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Where market sanity prevails
Mar 03, 2017

What’s the primary difference between the Winnipeg and the Toronto and Vancouver real estate markets?

Well, what first comes to mind is affordability. In both the Toronto and Vancouver markets, first-time buyers are virtually barred from making a home purchase due to prices that test their ability to obtain a mortgage. On the other hand, Winnipeg is cited by market observers as having one of the most affordable housing markets among Canada’s major centres.

At one time, the market with the greatest upward pressure on home prices was Vancouver, but as a result of steps taken by both the provincial and federal governments to cool the market down, Toronto has taken over that role.

Sales of detached homes, condominiums and townhouses in Greater Vancouver have dropped by close to 40 per cent in January 2017 relative to last year, according to the Canadian Real Estate Association (CREA).

The surge in Toronto house prices has become so spectacular that a significant proportion of experts have even predicted the existence of a housing bubble arising in the market.

Royal Bank of Canada CEO Dave McKay told the Globe and Mail for a February 25 article that he was growing increasingly concerned about the nation’s largest housing market, “where average detached-home prices have soared by more than 26 per cent in the past year, while condo prices have jumped more than 14.5 per cent.

He said that such price increases are “not normal.”

The average price of a detached-home in the Toronto region was $770,745 in January, up $140,552 more than a year ago, according to a report from the Toronto Real Estate Board (TREB). The average condo price in January was $442,598.

Despite the drop in sales, the average price of a similar home in Vancouver is $878,000 (condos included). In the latter instance, it’s still a hefty drop from a time when such a home in Vancouver commanded a price tag of over $1 million.

By the end of 2016, the average price of a detached-home in Winnipeg rose by just three per cent to $302,729, according to the year-end report released by WinnipegREALTORS®. For condos, the average price by the end of the year was $235,508.

In Winnipeg, nearly three-quarters of buyers seek detached-homes, which is a market that most buyers are priced out of in both Vancouver and Toronto, where condos for first-time buyers are the more affordable choice — if they can be termed “affordable.”

Buying a new detached-home in the Greater Toronto Area (GTA) Toronto is even more costly than purchasing an existing detached-home. The Building Industry and Land Development Association (BILD) recently announced the average price of a new home shot up to $1,316,325 in January. Ten years ago, the average was $444,368. Meanwhile, the average price of a new townhouse in the GTA was $879,619 last month compared to $328,989 in January 2007.

“The GTA is facing a severe shortage of housing supply, particularly for single-family homes which as soon as they come on the market,” said BILD president and CEO Bryan Tuckey. “When there aren’t enough homes to satisfy demand, prices increase and that is exactly what has been happening in our region over the last decade.”

The BILD reported that there were just 1,524 new homes available for sale in January, when 10 years ago there were 12,242. In 2007, there were 18,400.

Of course, such a low inventory of available homes, leads to bidding wars and inflated purchase prices.

“Unless sales drop dramatically, the outlook for home prices remain strong in places that face a continuing supply shortage,” said Gregory Klump, CREA’s chief economist.

In Winnipeg, the market conditions are considered to be more tilted toward balanced conditions while still retaining plenty of choices available for home buyers.

“Buyers will likely find greater selection (in 2017) across the city that will meet their needs,” WinnipegREALTORS® president Blair Sonnichsen forcasted in January, “and that there will be more properties available in the area they want to live in. At the same time, sellers will need to manage their expectations, as days on market for homes will likely go up due to the greater selection.”

As home prices in Toronto rise, so do the number of potential buyers going further and further from the city to seek more affordable housing choices. But this has created another problem — home prices in communities far away from Toronto are also rising due to increased demand. In effect, housing options are becoming more and limited to frustrated home buyers.

For the Toronto and Vancouver markets, challenges home buyers face include federal measures, such as new mortgage rules that introduced a risk stress test on Canada Mortgage and Housing Corporation (CMHC)-backed mortgages. The new rules may be a challenge across Canada to home buyers, but with such high prices in Toronto and Vancouver, there will be more stress on those wanting to enter the housing market.

CREA president Cliff Iverson said the effect on the market of the new mortgage rules that make it harder to qualify for a mortgage and regulatory changes that are pushing up mortgage financing costs will take time to gauge. But, he added, the changes will have different effects on different Canadian housing markets.

He further emphasized housing markets across the nation are local and that markets such as Vancouver and Toronto skewer sales figures, including the average selling price in Canada. In fact, the average selling price across Canada is reduced almost $120,000 to $351,998 if Greater Vancouver and Greater Toronto are taken out of the equation, according to CREA.

Meanwhile, some housing observers, such as Douglas Porter, the chief economist at BMO Capital Markets, are saying Toronto is in the throes of a housing bubble.

“Everyone may have a slightly different definition of what a bubble is, but most can agree it's when prices become dangerously detached from economic fundamentals and start rising strongly simply because people believe they will keep rising strongly, encouraging more buying,” he said in a commentary about the market.

Experts contend there’s that threat of a bubble rather that the market going into a dramatic correction; that is, a sustained drop in sales and prices. For the Toronto market, a serious economic setback or a substantial mortgage interest rate hike could have disasterous consequences.

Whether or not Toronto is in a housing bubble or on the cusp of such a bubble, be thankful that Winnipeg remains a market where sanity prevails.