This is the first bank economist report I’ve seen which looks beyond the typical “over supply†housing theory and discusses real life dynamics of the market. Up to now, they haven't understood why prices continue higher, only that it must be a housing bubble.
Limited supply from green belt legislation, higher demographic demand for downtown living, and a new normal for low “real†interest rates (nominal rates less inflation) will continue to produce a healthy Toronto real estate market for many more years to come.
http://research.cibcwm.com/economic_public/download/eisep14.pdf
I’ll Take Manhattan
by Avery Shenfeld
Where I live, calls for house prices to come
down to earth are like predictions for a
Stanley Cup win by the Toronto Maple Leafs.
We hear them every year, followed in short
order by the “wait until next year†refrain.
Are the current prophets of house price
doom any different?
Research by my colleague Benjamin Tal (see
pages 8-11) does suggest a vulnerability to a
correction in some elements of the housing
market. New supply in condos, borrower
fatigue, and eventually, higher mortgage
rates, are the likely catalysts. But unless one
were to call for, say, a 30% national price
correction, we’ll never reach the levels that
we were worried about a few years back,
when a 20% tumble was feared from an
initially lower starting point.
One reason is that it’s increasingly clear that
we are in an era of lower interest rates. The
present value of the steady stream of rental
payments avoided through home ownership
is twice as high if discounted by a rate half
its historic level. Still, from current low
levels, even a 100-bp rise in rates would be
a meaningful hit to affordability.
But our analysis at the micro level reveals
another key factor. The lion’s share of the
appreciation has been delivered by the upper
end of the price spectrum: not only in the
costliest cities (Vancouver, Toronto) but in
their urban cores, rather than lower priced
alternatives in the burbs or elsewhere in
Canada (Chart).
While perhaps stretched to the limit, that
gap actually provides a rationale for the
puzzling durability of the price rally: central
Toronto and Vancouver increasingly look
like Manhattan. The nearest available room
to expand the single family housing stock
is suffi ciently distant, entailing a sufficiently
troublesome commute, to be a very weak
substitute for the core. Development land
beyond the “905†or in its furthest corners
doesn’t effectively compete with or limit
prices in Toronto’s Rosedale or the Annex.
Vancouver’s surrounding mountains and
waterways impose their own limits on single
family house supply. For similar reasons,
the price for a rare single family house
in Manhattan is even more astronomical
relative to average incomes earned in the
city. And let’s not even talk about central
London.
Condo supply, even at the high end and
in good locations, can still be expanded
by densification. Luxury homes in central
locations could be at some risk, as Tal notes,
from the inability of those in middle level
houses to move up. But land scarcity, and
poor transport from distant suburbs, helps
make the insanity of Canada’s house price
climb look just a bit less insane.
