Sunday, 16 June 2013

Toronto Condo Bubble is Pinpointed By Bank Of Canada

The Bank of Canada didn't actually label Toronto condos as a bubble. It never would! At least not until the bubble bursts. You see, the central bank's role is cheerleading, not doom and gloom. Similarly, OECD doesn't equate Canada's housing market to a bubble as it says there is a difference between "overvaluation" and a "bubble". This is just becoming a game of labels where words such as bubble, overvalued, inflated, and stretched are thrown around. The thing is, it doesn't really change the final outcome - yet some say that perception is everything.

In its latest financial system report, the Bank of Canada focused on the housing market and specifically pinpointed Toronto's condo market as a place where trouble brews. You can read the original report here or continue reading for my summary with graphs.

Brief Summary of the Central Bank's View on Canadian Housing
  • The two top risks to the Canadian economy are household debt and inbalances in some segments of the housing market
  • It took years for overbuilding and home valuations to build up and it will take some time to correct
  • Price-to-income ratio suggests some overvaluation in the housing market
  • Housing affordability may become a concern once the interest rates start to go up
  • A soft landing is expected but there is a risk of sharper correction
  • Residential investment has been above its historic norm for nearly a decade
  • The number of units under construction is way above the historic norm

  • In the Toronto condo market, the number of unsold condo units in pre-construction and under-construction phases has remained near the high levels observed since the beginning of 2012
  • It is possible that investors have boosted the construction of Toronto’s condo market beyond demographic requirements and thus lead to a sell off
  • the risk of an abrupt price correction and construction activity will be increased if the upcoming supply of new units is not absorbed by demand over the next 12 to 30 months
  • Correction in condo prices could spread to other market segments and have negative spillovers to income and employment


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