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Toronto housing bubble talk dismissed


The head of Canada’s biggest bank and one of the country’s leading developers said the housing market is not in a bubble, even as one economist said Toronto is caught in a “condo craze.”

Canadian housing starts rose to the highest since September 2007 last month, led by multiple-unit projects, Canada Mortgage & Housing Corp. said yesterday. The annual pace of home starts rose 14 percent to 244,900, Ottawa-based CMHC said.

Participants at Bloomberg’s Canada Economic Summit in Toronto said talk of a housing bubble is overblown.

“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” said Gordon Nixon, chief executive officer of Royal Bank of Canada “Frankly, I’d like to see the rhetoric come down a little bit.”

A residential real-estate boom in the world’s 10th-largest economy has prompted senior policy makers such as Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty to warn that Canadians may be taking on too much debt.

Carney told lawmakers April 24 that high levels of household debt remain the greatest domestic risk to Canada’s economy. In an appearance before a parliamentary committee, he reiterated that a rate increase “may become appropriate,” and warned Canadian families to exercise “caution” with their debt levels.

Carney has kept his key lending rate unchanged at 1 percent since September 2010 in the longest pause

Housing prices in Canada are probably about 10 percent overvalued, economist Paul Fenton said at the Bloomberg summit.

There doesn’t seem to be a sense that there’s been overbuilding, and housing doesn’t pose a systemic threat to the function of the nation’s financial system, said Fenton, senior vice-president and chief economist at Caisse de Depot et Placement du Quebec.

The 244,900 housing starts last month released yesterday beat economists’ expectations. The highest forecast in a Bloomberg economist survey with 21 responses was a 222,600 rate.

“Wow. This report reflects unbelievable strength in Canadian housing starts, and all of the gain was in multiples again which reflect the ongoing condo craze,” Scotia Capital economist Derek Holt said in a research note.

Sales of new condominiums in Toronto reached 6,070 units in the first three months of the year, a record for the first quarter, market research firm Urbanation Inc. reported May 7. As many as 40 new projects with more than 11,000 units could come on the market in the second quarter, a trend that may cause inventory of unsold units to approach a record set in 2008, Urbanation said.

Risk Averse

Condo builders “tend to be risk averse,” insisting that 70 percent of a project is presold and buyers put down at least a 20 percent deposit, according to Jim Ritchie, senior vice president of sales and marketing at Tridel, a Toronto-based real estate developer.

“It’s all about managing risk,” Ritchie said. There’s a market for condos because average house prices in Toronto’s 416 area code are about C$830,000 ($831,000), compared with C$400,000 for a new condo, he said.

Almost 60 percent of people buying condos in that area are either single or couples without children, said Ritchie, who said concerns about foreign buyers are overdone, given about 95 percent of purchasers are “locals who have social insurance numbers and local addresses.”

RBC’s exposure to the condo markets in Toronto and Vancouver isn’t “significant,” Nixon said. “Part of the reasons for that is firstly a lot of the condo buyers in those markets are cash buyers. At the margin there’s certainly a significant foreign component to them, and I think to some degree the banks are a bit slightly more cautious,” he said.

No Bubble

The increase in housing prices in Canada is unsustainable, said Finn Poschmann, vice president of research at the Toronto- based C.D. Howe Institute. It’s difficult for market participants to tell a bubble has formed before it has deflated, he said.

“The big question people ask is, is Canada’s housing market in a bubble. Our answer to that is no,” said Jim Murphy, chief executive officer of the Canadian Association of Accredited Mortgage Professionals. The association’s research suggests growth in mortgage credit is below average, he said.

Canada’s housing agency said yesterday there is no compelling evidence of a price bubble based on factors such as household income and interest rates.

“Clear evidence of a bubble is lacking,” Canada Mortgage & Housing Corp. said in its annual report. “CMHC continues to monitor very closely housing prices and underlying factors such as demographic and economic fundamentals and financial conditions across all major urban centers, including condominium markets.”



A Look Back at NAR Housing Market Predictions

(National Association of Realtors, USA)


David Lereah, Chief Economist and Senior VP of the National Association of Realtors (NAR), is frequently quoted within articles pertaining to the housing market. Some of his opinions and predictions seem positively ludicrous now, while others were right on. Here is a look back at some of the statements made by Lereah and the NAR over the last few years and how they compare with the reality of the housing market.

Although the media often turns to the NAR's David Lereah for quotes, he has not made fans of everyone. In fact, there are several websites, blogs, and web pages that are dedicated solely to watching and ridiculing anything he has to say. 'Paid shill' and 'going to hell' are just a couple of the terms that have been used in association with his name.

