TORONTO HOUSING BUBBLE - IS IT READY TO BURST?

The Ontario Home Builders Association held its own economic forum on December 2, 2010 featuring two senior economists from the Toronto Dominion Bank and Bank of Montreal, Pascal Gauthier and Douglas Porter, together with Ben Myers, President of Urbanation and Tony Wong,  from the Toronto Star.  Topic:  Residential Housing Bubble - yes or no?

Other than Tony Wong, the resounding conclusion was no.  The two economists both felt that the Canadian economy continues to grow with significant employment growth and rising commodity prices.  Construction costs continue to moderate, keeping prices in check for housing.  Pascal Gauthier predicted a "safe landing" next year.  Ben Myers predicted a slowdown in high-rise sales of approximately 15,000 high-rise units in 2011 vs. 19,000 in 2010.  All these are pretty healthy numbers.

Tony Wong was concerned about the massive number of sales in the condominium market, the bulk of them being sold to offshore investors.  He was also concerned that the continuing high cost of housing in the Toronto area for both low-rise and high-rise could stall sales.  He reminded us of Jeff Rubin's forecast in 1999 that real estate prices were going to go down by 25% and the negative reaction from all other industry and experts and economists at the time who lambasted Rubin for making such an outrageous prediction.  We all know what happened back then.

Is there a bubble?  Looking towards another country in the world where real estate prices are still rising, Israel continues to enjoy price increases of 22% year to year recently.  Everyone there is asking the same question.  Experts there say a lack of land supply and increasing immigration should sustain a healthy market there.  Similar factors for the GTA seem to apply, given the intensification efforts of the Provincial government and the 100,000 new immigrants coming into GTA each year. 

My sense is that foreign investors are a finicky group, and it wouldn't take much to have them exiting from our marketplace.  High prices and a lack of return are making it much more economically unfavourable for them.  As well, if interest rates go up marginally, it will have a major impact on the affordability of these units for both owner occupiers and investors.  It is really low rates that are sustaining demand and allowing prices to rise.

My advice to developers is to buy sites in both unique and desirable locations with a cushion for pricing that can cover a modest market downturn.  Thin margin deals are to be avoided.  The other shoe hasn’t dropped yet.