Bank of Montreal Chief Economist Douglas Porter is brimming with the heat on Toronto real estate stating the market is going through a housing bubble. In an email he wrote to clients, he clearing stated that the city should be prepared for a housing bubble.
Determining when a market is heading for a bubble is something that is very difficult to recognize according to Porter as everyone has their own understanding of a housing bubble even though there is an existing standard which qualifies a market to be in a housing bubble. However in general terms, most people consider a housing bubble as a situation when home prices are increased by a high demand from buyers, speculations of a further rise coupled with a limited supply which takes a long period of time to be controlled.
And for Porter, this is the exact situation currently occurring in Toronto as home prices continue to soar beyond control. Although Porter had in the quite recent past dismissed claims from market spectators of a market crash, he is now presenting figures showing of a possible housing bubble.
Recent data suggests the average home price in the Greater Toronto Area in January increased 22.6% from the previous year.
Price index from the Canadian Real Estate Association also shows the price increase surpassed both inflation and wage growth by 21% and such price growth rate was last seen in the late 80’s when the housing market when through a housing bubble. The sales-to-new listing ratio was also a perfect indicator that the Toronto housing market was getting out of control as it has changed 93.5% in the Greater Toronto Area in January.
Homes are being sold at a rapid pace in Toronto and is fueling home prices as the demand for homes is increasing. Furthermore, home sellers in the city are also creating bidding wars which is also driving home prices forward. To determine a hot market, the index ratios above 60% is considered as a seller’s market and nearby markets like Ontario, Hamilton, Kitchener and Niagara are proud to have ratios above 100%. Although agents and the construction industry suggest that the low supply of homes is the driving force behind home prices, Porter deviates from this claim.
He proposes that other factors such as high demand, low interest rates, the concentration of people in the city or foreign buyers. He suggests housing supply is not the major reason citing the condo market which has been has increased by 20% despite sufficient homes on the market.
Porter warns that “Toronto and nearby regions are overheating, and possibly dangerously so.”