market does not imply a bubble”.  The conclusion by Mr. Hogue from RBC is that “concerns about condo investors may be overblown”.  He views the involvement of investors as having “benefitted the rental side of the market by addressing very low rental unit availability in the area”.  Furthermore, he finds “little evidence of speculation (property “flipping”) on any danger scale” based on the CMHC reports of the fall 2011 that only 10-15% of new condominiums having been listed within 12 months of registration.

Although RBC is of the view that there is no bubble, it does not expect condominium prices to go up substantially and may come down by a small amount between 2% and 7% in the near term.  I would expect prior demand to cool somewhat but given the significant sales over the past 2 years and the need for a breather to allow construction to catch up, this is not a bad scenario.

On the other hand, the Scotiabank Global Economic Research Group released a report last week ( http://tiny.cc/20wziw ) whereby they indicate that “supply risks and affordability pressures have the potential to trigger larger price adjustments” and that Toronto’s condo market “is beginning to “self-correct”.  Scotiabank noted that second quarter sales in Toronto saw a significant reduction from last year’s numbers.  This ignores the fact that last year was a record year and that sales for this year are still on track to be the second highest record.  The report does not specifically predict a specific percentage reduction in sales or prices in Toronto or Vancouver, although Vancouver has already seen a significant decline.  Notwithstanding the doom and gloom headlines in the Toronto Star, Scotiabank actually concludes that “Canada’s housing market is expected to avoid the sharp downturn witnessed in the United States and Europe.  Canadian household balance sheets remain in reasonably good shape.”  

So reading between the lines in both reports, sales may ease off somewhat to a more normal level and projects may take longer to sell, given that end users will be more of a factor in the marketplace.  All this means is that we may be returning to a more normal pre-2009 market where investors played a material but not an overwhelming role in driving the new condominium marketplace.

Good news for developers expecting to launch 45 projects in the fall 2012.