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It’s official. It’s a bubble!

Saturday, March 4, 2017 11:03
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RYAN  By Guest Blogger Ryan Lewenza

With stocks hitting new all-time highs almost every day, global bond yields at or near zero, and Canadian home prices at nose-bleed levels, it seems like everything these days is in a bubble. This is particularly true for the Toronto housing market with average home prices up 22% Y/Y.

In our opinion, there really is no longer a debate of whether Toronto, Vancouver and overall Canadian home prices are in a bubble. As we examine in this post, the Canadian housing market is in one big fat bubble, and the real question is when does the bubble burst, and how deep will the correction be?

First let’s look at the anecdotal evidence of a bubble. In my readings and conversations with real estate agents and experts, it’s become abundantly clear of the speculative froth in the Canadian housing market, particularly in Toronto right now.

The obvious data point to highlight this is the staggering 22% Y/Y increase in Toronto home prices. Over the long run, home prices typically appreciate in line with income growth and inflation trends. So a 22% Y/Y gain is incredible and completely divorced from the underlying economic realities.

Yes, the very low inventories in Toronto are greatly contributing to this, but I think Toronto is also seeing a surge from foreign purchases lately, as a result of the 15% foreign resident tax in Vancouver. It’s no surprise that Vancouver home prices are down significantly following this new tax (according to the CREA, average Vancouver home prices are down 19% Y/Y to $878,242), and that Toronto is surging to new levels over the last 12 months.

What scares the heck of me, beyond the 22% Y/Y appreciation, is the nature of sales these days. In speaking with agents I see a few clear and worrisome trends.

First, “bully offers” have become the norm these days when they used to be the exception. Bully offers are aggressively high offers that bidders submit before the official offer date. For example, a seller and their agent will market the home as accepting offers on a set date (usually Tuesday), but bidders will come in with preemptive offers shortly after the listing goes to market, canceling out the stated Tuesday offer night. Basically if you’re trying to purchase a home in Toronto you can’t react quickly enough since the bully offers come in so fast, leaving many interested parties no time to react.

This topic was addressed in a recent blog post from, a great website for chronicling the insane Toronto housing market. In the post the author states, “So picture this: he’s driving downtown to meet her client for 3pm, and when the light turns red and he comes to a stop, he checks his messages. And there at the top of the pile is an absolute dream-crusher: “66 Portland SOLD FIRM, no more showings.”

“The goddam property sold while I was on my way there in my car!” he told me once he returned back to the office. Crazy!

The second sign of excess is the spread between offers, particularly the winning bid and other offers. Before the winning bid may have been $20,000, $30,000 or $50,000 above the next highest bid. Now the winning bid is often six figures above the next highest bid. Basically, current buyers have to be incredibly aggressive with their bids if they want any chance of purchasing the home.

Doesn’t this sound familiar? Didn’t we see this excess near the top of the US housing bubble or Japan during the 1980s?

I’ve been thinking a lot about the craziness that I’m seeing and it made me wonder how the run up in the Toronto housing market compares to previous housing bubbles. So I decided to compare the data of these housing bubbles and the results were shocking.

Using the Toronto Teranet-National Bank Home Price Index, I looked at the appreciation of this index over the last 17 years and compared the results to Japan’s home price appreciation in the 1980s and the US in the 2000s. Since 1999, the Teranet-National Bank Toronto Home Price Index has risen an incredible 200%. In contrast Japan’s home price index rose 193% in the 17 years prior to its peak, and the US S&P/Case-Shiller National Home Price Index rose 152%. As illustrated below, the run up in Japan and US home prices have been almost exactly the same as what Toronto has experienced. When I completed the chart I basically sat and stared in awe of the similarity between these markets.

So the conclusions from this chart are: 1) Toronto’s home price appreciation has been on par with other notable housing bubbles; 2) will Toronto’s housing market follow Japan’s and the US and peak soon as the chart suggests; and 3) if it does peak and rollover, will it track more like Japan (which today is still half of what it was worth at its peak in 1991) or will it follow more like the US, which declined 30% during the Financial Crisis, but has since fully recovered?

Personally I don’t see a 30% or deeper correction similar to the US and Japan. It’s probably somewhere in between, more likely in the 10-20% range. But the historical data and anecdotal evidence supports our view that the Toronto housing market (and Canada for that matter) is completely out of control, and if history is prologue, suggests prices are near a peak.

I have to run now. I’m interviewing some real estate agents to give me a quote on what my home is worth. Who knows, maybe Garth has rubbed off on me and I can convince my wife to sell our home and lock in a massive profit. These type of gains don’t come along too often in life!

Past Housing Bubbles

Source: OECD, Bloomberg, Turner Investments
Ryan Lewenza, CFA,CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.


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