One of the economic themes of these times has been the boom in asset prices caused by ultra easy monetary policy and the way that establishment’s present this as “wealth effects” leading to economic growth when in fact some and often much of this is in my opinion inflation. For example those investing in government bonds have benefited from rises in prices and this is presented as a “wealth effect” but on the other side of the coin someone taking out an annuity faces much lower yields and much lower income from a set sum. Yet the “wealth loss” for them is not counted. There is also the issue of house prices where again rises are presented as an economic benefit which for some they are but both first-time buyers and those wishing to trade up in the market face higher prices.
The house price issue is one which has dogged economic comment about Canada and merited a substantial mention by the Bank of Canada last week. This is significant because central banks look away from such matters until they feel they have no other choice. The emphasis is mine.
Housing activity has also been stronger than expected. We have incorporated some of this strength in a higher profile for residential investment, although we still anticipate slowing over the projection horizon. The current pace of activity in the Greater Toronto Area (GTA) and parts of the Golden Horseshoe region is unlikely to be sustainable, given fundamentals. That said, the contribution of the housing sector to growth this year has been revised up substantially. Price growth in the GTA has accelerated sharply in recent months, suggesting that speculative forces are at work. Governing Council sees stronger household spending as an upside risk to inflation in the short-term, but a downside risk over the longer term.
What is happening to house prices in Toronto?
Canada Statistics has an index for the price of new houses.
On the strength of price increases for new houses in Toronto, the NHPI rose 3.3% over the 12-month period ending in February. This was the largest annual growth at the national level since June 2010.
Chart 2
The metropolitan region of Toronto posts the highest year-over-year price increaseToronto recorded an 8.6% year-over-year price increase, the largest among the metropolitan areas surveyed, followed by Victoria (+6.3%), St. Catharines-Niagara (+6.2%), and Windsor (+6.2%). The gain for Windsor was the largest reported since January 1990.
Care is needed with such measures as for example the UK has hit trouble. So let us look further, the editorial of the Toronto Sun told us this yesterday.
house prices are skyrocketing in Toronto (the price of an average detached home is now over $1 million and has risen 33% in the past year)
The Toronto Life has something that is even more eye-catching.
Sale of the Week: The $2.7-million house that proves asking prices are meaningless in Summerhill
Ah too high eh? Nope.
The listing agents say they priced the house at what they thought was market value. Eight offers came in, after which the agents gave everyone the chance to improve. Seven did, and the sellers accepted the offer with the fewest conditions and best price, for more than $750,000 over asking. This may not have been a complete fluke: two other houses on Farnham Avenue have sold in the $2.5-million price range in the past year.
You have to question the listing agents there of course but it is an interesting price for a house which is very smart inside but does not look anything special from the front. We do get perhaps more of a realistic perspective from yesterday’s “sale of the week” as we have a comparison.
Previously sold for: $659,000, in 2007
Okay and now.
The sellers made the easy decision to go with the highest offer, at more than $400,000 over asking, $1,656,000.
Yesterday the Royal LePage house price survey told us this.
In the first quarter, the aggregate price of a home in the Greater Toronto Area increased 20.0 per cent to $759,241, while the price of a home in the City of Toronto rose 17.0 per cent to $763,875. Home prices also increased significantly in the surrounding GTA regions, with suburbs such as Richmond Hill, Oshawa,Vaughan, Markham and Oakville posting increases of 31.5 per cent, 28.2 per cent, 25.8 per cent, 23.2 per cent and 23.1 per cent to $1,209,741, $500,105, $985,534, $970,216 and $987,001
What about monetary policy?
According to the Bank of Canada it is very expansionary or loose.
The neutral nominal policy rate in Canada is estimated
to be between 2 .5 and 3 .5 per cent, 25 basis points
lower than previously estimated
If we maintain a straight face at the chutzpah and indeed fantasy that they know that to that degree of accuracy we can see that with an official interest-rate of 0.5% they are some 2.5% below neutral.
If we look at the exchange-rate then there was another boost as the trade-weighted Loonie or CERI fell from the low 120s in 2011/12 to a low of 89 as 2016 opened. It then rallied a little and over the year from March 2016 has in fact started at 95 and ended there. There are two issues here that need to be noted. Firstly this is an effective exchange rate with an elephant in the room as the US Dollar is 76.2% of it! Secondly due to its plentiful stock of raw materials the currency is often at the mercy of commodity price movements.
Moving to the money supply we see that the taps are open pretty wide. The broad measure has seen its annual rate of growth rise from the 4.5% of late 2010 to 7.7% in February of this year. There was a dip in narrow money growth in March but it is still increasing at an annual rate of 9%.
Household debt
Canada Statistics tells us this.
Total household credit market debt (consumer credit, and mortgage and non-mortgage loans) reached $2,028.7 billion in the fourth quarter. Consumer credit was $596.5 billion, while mortgage debt stood at $1,329.6 billion.
If we compare to incomes we see this.
Household credit market debt as a proportion of adjusted household disposable income (excluding pension entitlements) edged up to 167.3% from 166.8% in the third quarter. In other words, there was $1.67 in credit market debt for every dollar of adjusted household disposable income.
