Banks begin to agree: Toronto’s condo market is getting a little bubbly
We’ve been trying to sort out whether Toronto’s housing market is in the midst of an unprecedented bubble for awhile now. Some banks have long-seemed to fear the worst, while others have long-argued that homes in the city are so expensive simply because of the fundamentals. But that ambiguity might be on the cusp of being resolved, and not in the way we would’ve wanted: turns out banks are increasingly worried that the housing market in Toronto—especially when it comes to condos—is, in fact, in a bit of a bubble and prices could drop by up to 12 percent over the next two years.
The Toronto Star has the story:
“Toronto and Vancouver are the two most vulnerable markets” said TD economist Sonya Gulati in an interview Monday. “We can expect to see some decline in the next seven to eight quarters.”
The TD report comes on the heels of a report Wednesday by the Canadian Imperial Bank of Commerce that said homeowners could expect a “gradual” correction in the market over the next several years.
A 12 per cent drop in the cost of an average Canadian home of $346,950 would translate into a greater than $41,000 haircut for home owners. The bank also said potential overbuilding in the high rise market meant special attention is warranted.
Naturally, the next question is how many people will be caught holding mortgages on condos that end up being worth less than their debt. American homeowners became more familiar with the terms “underwater” and our favourite, “jingle mail” than they probably would’ve liked, and, of course, we hope that Toronto avoids the worst of that. Nevertheless, if Toronto and other big cities get hit with a real estate boom, it might be wise for Canada’s leaders to stop crowing about our super-awesome banking system for at least a little while.
Jingle mail is a product of the non-recourse mortgages allowed in some states. Every mortgage in Canada is full recourse – the bank can and will come after you for every cent not covered by selling the house.
This makes Canadians much more interested in keeping current on their homes despite being underwater. We saw this in the long slog back from the bursting of the late 80s bubble.
The area of concern is investor owned condos held through a corporation or by foreign investors. These investors may be able to avoid pursuit for debt not covered by a sale of the property if the banks didn’t sufficiently protect themselves. Thanks to the painful experience from the bursting of the 80s condo boom that is unlikely to be a substantial issue, though perhaps some of the more aggressive lenders will have made that mistake.