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Bridge Beat

Jan 25, 2013

Extremely uncertain and incredibly crazy

Benjamin Tal, Deputy Chief Economist with CIBC World Markets Inc., offered his Global Economic Perspective to the RealNet Private Client Briefing on January 23, 2013. He started his presentation by characterizing the last two years as ‘crazy’ and anticipating the next two years to get ‘crazier’ still.


If my memory serves me correctly, last year the key word was “uncertainty” and, be assured, there is still a lot of uncertainty in the global market. While the Euro zone is experiencing a difficult recession, Mr. Tal’s opinion was that Germany’s dependence on the Euro would ensure its survival. China, on the other hand, is achieving economic growth and has the necessary tools for a “soft landing” from the economic slowdown due in large measure to the vast central power of the government to quickly implement the necessary regulatory policies to boost the economy and control inflation.  The US economy is also recovering suggested Mr. Tal, particularly the housing market which is benefitting from a market triggered solution – albeit not sustainable for the long-term -  where there is an eager supply of investors buying and renovating distressed units and an equally eager supply of renters wishing to rent them. 


On the home front, the question of whether or not the Toronto real estate market will ‘burst’ has been answered -- at least for the moment. (The answer: A burst? No. A correction? Yes. See Leor’s upcoming blog for the actual numbers from RealNet for 2012) However, this has now spurred an even more urgent question: Now that sales and prices are admittedly down, will this precipitate a catastrophic US-style real estate crash?


On this topic, Benjamin Tal debunked the argument that the four traditional indicators of the US crash do not hold true for Canada, namely: the high delinquency rate among borrowers, the high debt to income ratio among consumers, the lack of recourse on security for banks, and the tax deductibility of mortgage payments.  Mr. Tal made a convincing argument that the delinquency rates for Americans were not high prior to the crash; that US states with recourse mortgages still suffered significant losses; that tax deductibility offers only minimal tax benefits to the borrower; and that for the past few years, the low interest rates have allowed Canadian consumers to develop US-style borrowing habits that have increased their debt to income ratio.


The key difference between Canada and the US was and continues to be the exposure to the sub-prime (non-conforming) mortgage market and that, Mr. Tal submits, has made all the difference.


The take-away is that the Toronto real estate market has not burst and what we are experiencing is a healthy ‘adjustment’ or a ‘regression’. The biggest risk appears to be the perception that the question has not been answered definitively but just deferred for another time. And that means that media hype on the “housing bubble” will exacerbate any “soft landing” we might hope to achieve.



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