Fixing Toronto's housing bubble: Today would be good

Theglobeandmail.com
April 18, 2017
By Michael Babad

The bubble

With the exception of speculators looking for instant gratification, just about everyone thinks someone should do something about Toronto’s housing bubble.

Today would be good.

Federal Finance Minister Bill Morneau passed on the opportunity in his latest budget. And the Bank of Canada certainly isn’t going to raise interest rates to cool down Toronto and other hot spots in Southern Ontario.

That’s not to suggest that either should use national measures to hose down speculators and home buyers in one region of the country. But it is worth noting that some other markets are also inflating and the already wildly unaffordable Vancouver is showing signs of having hit bottom.

Remember, too, that Mr. Morneau has already taken tax and mortgage measures, and that Bank of Canada Governor Stephen Poloz doesn’t believe higher interest rates would fight the blaze all that well.

Mr. Morneau isn’t prepared to let the matter rest, however. Even though he took no new measures, he asked to meet with Ontario Finance Charles Sousa, who said he plans to address the issue in his upcoming budget, and Toronto Mayor John Tory to discuss what can be done as prices rise seemingly by the day.

Often, actually by the day.

That puts the spotlight on Mr. Sousa and Mr. Tory when they hold that meeting with the federal finance minister in Toronto this afternoon.

“They are likely to announce a desire to act in co-ordinated fashion on the challenges facing Toronto,” Derek Holt, Bank of Nova Scotia’s head of capital markets economics, said of the meeting, adding that “blunt cross-country ‘solutions’ to strained affordability may, in fact, be ill-advised” given that the trouble lies in Ontario.

Some new Ontario measures have been kicked around. And, as The Globe and Mail’s Justin Giovannetti reports, the province is eyeing a speculation tax on non-resident buyers, though there are no details.

Coincidental though it may be, Mr. Morneau, Mr. Sousa and Mr. Tory will have the latest national and local numbers to spur them on.

Later this morning, though before the meeting, the Canadian Real Estate Association releases its monthly report on sales and prices in March.

We already know from the Toronto Real Estate Board’s March report that the city is on fire, with the MLS home price index showing an annual surge of almost 29 per cent last month. Still, the report should add urgency to the discussion.

“Bubble much?” Bank of Montreal senior economist Benjamin Reitzes said of the latest Toronto numbers.

“The areas bordering Toronto are red hot, as well, due to spillover, as buyers move as far as necessary to afford a home.”

Mr. Reitzes expects the CREA report to show national sales rising 3.5 per cent in March from a year earlier, with the MLS home price index surging by a record 16.6 per cent.

There are other cities to talk about, as well.

“Vancouver sales were down about 30 per cent year over year, but this is roughly 10 percentage points off their worst level, as that market appears to have bottomed,” Mr. Reitzes said.

“The worst appears to be behind Calgary and Edmonton, as well, with sales now up from a year ago.”

Ontario’s improving economic fortunes are obviously playing at least part of a role in the rapid rise in prices, said Scotiabank’s Mr. Holt, but there’s more going on.

“Ontario’s industrial/commercial base benefits from the flip side of the commodity shock,” Mr. Holt said.

“This has translated into solid job gains and the return of migrants from other parts of the country to Ontario after a decade-and-a-half of defections. Immigration increases that have gone to cities like Toronto and Vancouver and supply shortages have also driven prices higher.”

Then there are the Bank of Canada’s rate cuts during the oil shock.

“Governor Poloz’s two rate cuts in 2015 added to lagging housing momentum, but one reason he doesn’t see fundamentals playing a role in driving housing is that he dismisses the role of rates notwithstanding the acceleration of mortgage growth thereafter,” Mr. Holt said.

“Such demand drivers likely don’t explain the one-third rise in house prices over the past year, but they would explain some of it,” he added.

“The residual that is not explained by fundamentals is likely unsustainable just at the same time that supply is responding through sharp increases in housing starts and building permits.”

Mr. Poloz might in fact want to start raising rates “sooner rather than later,” given rising home prices and the record debt-to-income ratio of about 170 per cent among Canadian families, said Moody’s Analytics economist Paul Matsiras.

“Barring a deterioration in economic conditions, putting the brakes on debt growth would be prudent to avoid a hard landing in the housing market,” he said.

Timing, of course, is everything.

“Should the bank act too soon and raise rates faster than highly over-leveraged Canadian households can manage, the resulting shock could set off a wave of defaults that would cripple the country’s banking system,” Mr. Matsiras said.

The inevitable end of the Toronto bubble will mean “pain” for those who bought in the past year or two and expected further price gains, said David Rosenberg, chief economist at Gluskin Sheff + Associates.

But “the reversal will then blaze the trail for a wide range of millennials who could not afford to buy a home to finally step into the market,” he added.

“So you see – popping bubbles does have a silver lining.”

Stocks sink

Stocks are tumbling almost everywhere, with New York poised for a weaker open as angst rules the world.

Tokyo’s Nikkei was the only major global market to see an upswing, rising 0.4 per cent. Hong Kong’s Hang Seng lost 1.4 per cent, and the Shanghai composite 0.8 per cent.

In Europe, London’s FTSE 100, Germany’s DAX and the Paris CAC 40 were down by between 0.7 and 1.4 per cent by about 6:20 a.m. ET.

New York futures were also down, and the Canadian dollar was just below the 75-cent U.S. mark.

This came as investors continued to fret over geopolitical developments, as British Prime Minister Theresa May called a snap June 8 election, and as the French election campaign headed into a key week.

What else to watch for today

Quarterly earnings reports on tap: Bank of America Corp. Goldman Sachs Group Inc., IBM, Johnson & Johnson, Kinder Morgan Inc., Rogers Communications Inc. and others.

“The Q1 earnings season kicks into higher gear this week,” said BMO senior economist Sal Guatieri.

“The consensus sees S&P 500 earnings growth of about 10 per cent year-over-year, and 6 per cent excluding energy, according to Thompson Reuters.”