Is the Toronto Housing Market Really High Risk?

Toronto Housing Market High Risk

By: Will Dunning

Last fall, Canada Mortgage and Housing Corporation published research on a “House Price Analysis and Assessment framework”.  This combines various housing market indicators into an overall rating of “problematic housing market conditions”. The ratings are published for all of Canada and 15 major markets.

The ratings have now been published three times.  On each of these three occasions, the rating for all of Canada was “Low Risk”.  For the Toronto area, the rating was “Moderate Risk” the first two times, with a change to “High Risk” in the August 2015 release.

This, of course, has given rise to suggestions that there is a significant risk of large house price reductions for the Toronto area.

A True Risk Indicator?

I have to say that the CMHC analysis doesn’t convince me there is high risk in the Toronto market. Also, based on what CMHC says in its report, it has not explained why the level of risk has increased compared to its two prior reports – if anything, what CMHC says in its newest report should have led it to conclude that the level of risk is the same or even lower than previously. Finally, based on CMHC’s data, plus my own market analysis, I just can’t get into an apocalyptic state of mind about the Toronto housing market.

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Is Overvaluation Over-Hyped?

I see four relevant statements in the CMHC analysis for Toronto.

  • First of all, CMHC says that in Toronto, there is a “modest risk of overvaluation”. I have trouble connecting this statement about “modest risk” to CMHC’s conclusion that there is “high risk” overall.  I’ll have some more comments later on the question of “overvaluation”.
  • Secondly, CMHC points to a significant rise in the number of complete and unsold units. I’ll make some detailed comments on this below.
  • Thirdly, CMHC points to a reduction in the number of condominium apartment units under construction. Based on CMHC’s description of its methodology, this should be seen as a positive factor, which should mean that the level of risk is falling, not rising.
  • Fourthly, “condominium resale and rental markets remain tight…”, which CMHC probably sees as a positive condition.

Overall, therefore, I would say that on its own terms CMHC has nfot justified the overall assessment of “high risk”, or the worsening compare to the prior ratings.

The Rising Price Perception

During the past decade, house prices have increased rapidly in Canada. It is true that the increase has been greater in Toronto compared to the national average, and that in recent times, price growth has been stronger in Toronto than in most other places.  But that doesn’t prove that there is overvaluation.

My research (including a report I published a year and a half ago) shows that during the past two decades house price growth has been closely related to changes in interest rates. To be precise, house prices adjust slowly to changes in interest rates. Since interest rates have fallen during the past few years, prices haven’t yet fully adjusted. This means that there is still room for prices to grow further and/or for mortgage borrowers to tolerate rises in interest rates. Therefore, house prices in Canada and in Toronto make sense given the conditions that exist. This strong relationship between interest rates and house prices is a strong counter-argument to any suggestion of overvaluation.

Also read: Could Canada’s Housing Market Be Undervalued?>

About Those Unsold Units…

Before I get into this, the reader should be aware of an important point of definition in the CMHC data: CMHC counts unsold units after construction has been completed. That’s why they refer to “completed and unsold”.

Developers of new homes and condominiums like to have some inventory to sell after construction has been completed.  That’s when they get the highest prices and therefore the highest profits.

Therefore, when there are a lot of construction completions, there is a rise in the number of “completed and unsold units”. And, therefore, the reason the number of unsold units has expanded in the Toronto area is that in recent months there have been very large numbers of construction completions.  Most of this action has been in the condominium apartment sector.  At present 84 per cent of unsold units are condominium apartments.

I have struggled with how to show this in a chart: the month-to-month numbers vary a lot, so any chart that compares completions and unsold inventories looks like a plate of spaghetti.

The chart below is my best idea (so far) about how to make this point.  The ratio that I am showing compares the number of unsold condominium apartments to the average number of units completed during the past 12 months. The ratio has been essentially flat for about the past five years, and at present the ratio is well within the historic range. This confirms for me that changes in the numbers of unsold units are due to changes in the numbers of completions.  The reason for a recent rise of inventory is that there was a huge lump of completions at the start of this year.

Dunning chart

Final comment here – CMHC’s fourth point says that the condo market is not a problem, yet its conclusion that there is “high risk” in Toronto comes largely out of data from the condominium sector.  I see a problem with the CMHC logic.

About the Author: Will Dunning

Will Dunning is Chief Economist at CAAMP, founder of Will Dunning Inc., and contributor to’s Mortgage Rate Outlook Panel. Click here to view his monthly’ forecasts for fixed and variable mortgage rates.


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