ONTARIO'S HOUSING BUBBLE - IS IT REALLY ABOUT TO BURST?

Since mid 2008, hardly a week has gone by without economic experts predicting that Canada's housing bubble as driven by BC and Ontario will pop and more so, that it needs to asap.

In the last several weeks those same pundits have upped the ante and taken to predicting doom and gloom for Canada's, nay the globe's near economic future. One day they will be correct after all the housing market is cyclical, but is Ontario's market ready to collapse or did the bubble already burst or at least deflate and they didn't notice?

I love crunching numbers and use them to successfully guide my clients on buying or selling particularly for if and when they should. This chart along with other relevant facts will clarify why the housing market has been robust for the last 8 years and barring a global meltdown, where it is 'imminently' heading. [For the latest update on a "housing bubble" see here ]

Government intervention plays a significant role in setting the direction of the economy and no less a driving factor in the real estate sector is the Bank of Canada's benchmark interest rate. Since a comparative analysis is best used with completed months, the figures I provide are all January to August from 2004 onward, so I point you first to that big bubble hovering over 2007 as our reference point. The two numbers you see are the number of resale properties sold and the highest recorded monthly 5 year conventional mortgage rate during those eight months. Let's now take a closer look at what else transpired before, during and after.

2004/2005
You'll note that rates increased and sales decreased.

2006
CMHC decided to raise the amortization period on insurable mortgages from 35 to 40 years and also introduced an interest only payment plan thereby opening the door for those who couldn't previously qualify for a mortgage. 
Zero downpayment is gaining traction.
Mortgage rates continued to rise but this time sales lost no ground.

2007
October - Toronto City Council announced a municipal land transfer tax effective February 2008.
The U.S housing bubble pops, a banking crisis grips the country from the fallout.
Despite the continued increase in rates, CMHC's 2006 easy lending practice is evidently proving attractive. 

What happened during the rest of this year is telling. TREB's November and December Market Watch declared: "Best November Ever!" and "Best Year Ever!" Small wonder given the easiest mortgage terms available. And, to put that looming tax around the corner into perspective, the year's last quarter sales represented a remarkable 16% increase over 2006 which conversely recorded a scant 1% increase over 2005.  

Noting that in our benchmark year our sales bubble also peaked, we'll continue:

2008
March records the collapse of the U.S financial boondoggle.
The crises crosses the Atlantic and heavily infects the European economy.
Bank of Canada aggressively cuts its benchmark interest rate ending with a full 175 basis point reduction - a significant 1.75%.
Canadian banks, fearful of fallout from the U.S collapse enter scrooge mode and hide their booty deep within their underground vaults.
The big 5 Auto companies are in dire straits and investors are nervous.
CMHC unceremoniously discontinues the 40 year amortization term reducing it back to 35.

It all seemed like a recipe for disastrous economic results in Canada and thus its housing market. With this in mind, I introduce another chart also year to date at August 31., which shows each year's listings to sales ratios(LTS) along with the percentage by which the total sales and median sales price changed over the previous year.  

At this point that glaringly obvious upside down purple pyramid does not surprise you as it represents a dramatic 14.57% decrease in the number of sales - 9,782 units to be exact, coupled with panic to sell. You'll also notice that the next highest LTS ratio was in 2006 when mortgage rates climbed by a full 1.95% and prior to the introduction of 40 year terms and the interest only payment scheme.

2009

Financial crisis continues, mega U.S Banks fold, Wall Street, Bay Street, Fleet Street, Investor Street in general are all in a state of apoplexy.

5 year conventional mortgage rates continue a steady descent to the bottom reaching 3.60%.

The number of listings decrease from the 2008 high of 116,398 units to 96,154 units - the lowest recorded during these 8 years.

Word is out that an additional tax on housing is planned.

It's worthwhile now to peek back at the bubble chart to see what happened to sales.

2010

It is announced that effective July, the PST tax on new housing will be isolated as a tax on top of purchase price and the GST at 8% will be tacked on as well.

CMHC reduces the amount one can borrow for an insurable high ratio mortgage from 95% to 90%.
Borrowers must now also qualify for affordability based on a 5 year fixed rate.

In addition, a minimum 20% downpayment on non-owner (investor) occupied homes is required.

5 Year conventional mortgage rates decline further.

Toronto Mayoral candidate Rob Ford announces he will repeal the municipal land transfer tax if elected.

TREB listings climb by 21.7% over 2009 to 117,060.

2011

Rob Ford is elected mayor and waffles over his land transfer tax promise.

CMHC implements tough changes to insurable mortgages once again reducing the: maximum amortization term to 30 from 35 years; maximum high ratio mortgage to 85% from 90%.

5 Year conventional mortgage rates fluctuate claiming back at least 15 basis points since 2010.

Listings decrease to 105,803 units.

Perhaps by now you've started to formulate a picture that indeed the bursting of the bubble is around the corner. A market bubble happens when housing demand well outstrips supply. Prices eventually soar well past financial sustainability resulting in the bubble bursting where buyers stay home and market values inevitably decline.

It's obvious that the sales record in 2007 was fuelled along by cheap mortgages, and magnified October through December by an impending tax. In fact, in can be said that each year's sales statistic has its ultimate correlation with the cost of borrowing and spikes significantly to beat announced increases. Even the rise in rates had no tempering effect as this was offset by the various term extensions and less money down plans and so this allowed for buyers who really had no business buying entering the market.

Given the U.S crisis, CMHC was quick to recognize that this had to be corrected and so as it and banks tightened lending practices, the market is being weened of risky buyers. I submit that this was partly reflected in 2008 and again in 2010 per the listings spike when risky buyers were now renewing their mortgages.

There are two statistics that must be considered before deciding if a bubble pop is imminent or not. The first is the historical sales numbers. You will note that with the exception of 2007's bubble, there are no significant changes to the number of sales each year. I would even suggest that the small increases reflect population growth and the natural progression of the younger crowd moving from rental or living at home to ownership.

The second and most significant is the year over year median price change. A glance back at both charts unequivocally show that regardless of whether sales numbers increased or decreased, the median price continued to climb. This suggests to me that there is a consistent 59,000 or so GTA buyers who can weather higher mortgage standards.
 

So have prices reached unsustainable levels yet whereby the bubble bursting is imminent? As long as the CMHC and banks don't fiddle with cheaper mortgages again, and the pundits and experts don't inadvertently bring about a global depression with self-fulfilling prophecy, I say no.

But! and you know there is always a but...I haven't delved into the condo production boom and the increase in rental activity to determine whether they will have a detrimental or a positive effect on home prices.

For the latest update on a "housing bubble" see here