These strong anti-Lereah sentiments may lead some to wonder exactly what he has said in the past to stir up such a bubbling pot of resentment. While the following overview may or may not answer the question, it is interesting nevertheless to look back at some of the predictions made by Lereah to see how they have compared with the reality of the situation.


'We continue to have more home buyers than sellers in most of the country, which results in tight housing inventories and higher rates of home price appreciation.' - Lereah in a May NAR press release

'...even though we're expecting rates to rise slowly they will stay in a historically low range and a strong momentum of home sales will carry over into 2005.' - Lereah in an October NAR press release

The Reality:

Sales of both existing and new homes increased during 2004. The average home price moved upward from $178,800 to $195,400. Inventory began to decrease with 46,000 less existing homes for sale in 2004 than there were in 2003.

The Fed did raise rates in 2005 as predicted, but rates remained low enough throughout the year to encourage an increased number of mortgage applications.


'We're going to drop significantly, but it's not a balloon bursting.' - Lereah during a PBS Newshour appearance

'The continuing shortages of housing inventory are driving the price gains. There is no evidence of bubbles popping.' - Lereah in an August NAR press release

'There is virtually no risk of a national housing price bubble based on the fundamental demand for housing and predictable economic factors.' - Lereah in one of the NAR's many Anti-Bubble reports released in August

'...housing activity will remain healthy for some time to come.' - Lereah in an NAR housing market forecast, October

The Reality:

Housing appreciation was significant during 2005, especially within the first half of the year. In fact, values were appreciating so fast that many in the industry began to warn that there was a housing bubble on the horizon. Lereah obviously didn't agree with the assessment, and consistently maintained this opinion throughout the year 2005, being sure to mention at every turn that there is no such thing as a bubble or balloon.

But the fact is that a bubble is categorized by a rapid increase in value that can not be sustained due to a lack of increase in things like income and affordability. With home prices increasing as much as 30 percent in some areas, and family incomes coming nowhere to keeping pace, the action in the 2005 housing market is what defines a bubble.

By the time Lereah stated that housing activity would remain healthy for some time to come, the market had made a definite turn. Even the Fed chairman admitted in August of 2005 that the housing market was experiencing some 'froth'.

By the end of the year, home appreciation was leveling off in many areas, making it clear to most that the housing boom was coming to an end and that the possibility of downward spiraling activity was very likely.


'There is no real estate price bubble.' - Lereah in his book Why the Real Estate Boom Will Not Bust and How You Can Profit From It, published February, 2006 (Note: This book was sold in 2005 under the title Are You Missing the Real Estate Boom?: Why Home Values and Other Real Estate Investments Will Climb Through The End of The Decade-And How to Profit From Them)

'We're going to drop significantly, but it's not a balloon bursting. This is a soft landing for the housing markets.' - Lereah in Business Week, May

'We've been anticipating a price correction and now it's here. The price drop has stopped the bleeding for housing sales. We think the housing market has now hit bottom.' - Lereah in an August NAR press release

'The housing contraction has bottomed.' - Lereah on December 28 (

The Reality:

The reality of 2006 was painful to homeowners, investors, and virtually everyone else who had a frying pan in the fire of the housing market. On average, national housing prices declined by more than 10 percent. Some states like California, Florida, and Arizona took the brunt of the slowdown and saw depreciation as high as 30 to 40 percent in certain cities.

Such declines haven't been seen since the Great Depression and were financially devastating to the many homeowners who purchased during the boom. reports that fifteen percent of the people who purchased a home in 2005 owe more than their home is worth. Some of these people bought based on advice from Lereah and those like him who stated that housing was a sure investment.

Basically, the only things that increased in 2006 were foreclosures, interest rates, and home inventories. As a result, most economists are predicting that the slowdown will continue well into 2007. In other words, the housing market has not yet hit bottom.

What is the Point of this Analysis?

The point of the analysis was not to call out or bash David Lereah--quite the contrary. The point is this: there is nothing wrong with looking to forecasts and predictions in an effort to determine what a particular market will do. This is especially true with housing. There are many different economists, analysts, and industry experts who have made a life and a living out of watching the housing market. Many of them know their stuff and can lead you in the right direction. But, here's the rub: people tend to push what they sell.

If you are only looking to the NAR for housing market predictions, you will be encouraged to be optimistic about real estate. The same holds true if you are only looking to the lending industry, in which case you will be encouraged to think positive about borrowing and mortgage debt.

To get balanced market predictions, you need to gather all of the facts and listen to what everyone has to say on the subject. This will enable you to draw your own conclusions and make your own educated guesses. In other words, read well and read often.



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