TD expects soft landing for “vulnerable” Toronto and Vancouver housing markets


By Sean MacKay
parachute-compressed-1024x761Photo: Steve Jurvetson/Flickr
Prices in Canada’s two hottest housing markets have continued to rise sharply in 2015, with home prices in Toronto and Vancouver up 8.9 per cent and 10.3 per cent in June over the same time last year, respectively.
But despite market activity that has made headlines across the country in the first half of the year, TD Bank’s economics team believes the Toronto and Vancouver markets will see soft landings, not disorderly price crashes.
In a report published Thursday, TD economists Derek Burleton and Diana Petramala evaluated nine key housing indicators and concluded that although strong home sales and prices have “further ignited ‘bubble’ talk,” evidence points to a steep price correction as being only a medium-to-moderate risk overall.
The bank believes housing activity will moderate through the second half of 2015 and into 2016 in Toronto and Vancouver, but both markets will require ongoing monitoring as the risk profile could shift into more dangerous territory.
“To the extent that the Toronto and Vancouver markets continue to gain strength in the coming months, the risk profile would rise in tandem,” wrote Burleton and Petramala.
In their assessment of the nine key indicators in the two markets, only the existing home price-to-income ratio received a “high” on the TD economists’ risk scale in both Toronto and Vancouver. The economists explained that the steady upward trend in this key measure is partly a result of slow growth in household income.
However, while Burleton and Petramala view the price-to-income ratio as being useful in gauging market sensitivity to an unexpected economic shock, it “fails to take into account the impact of the structural drop in interest rates.”
With mortgage rates at historically low levels and a slim chance of an increase coming anytime soon, homeowners are able to carry larger mortgages and purchase more expensive homes than in the past.
In light of this, the economists preference was to highlight housing affordability when determining the extent to which homes are overvalued. This indicator received a rating of “moderate” on TD Economics’ risk scale in both cities, with the economists writing that affordability deteriorated significantly in the US market during the lead-up to the crash. In 2006, the affordability measure “pointed to a 20 percent overvaluation [in the US market].”
“Currently, the extent of over-valuation as measured by the affordability index is running at a moderate 10 percent in both the Toronto and Vancouver markets — a fraction of what was evident in most US major markets during their run up,” Burleton and Petramala wrote.
Other indicators that raised red flags for TD were new units under construction which was a “medium-high” risk for Vancouver and newly completed and unabsorbed units, a “medium-high” risk for Toronto.
The remaining four indicators measured between “very low” and “medium” in the TD Economics risk scale.
In the report’s final section, the economists cited several factors, including cooling sales activity, additions to new supply and a slowdown in price increases in 2016 and 2017, they believe will begin play out and likely lead to a soft landing in Toronto and Vancouver.
Both markets are remain vulnerable to an unanticipated shock and the economists believe the risk is higher in Toronto, with its “hotter price performance over the past three to five years and greater supply risk.”
“[T]he need for careful and ongoing monitoring of these key indicators will be crucial in understanding to what extent the risk profile may be shifting,” Burleton and Petramala concluded.
Original Source: BuzzBuzzHome
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Original article: The Province
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