My research is all about the impacts of boom and busts on local economies and governments’ responses to it. Usually I focus on places farther away – natural resource communities – but it’s hard not to notice what is happening outside your front door: Was Toronto’s housing market a bubble? Has it popped or deflated? The media has a fascination over that question as can be seen here, here, here, and many more. Anyone who acts like they know for certain is selling something. The experts, economists and major government entities, admit they don’t know. But here is what I do know: it is a perfect example of the boom-bust framework. A hangover of uncertainty is a classic sign of the boom-bust framework in action.
- Signaling. Irrational exuberance can be stopped by powerful technocrats warning of dire consequences. CEO Evan Siddall of Canada Mortgage and Housing Corporation (CHMC) – the public entity responsibility for regulating the housing market with the dual goals of promoting homeownership while maintaining financial stability – expressed concern about the level of indebtedness Canadians are taking on to purchase homes. The Bank of Canada Governor Stephen Poloz has issued a warning about the “unsustainable” rise in Toronto real estate prices, but stopped short of referring to it as anything but reflecting job and population growth. This makes lenders wary of who they are lending to and for how much.
- The federal government has tightened house lending rules by (a) introducing tougher requirements to qualify for a mortgage and higher minimum down payments, (b) increasing reporting requirements to catch tax-dodgers, and (c) tightening rules on mortgage lenders including more stringent stress tests.
- The Bank of Canada recently raised the overnight interbank rate by 0.25 percent – the first time in 7 years – and signs are pointing that another raise in the rate is on the way in a few short months. The relationship between this and borrowing rates is indirect, but it does mean that the price of borrowing (e.g., mortgage rates) is going up. When borrowing is more expensive, people can afford to bid less on housing – that is, unless they are paying cash.
- The Ontario (provincial) government recently passed a series of reforms into law intending to make housing more affordable for residents. This includes (a) expanding rent control policies to cap how fast rent can be increased on current tenants and further protections for them from being unduly evicted; (b) creating new policies that would expand housing supply by expediting condo approval near transit nodes, promoting greater infill development, and investing in government rental housing; and (c) placed 15 percent tax on foreign homebuyers to ensure that residential units are homes for locals foremost instead of a financial investment for those living abroad.
Putting it into context:
The cool down makes it look a lot like boom-bust framework is at play.
- Irrational exuberance was at work. Toronto’s housing prices rose far more and far quicker than anyone expected. Despite expectations and predictions of a bubble bursting, housing prices continued to climb for over a decade and even accelerated over the last few years. Though whether it was a bubble or not is still in doubt, no one in their right mind argued that it was economically sustainable. A few went overboard – Toronto exceptionalists – comparing the city to global hubs of London or New York.
- Booms have their downsides. The consequences of a boom include low-income families being gentrified out of their homes by rising rents, middle-class families who find buying their first home farther away with each passing year, and even those who can afford to buy must enter bidding wars where success is dependent upon unconditional offers – asking for an inspection is a deal-breaker and even seeing the house in-person might be too much to ask.
- Booms are followed by busts. Let’s be clear what a bust is: a slow-down in investment that causes a drop in prices as irrational exuberance gives way to reality. This does not mean a 50% drop in prices or a recession is on the way (it could, but I am not in the prediction business). This short-term drop in prices hammers those who are overleveraged at the peak. Bankruptcies mount as creditors seize and sell-off the assets of their borrowers. Supply increases as demand falls. Uncertainty of when conditions will change perpetuates the cycle further.
- There is a reallocation of money and assets. In other words, the geography changes. Investors (in this case, homebuyers) now have a lot more choice in where to place their money. They will critically evaluate their options and choose those they think are the best prospects for the future. This means that there will be places that continue to rise and places that decline.
In my research, rural regions tend to take the brunt of the bust while cities – and particularly their cores – tend to do better. If that trend holds here, don’t hold your breath for a cheap downtown condo. But now is a good-time to buy on the outskirts. Want to buy near a main transportation hub? Those prices are still (likely) going up.
Prices are still high and unaffordable for many. Has the government done enough? Should it do more? Post in the comments below!
Blog entry written by Austin Zwick, PhD Candidate in Planning