Monday, 20 August 2012

Housing Bubble or No Housing Bubble? That is the Question!

These days conversations about the housing market in Toronto are almost as common as conversations about the weather amongst Torontonians. Discourse about the existence of a housing bubble and whether or not it will burst has been ongoing for quite a while now. So should we be worried? Is the market really as hot as the topic?  Will it cool down in due time or are we going to see a sudden crash? If one were to do some research on this issue he/she would find out that there is no unanimous answer to any of these questions.
“We have hit the peak in the new condo market, we are on the down side of the roller coaster,” Ben Myers, executive vice president of Urbanation Inc., a leader in condominium market research, said in a recent interview published on the Financial Post website. According to Urbanation  4,769 new condos were sold in the second quarter of 2012, down 21 per cent from the record high of 6,070 in the first quarter. Moreover, 88 per cent of the units currently being built are sold, but unsold supply set a new market high at 18,123 in the second quarter. But this reduction in sales is not just limited to the new condo market. 
Toronto recently experienced a reduction in the total number of new properties (not just condos) as well but in my opinion one should not take this as a sign of bad things to come and it would be unwise to jump to any conclusions regarding a bubble right now. The decline in sale numbers can be in part attributed to the reduced maximum amortization of new mortgages from 30 years to 25 years, a new rule set in motion by the Minister of Finance back in June. Another contributing factor is the rising credit market debt as a percentage of personal disposable income of Canadian households. 
 Low interest rates have made the cost of servicing debt remain low in recent years. In order to diminish risk of future default, the Minister of Finance placed a cap on debt payments at 39% of income, making it more difficult for Canadians with large debts to acquire a mortgage.
Despite all of this, RBC’s senior economist Robert Hogue recently stated that demand in Toronto is still in line with supply, contradicting claims that a condo bubble has emerged in the city. “To accommodate the 38,000 or so net new households it sees every year, the GTA must increasingly expand its housing stock ‘vertically,’” he said.
In my opinion, the market will cool down but this topic will definitely remain a hot one. We will see sales and prices slowly plateau and some new condo projects may get cancelled but one cannot burst a bubble that does not exist in the first place.

1 comment:

  1. I will wait to buy condo.
    Thanks Investomax