On the other side of the ledger that was something to please the Bank of Canada.
National wealth, the value of non-financial assets in the Canadian economy, rose 1.4% to $9,920.0 billion at the end of the fourth quarter. The main contributors to growth were real estate and natural resources. The value of real estate grew by $93.0 billion while the value of natural resource wealth increased $29.4 billion.
Although the rest of us will wonder how much of that $93 billion is from the Toronto area?
Comment
There is a lot to consider here as whilst the word bubble is over used it is hard to avoid thinking of it as we look at Toronto and its housing market. If we look at wages growth it has been slowing from around 3% to 0..9% in Canada in terms of hourly wages so it is not any sort of driver. The price moves are if anything even more extreme than seen in London.
If we move to the economics then if you own a property in Toronto and want to move elsewhere you have a windfall gain and good luck to you. A genuine wealth effect. But against that all new buyers are facing rampant inflation and there are clear wealth losses for them. We are back to a society of haves and have note here,
A big factor is we see another place where foreign funds are flowing in and like in the other cases we are left to mull this from Transparency International.
Transparency International Canada’s analysis of land title records found that nearly a half of the 100 most valuable residential properties in Greater Vancouver are held through structures that hide their beneficial owners.
Canada is of course far from alone in such worries.
Meanwhile the Bank of Canada finds itself not far off irrelevant which is awkward to say the least for a central planner. Of course where it is relevant it is making things worse.
Notayesmanseconomics's Blog 
Western economies have resorted to being nothing more than property bubbles.
Barcelona up 19%
https://www.bloomberg.com/news/articles/2017-04-11/barcelona-takes-lead-in-spanish-home-price-rebound-chart
How this has been encouraged to happen so close to 2007/8 crash is nothing short of fraud.
Hi Arthur
Thank you for that link as I had not spotted it. Ironically I met a friend earlier whose partner is from Barca and has a property there so good news for her. But as you point out we were on this road not so long ago, what happened next?
hello Shaun,
the bigger issue which is ignored so far , is why the Western economies seem to be able only to grow if housing assets are inflated .
In the end there’s only so far you can push this asset before the returns diminish to zero
My post yesterday alluded to the fact that economic models are not working* and we are in a “new phase” here . Yes I think thats because the markets are rigged , to help governments
pay the bills and to keep the electorate happy ( and the TBTF Banks as they are in charge).
* classically we’re told if prices rise then goods will be restricted to who ever has the most money but ALSO that the suppliers will then invest in more goods to bring to market.
Not happening for the last bit for housing is it ? or for stocks and gilts , etc
I know I have posit before that the 1930’s were seen as a asset deflation issue and therefore our government and banks have pressed all the buttons to prevent asset deflation but if appears
there is no plan to back that out – just more (!)
I can’t see this changing for a while ( but then again black swans are notoriously difficult to predict)
And they’ll all doing it , even you pointed out Sweden is too ( and why ? )
Strange times indeed
Forbin
Hi Forbin,
“the bigger issue which is ignored so far , is why the Western economies seem to be able only to grow if housing assets are inflated .”
Clearly, house price inflation does not lead to economic growth, only when measured by the distorted indicators and methods used by the very people who are promoting these bubbles to start with.
Yes there may be a small boost to sentiment of those who are currently “on the ladder”, and their wealth effect, but unless one cashes in completely or trades down the gains are completely un-realisable, those people are merely spending their theoretical unrealised gains.
And as Shaun rightly points out, where is the economic boost to a first time buyer, who can neither afford to buy, nor to save the deposit, because rents are artificially inflated beyond the cost of buying in some cases by central bank’s ZIRP?
So what you have is virtually a form of financial repression by central banks, who have now created this monster that is now so huge, it cannot be destroyed without taking the real economy with it. As I have said numerous times, the government and the Bank of England are now complete hostages to the housing market, it has grown so much that it threatens the financial stabilty of the entire country, and so they will do literally anything to prevent it collapsing. Short of a Paul Volker type character taking over from Carnage or the start of WWIII, I can’t see the repression ending anytime soon.
“Clearly, house price inflation does not lead to economic growth, only when measured by the distorted indicators and methods used by the very people who are promoting these bubbles to start with.”
This study suggests there is a relationship :- http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.646.1898&rep=rep1&type=pdf
I am interested to know what you classify as ” distorted indicators and methods used”
Increasing house prices fuel positive sentiment. When people feel wealthier they spend more, i.e. they save less and those whom are unable to save, borrow, as they feel reassured by the increase in “value” of their home. This boosts GDP.
Great blog as always, Shaun.
Thank you for devoting it to the housing bubble in my country.
Your chart is well-chosen in that it shows very clearly that while the Bank of Canada speaks of housing surges in the GTA (Greater Toronto Area ) or the Golden Horseshoe, which would include other Ontario cities in Southwestern Ontario like Hamilton and St.Catherines, other cities in southwestern Ontario are also bubblicious, like Kitchener-Waterloo and London, as well as cities not shown like Barrie and Guelph. (Guelph is one of the cities added to the NHPI starting in January, and had the largest monthly increase of any city (1.4%) in February. There are now also separate indices for Ottawa and Gatineau.) Windsor’s big housing price increase is deceptive as its market had been badly depressed. A housing correction (burst bubble?) already seems to be under way in Vancouver, prompted by the tax on foreign buyers in the Greater Vancouver Area, but Victoria, the BC capital, is still in bubble territory. So this is much more than a GTA problem. It is broad enough in scope to be a national concern.
