Toronto area in housing bubble, say BMO Capital Markets economists

Housing prices in Toronto and surrounding cities are rising at a "fiery"rate not seen since the late 1980s, according to the chief economist at BMO Capital Markets.

"Let's drop the pretence," Douglas Porter wrote in a commentary. "The Toronto market and the many cities surrounding it are in a housing bubble."

"Everyone may have a slightly different definition of what a bubble is, but most can agree it's when prices become dangerously detached from economic fundamentals and start rising strongly simply because people believe they will keep rising strongly, encouraging more buying," he said.

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Prices in the Greater Toronto have risen22.6 per cent in January froma year ago,

Porter downplays industrysuggestions that a lack of new housing is the reason behind the big appreciation in prices in the GTA, pointing to strength in housing starts.

"The massive price gains are being driven first and foremost by sizzling hot demand, whether from ultra-low interest rates (negative in real terms), robust population growth, or non-resident investor demand," he wrote.

Region is 'very vulnerable'

Speaking onCBC Toronto's Metro Morning radio program,BMO senior economist Sal Guatieri said the bank is not using the term bubble to indicate a "huge correction" is expectedin house prices in the region.

"We're not anticipating a meaningful correction in prices, but we do believethis market is now very vulnerable to a correction if something wrong happens," Guatieri told host MattGalloway. "So, if interest rates do shoot higher or if we go into recession, for example,that would likely spur a material correction."

A correction, he said, generally means a price drop of around 10 per cent.

If that does happen, it would translate in less revenue for municipalities as construction activity and employment slows, he added

Guatierisaid price increases are expected to slow this year, partly due to the new federal homefinancing rules that will make it harder to get a mortgage.

However, he added, we will see prices decline or stabilize at some point in the future to allow market fundamentals to catch up.

In late January, Canada Mortgage and Housing Corporationcautioned that speculation might be driving the price gains in Toronto and Hamilton, along with Vancouver and Victoria, as they were outstripping what economic fundamentals, such as migration, employment and income could support.

CMHCsuggested the price gains in the GTA were contributing to increases in other southern Ontario cities, and even regions as far away as Sudbury and Ottawa.

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On Wednesday, the Canadian Real Estate Association reported that the average price of a Canadian home sold in January was $470,253, just 0.2 per cent more than the same month a year earlier, while sales slid by 1.3 per cent during the month, to the second-lowest monthly level since the fall of 2015.

Porter said that sales figureis being "artificially suppressed" by a sharp drop in Vancouver sales. He added that "serious churning" lies behind the headline figures.

"Toronto and any city that is remotely within commuting distance are overheating, and perhaps dangerously so," Porter said. "It's a very different story in most of the rest of the country, where conditions are generally calm and under control (with the exception of Victoria). And it's that deep divergence which continues to confound and bedevil policymakers."