The housing market: Cooling is better than bursting

Given that the family home is not only the most expensive purchase most people will ever make, as well as their hedge against a mediocre, if not outright poverty-stricken retirement, it’s no wonder we’re obsessed with the housing market.

Most of the people I know who already own homes are watching housing prices climb with dollar signs in their eyes. But is it time to start getting concerned?

That prices are higher than they’ve ever been before isn’t surprising — so is bread, beer and designer clothing. It isn’t the climbing prices that have the more cautious among us concerned, but rather the speed and relentlessness with which they’re climbing.

If you’re planning to hang onto the same home for the next 10, maybe 20, years, maybe you don’t need to be concerned. 20 years is a long time in a housing cycle, and regardless of what happens in the intervening years, your investment is almost certainly safe. It will be worth more then than it is now. But those who are hoping to use inflated prices to sell and get rich should be watching more warily.

Prices were up more than 16% in Toronto in July versus the year prior, with detached prices up more than 20%. CIBC deputy chief economist, Benjamin Tal, said this week that developers sitting on real estate in anticipation of higher-still prices is creating a scarcity of land, exacerbated by provincial legislation.

“If you are an owner of potential development land and you are well aware that Places to Grow will result in a shortage of land by even more than currently anticipated, you will probably not be eager to sell,” says Tal in a report.

The legislation mandated that by 2015 and every subsequent year, at least 40% of new development had to take place within existing urban boundaries; the province wants to up that percentage to 60.

By contrast, when we take all of British Columbia and its super-hot markets as well as Ontario out of the mix, average prices across the country went down by 0.2% compared to July 2015.

(While sales declined in the city in July for the third consecutive month — 21.5% down from their peak in February — prices continued to climb, up 32.6% year-over-year.)

Simple physics tell us that what goes up must come down, and historically that’s certainly been true of housing prices as well. Although decades-long overall growth is almost assured, prices like those in our two hottest markets aren’t sustainable. Prices don’t just climb and climb and climb. The market is cyclical. The only question is whether they come down with a crash, or a slow descent.

On Monday, the chief economist for CIBC Capital Markets, Avery Shenfeld, told Metro Morning that Toronto needed to seek a “gentle end” to rising home prices, to spare us the possibility of an economic crash that would come with a sudden bubble-burst. (Digression: If you haven’t seen The Big Short, see it. Great cast, great script, and you’ll learn a lot about why the 2008 mortgage crisis in the US devastated the economy).

Shenfeld said it was the supply side, not the demand side, that needed addressing, and given that all evidence points to supply being the problem. Putting a larger supply on the market, he said, would put downward pressure on prices while creating the economic activity associated with the sale and construction of new homes.

In his paper “This Needn’t End Badly,” released last week, Shenfeld said that governments need to aim for the right mix of policies. "Releasing more land for single family homebuilding, and speeding the approval process for new construction, would be part of that process," he says in the paper. He also says we need more transit to reach homes outside the core.

He suggests we should take a lesson from Manhattan, where it’s more socially accepted for families to live in high-rises, and an extensive commuter train network gives them the option of living further out as well, with a driveway and a backyard; there is also zoning for social housing.

In Toronto, with a younger generation that can’t afford to buy downtown and employers who want them to live nearby, prices can’t keep going up as quickly as they are.

Is it time to ease price growth, motivated by our own desires regardless of the potential harmful effects? I’m starting to think so.