Toronto and Vancouver’s red-hot housing markets aren’t as ‘insane’ as they look, says CIBC’s top economist

"Land scarcity, and poor transport from distant suburbs, helps make the insanity of Canada's house price climb look just a bit less insane," says CIBC's Avery Shenfeld.

In Toronto, calls for house prices to significantly fall are much like predictions for the Maple Leafs to win the Stanley Cup: They surface every year, but when the results don’t materialize, people are quick to say “wait until next year.”

This analogy from CIBC World Markets chief economist Avery Shenfeld comes as research continues to suggest that some elements of the Canadian housing market are vulnerable to a correction.

New condo supply, fatigue among borrowers and the inevitability of higher mortgage rates are obvious catalysts for such a fall, but Mr. Shenfeld highlighted an important point that investors and homeowners seem to be overlooking: The vast majority of gains have come at the upper end of the price spectrum.

Yes, this applies to the most expensive cities to live in Canada – Vancouver and Toronto – but more notably in their urban cores, as opposed to lower-priced alternatives in the suburbs.

“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,” Mr. Shenfeld said in report.

He noted that there is no room to expand the single-family housing stock anywhere near these cities, which translates into long commute times for homeowners.

For Toronto, the economist pointed out that development land beyond the 905 area code (e.g., Markham and Niagara Falls) or in its furthest corners, doesn’t compete with or limit prices in the inner Rosedale or Annex neighbourhoods.

Meanwhile, the mountains and waterways surrounding Vancouver limit single-family housing 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,” Mr. Shenfeld said.

Condo supply can still be expanded through densification, and luxury homes in central locations face some risk due to the inability of those in mid-level house 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,” the economist said.

 BY JONATHAN RATNER, FINANCIAL POST SEPTEMBER 17, 2014

Renee Pelland

Renee Pelland

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