In another sense, the NHPI data do not properly convey the gravity of the situation since they are not only limited to new housing, but also exclude condominium apartments, which are now a big part of the dwelling stock nationwide and an even bigger part in the cities with bubbles. StatCan, if everything went according to plan, started collecting data for a new condominium price index for nine cities last August, but nothing has been published yet. The Teranet National Bank HPI, a repeat sales price index for 11 cities, does include condos, and shows much higher housing price inflation, an overall inflation rate of 13.4% for February 2017, with Toronto at 23.7%, Hamilton at 19.7% and Victoria at 15.9%. It is worth underlining that the Teranet National Bank HPI very deliberately modelled its methodology on the US Case-Shiller HPI. The latter showed a 5.9% inflation rate for its national index in January, with Zillow Real Estate Research backcasting a 6.0% inflation rate for February. It shows you that housing price inflation is in another dimension in Canada as compared to any other G-8 country.
Bank of Canada Senior Deputy Governor Carolyn Wilkins was interviewed by Anna Maria Tremonti yesterday on CBC radio, about the speech she gave Tuesday in Toronto on, of all things, the automation economy:
http://www.cbc.ca/radio/thecurrent/the-current-for-april-19-2017-1.4074216/bank-of-canada-urges-government-to-embrace-automation-economy-1.4074252
Finance Minister Morneau, the Ontario Finance Minister Charles Sousa and Toronto mayor John Tory were meeting in Toronto to talk about the Toronto house price inflation the very same day. As you said, the Bank of Canada seems to be not far off irrelevant, given its indifference to this bubble, When Anna Maria Tremonti asked Wilkins about Toronto housing prices, gamely trying to relate it to the new economy, Wilkins actually said that a lot of the inflation was supply-related and required a supply-side response. As BMO’s Chief Economist Doug Porter wrote earlier: “Do you think that the best response to the Dutch Tulip Bubble in 1637 was to cultivate more land and grow more tulips? Do you think that the problem in the South Sea Bubble in 1720 was a lack of supply in the shares of the doomed company?”
Click to access talkingpoints.pdf
Hi Andrew and thanks
I do enjoy all South Sea Bubble references as they remind me of this.
“”For carrying-on an undertaking of great advantage but no-one to know what it is!!” Unbelievably £2000 was invested in this one!” ( Historic UK)
For those wondering what it was nobody knows even now as the “entrepreneur2 disappeared with the cash.
Returing to Canada your extra stats and data just expands the problem especially for the Bank of Canada. The wider the problem the more inappropriate its monetary policy setting is. I watched some of the press conference and the body language of both the Governor and Deputy-Governor looked very defensive to me. Perhaps they feared any incisive questioning….
Thank you for your reply, Shaun. If you watched part of the press conference following the presentation of the April Monetary Policy Report you would have noticed the sharp contrast between the report itself, which as good as ignored the housing bubble and the press conference that followed, where the journos were very much concerned about it. There hasn’t actually been a housing price chart, like the one in your blog yesterday, in the MPR since October 2014, perhaps not coincidentally the last MPR before the Bank of Canada started dropping interest rates. If you are going to be driving down mortgage rates you really don’t want people’s minds concentrated on the risks that you might be creating a housing bubble.
As Doug Porter said in his April 13 talking points, far from pronouncing he is ready to fight the housing bubble with an overnight rate increase, Governor Poloz’s viewpoint “boils down to ‘rates don’t matter for the housing market’”, which is simply wrong. “While speculators/investors no doubt are playing a role in the housing market, they are certainly not the only buyers at work. There are still many folks actually buying a house in Toronto to live in. And, yes, even a small nudge in rates would matter for these potential buyers and thus for the market as a whole.”
So, Shaun, we have:
1. Houses treated as investments, not living spaces;
2. Ultra low interest rates causing the rises;
3. A massive increase in borrowing:
4. Price rises not treated as inflation, but gains.
What could go wrong?
Hi James
I would add
5. Real wage growth which was already slowing pre credit crunch being even slower afterwards. In the UK it has yet to regain the past peak.
Yet we keep being told that it is an economic gain and benefit.
Same everywhere. Expand the debt or die.
but this means the economic rules have changed / or laws
doesnt that make economic theory just guess work ?
we’ll see , won’t we Shaun
interesting times – will gravity win?
Forbin
Hi Shaun
Wages falling house prices rising ,how can this be? The Bankster and the politician assisted by media propaganda a true axis of evil.
Yet the population are blinkered brainwashed or both……they think this is normal,no indication of protest or dissent anywhere……incredible
Hi Private Fraser
Pretty much everywhere the “medicine” is the same but the catch is the way that so many do not feel the claimed recovery. The one place which took the other road was Iceland.