Well, this may be the first time in recent memory a big bank economist has used the feared B-word in relation to real estate.

Bubble.

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“Let’s drop the pretence. The Toronto housing market—and the many cities surrounding it—are in a housing bubble,” Doug Porter, chief economist for BMO Bank said in his latest report. “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.”

It gets worse.

Porter is comparing Toronto’s current real estate plight to the crash experienced in the ’80s.

“Prices in Greater Toronto are now up a fiery 22.6% from a year ago, the fastest increase since the late 1980s—a period pretty much everyone can agree was a true bubble—and a cool 21 percentage points faster than inflation and/or wage growth,” he said. “And, the ratio of sales to new listings was a towering 93.5 in the region last month adjusted for seasonality (and was above 100 in Hamilton, Kitchener and the Niagara Region).”

A normal sales to new listings range, according to Porter, is 40-60, with anything above considered a seller’s market.

Across Ontario, months of inventory has fallen below 1.8 when above five is considered the norm.

“The data simply reinforce an obvious message that has very much been in place for many months now, and by all accounts is still going strong as we speak—the market is far too hot for comfort,” Porter said.

As for Porter’s opponents, he shoots down their number argument – that there is a supply shortage contributing to the hot market.

“But we would remind that housing starts in Toronto and Vancouver have been chugging along at almost 70,000 units per year recently, an all-time high, while overall Canadian starts are above demographic demand at 200,000 units in the past year,” he said. “And, we are seeing near-20% price gains in Toronto condo prices, where supply constraints are not a major issue.”

So, are we currently in a housing bubble in Toronto?

The scary thing is that you never know until it pops.

“Toronto and any city that is remotely within commuting distance are overheating, and perhaps dangerously so,” Porter said.

The industry has provided its recommendations to the government committee that is studying the Canadian real estate market and the issues facing it.

The Canadian Mortgage Brokers Association sent a letter to the Standing Committee of Finance, advocating for changes that would lessen the burden on Canadians wanting to purchase homes.

“It goes without saying that people have to live somewhere: if they are not able to purchase housing, they must rent.  In doing so, they are no longer paying down a mortgage on their appreciating asset, but instead that of their landlord,” CMBA said in the letter, which was obtained by MortgageBrokerNews.ca. “However, most Federal Government policies, such as latest crop of federal mortgage rules, which are intended to promote economic stability by curbing consumer debt, only have only a singular, narrow focus on the economy.

“These policies fail to consider that housing affordability problems impact both lower and middle income households, renters, first time buyers, and even established home owners.”

Indeed, industry players have argued many of the recent mortgage rule changes have made it harder for first-time buyers to break into the market.
The association provided the government with nine recommendations, all aimed at helping Canadians more easily purchase a home.

They include;

• Exempting fixed-rate five (or greater) mortgage borrowers from having to qualify at the Bank of Canada’s benchmark rateyear
• Permitting amortizations for first-time buyers30 year
• Allowing borrowers with a LTV of 80% or less to amortize up to 30 years
• Exempting insured mortgage with amounts of $499,000 or less from having to qualify the BoC benchmark rateat
• Modifying the benchmark rate to include the averages of all federally regulated lenders, not just the big banks
• Finding ways for government to remove excessive red tape relating to housing development
• Reducing high ratio insurance premiums so that they are revenue neutral
• Having the government focus more on the impact of unsecured debt
• Ensuring lenders of unsecured credit qualify borrowers on income and debt ratios and not just credit scores                                                                                                          

Recent changes to mortgage regulations have negatively impacted first-time buyers and there should be a pause on further measures, the CEO of Genworth said Monday.

Stuart Levings was appearing as a witness at the Standing Committee of the Finance Department as part of its study of the Canadian Real Estate Market and Home Ownership.

He said that the changes made to date “largely targeted aspiring first-time buyers, making it harder for them to gain a foothold in the housing market today.” This group, Mr Levings said, was not the problem and added that insured first-time buyers are the “most tightly regulated, rigorously underwritten borrowers in the market today.”

The Genworth chief said that the policy changes that targeted the strong markets of Vancouver and Toronto has also impacted others including Calgary which “was already under pressure and didn’t need any additional cooling.”

He also pointed out that the changes only affected a relatively small percentage of those in Vancouver and Toronto and therefore had little impact on rising prices. Mr Levings said that local measures may be more effective, citing the foreign buyers’ tax in Vancouver.

In conclusion, he called on the federal government to pause before making more changes; modify the stress test to better reflect rate expectations; scrap plans for a risk-sharing model; and work with all levels of government to study and address local housing issues.