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.”
housing starts rose to the highest since September 2007 last month, led by
multiple-unit projects, Canada Mortgage & Housing Corp. said Tuesday.
The annual pace of home starts rose 14% to 244,900, Ottawa-based CMHC said.
Participants at Bloomberg’s Canada Economic Summit in
Toronto said talk of a housing bubble is overblown.
‘I’d like to see the rhetoric come down a little bit’
“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.
Mr. 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.
Mr. Carney has kept his key lending rate unchanged at
1% since September 2010 in the longest pause since the 1950s.
Housing prices in Canada are probably about 10%
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 Mr. Fenton, senior vice-president and chief
economist at Caisse de Depot et Placement du Quebec.
The 244,900 housing starts last month released Tuesday
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
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.
Condo builders “tend to be risk averse,” insisting
that 70% of a project is presold and buyers put down at least a 20% deposit,
according to Jim Ritchie, senior vice president of sales and marketing at
Tridel, a Toronto-based real estate developer.
Concerns about foreign buyers are overdone, given about 95% of
purchasers are ‘locals’
“It’s all about managing risk,” Mr. Ritchie said.
There’s a market for condos because average house prices in Toronto’s 416 area
code are about $830,000, compared with $400,000 for a new condo, he said.
Almost 60% of people buying condos in that area are
either single or couples without children, said Mr. Ritchie, who said concerns
about foreign buyers are overdone, given about 95% 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,” Mr. 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.
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
housing agency said Tuesday 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.”