If Yogi Berra were alive today, he'd probably describe the Toronto housing market like this: Things are so good, they're bad. And if they get any better, that'll be worse.
In February, the Teranet-National Bank house price index showed prices in Greater Toronto rising 23 per cent over the previous year – or about 21 per cent faster than the rate of inflation. Homes in neighbouring Hamilton were up 19.7 per cent. Even in Metro Vancouver, long the hottest market but which recent policy changes have somewhat cooled, prices are up 14.3 per cent. Most of the rest of the country, however, looks relatively calm.
But not Toronto. It's become such a sellers' market that – another Berraism – nobody wants to sell.
In response to surging demand, the number of properties offered for sale has dropped. Potential sellers are holding off putting houses and condos on the market, because they assume the longer they wait, the higher prices will go.
"In the first two months of 2017," writes Simon Fraser University public-policy professor Josh Gordon in a recent report on Toronto housing, "new listings dropped despite rapidly rising prices, likely because even more sellers now expect prices to climb higher. That has sent the sales-to-new-listing ratio soaring, which is a good proximate indicator for future house price increases."
In other words, prices in Toronto appear to be feeding on themselves. Why? It's the psychology of FOMO – the fear of missing out. Purchasers fear that, unless they buy now, they'll miss out on ever owning a home. Potential sellers fear that, if they sell now, they'll miss out on windfall profits from inevitable price jumps. Based on the past few years, these have become rationally held beliefs. Speculation is now wisdom.
If you're already a homeowner, it's wonderful. If you're a young person, an immigrant or middle-class, it's depressing. If you're an economist or a banking regulator, it's terrifying.
Toronto has long shown signs of a classic bubble, and so has Vancouver. And when housing bubbles burst, they send tsunamis rushing through the financial system, and the entire economy. Just look at what happened in the United States in 2008.
That's the danger. And the best way to address it is to try to carefully let some air out, before the balloon pops.
So what's been driving prices in Toronto and Vancouver? A lot of things – some of which can't be changed, or shouldn't be.
There are the Bank of Canada's record low short-term interest rates, a response to weak domestic and global economic conditions. Should Ottawa be agitating for higher borrowing costs, across the entire economy? Obviously not.
The Bank itself is also reflecting a worldwide savings glut, which has pushed global bond yields and mortgage rates to the floor, while pushing up the value of a lot of investment assets. Can Ottawa or the provinces address that? Not really.
Some of the price increases are a reflection of population growth, with the Greater Toronto Area adding nearly 400,000 people between 2011 and 2016, and Greater Vancouver growing by 150,000. Should government policy aim to stop people from moving to these successful cities? Absolutely not.
However, housing in Toronto and Vancouver has also been driven skyward by other factors. Greater Montreal, Canada's second-largest market, has the same low interest rates, and over the last five years, it's added twice as many people as Vancouver. But Montreal prices have not been bubbling.
The price boom in Toronto and Vancouver has been far beyond what population and income growth would suggest. For example, there tends to be a long-run relationship between average incomes and average housing prices. That's because, as Yogi Berra might have put it, people can't afford what they can't afford – except when they can. In Toronto and Vancouver, the unaffordable is now the norm.
Average home prices are normally expected to be about three times median family incomes. As of last summer, that's roughly where things were in Montreal, Ottawa and Calgary. But in Toronto, prices were more than eight times family income. Vancouver? Nearly 12.
Last year, the situation finally pushed British Columbia to act. The government introduced a 15 per cent tax on foreign buyers, which appears to have had an impact. Vancouver prices actually dipped late last year, reversing steep gains earlier in 2016.
The levy, which doesn't apply to immigrants, had a dual effect. It discouraged non-resident speculators, while also signalling to the entire market that prices might not go up forever.
(Unfortunately, B.C. recently undermined the measure, by watering down its application, and creating a price-inflating program of interest-free loans for first-time homebuyers.)
Ontario Finance Minister Charles Sousa is now also musing about a foreign-buyers tax for Toronto. As in Vancouver, it might calm the market, and it's hard to see how it could hurt. Non-resident investors are likely only a small part of the picture – the data is still poor – but they may be having a significant impact on prices and psychology.
Economists keep sounding alarms about a Canadian housing bubble; the latest comes from the Bank of International Settlements. A popped bubble will harm the entire country, but the entire country is not in a bubble. There's no need for a national plan to throw cold water on buyers from Halifax to Ottawa to Edmonton. Policy has to go after the problem where it makes its home, in Southern Ontario and B.C.'s Lower Mainland.