Canada is not in danger of heading for a housing bubble, according to a new report from the Conference Board of Canada that says such fears are exaggerated.
While there may be a slight correction in some areas of the country, the real estate market is in for a soft landing, according to Housing Briefing: Bubble Fears Overblown. The news is positive for Toronto, where the resale market is balanced and price growth remains healthy. The Conference Board's view is that a major price correction is hard to envision, given solid employment and population growth.
Mortgage costs, not just house prices, are the principal deciding factor for potential homebuyers, according to Robin Wiebe, Senior Economist, Centre for Municipal Studies. He added that mortgage rates are expected to rise this year, but not increase significantly, because the economy continues to grow slowly.
Housing bubble fears hinge on the ratio of house prices to apartment rents and house prices to incomes. The Conference Board believes that while these ratios are high, they are misleading and better indicators of affordability are the ratio of mortgage payments to rents and mortgage payments to incomes. Neither presents much cause for alarm about a housing bubble.
Job growth in on a modest increase and the population is growing. In the GTA, about 100,000 new immigrants arrive each year.
Although Toronto's economic growth slowed from 2 per cent in 2012 to 1.8 per cent in 2013, the job market is strong with employment gains on a year-over-year basis up 4 per cent on average in the second half of 2013. Estimated population growth remained healthy at 1.7 per cent in both 2012 and 2013.
Low interest rates for the past five years have softened the brunt of rising house prices, keeping carrying costs to incomes and rents within historical norms, the report finds. Mortgage payments in 2013 ate up less than 20 per cent of average household incomes and were about twice the cost of rent for an average two-bedroom apartment.
Interest rates have helped with affordability and most homebuyers are able to negotiate mortgage rates lower than those posted rates. A lot of buyers are opting for extended terms that lock in their payments and protect them from rate increases for a few years. By the time they review, they'll have more equity in their homes.
The report found that a low proportion of Canadian mortgages are in arrears, so there is no reason to fear a wave of distressed home sales in here as there was in the United States in the 2000s.
While the report said that oversupply in Toronto's condominium market remains a risk, largely because of an all-time high number of units under construction, and the Conference Board believes the market will ultimately cool and increases in the average resale price will slow, a big price drop will likely be avoided.
A growth in population and jobs, coupled with the headaches of gridlock and commuting are helping to drive the desirability of downtown living, where condos are the logical solution. The tight downtown rental market is also making it easy for potential condo investors to find tenants.