Monthly Archives: June 2009

GTA Market Report – June 21, 2009

Toronto house prices heading for new high

GTA Monthly Sales June 15, 2009

GTA Monthly Sales June 15, 2009

There’s been an unlikely epidemic of shyness among Toronto real estate agents this spring. In a time of economic uncertainty, it seems somehow unbecoming to point out that local house prices are pushing into record high territory at this time. Still, it’s probably best to face the numbers head-on, and try to make some sense out of them!

 First off, the value for June 2009 in the above chart ($407,716) reflects only the sales in the first half of the month. It’s entirely possible that the full-month average will be closer to $400,000. Secondly, the numbers when averaged over a longer time period (say, three months) will be more in line with recent years. And I think that’s the issue here… House prices generally don’t rocket around like high-tech shares, they shift much more gradually.

Not to put too fine a point on it,  the volume of transacations is more telling than the exact price level. Last winter, volumes were down while buyers took a breather, and prices softened as a result. This spring, record-low mortgage rates helped make home ownership even more affordable, and sale volumes went back up. Roughly speaking, we’re back where we were (which is not a terrible place to be).

Long-term steady growth in Toronto

What’s clear, in mid-2009, is that there’s no longer a general expectation that prices only go up. Over the long term, prices do rise, but in varying degrees. Looking over the many local housing markets across North America, we see some major urban area where prices have been flat for decades, others where there has been steady growth, and some that have shown extreme volatility. The Toronto housing market is an example of an area with steady growth. The chart below shows average sale prices for Toronto since 1966. The display is in logarithmic scale, which means that the rate of increase for any year can be accurately interpreted by the angle of the line:
Toronto Average Sales 1966 to 2009
Toronto Average Sales 1966 to 2009

As the chart shows, home prices actually increased more dramatically in the 1970s and 1980s than at any time during the past 20 years. The chart also shows that over time, prices have increased steadily. Since 1966, average home prices have gone from just over $20,000 to somewhere close to $400,000. That’s about three times the rate of inflation… not too shabby.

Mark Carney spells it out

The Governor of the Bank of Canada, Mark Carney, made a remarkable presentation last week at an international conference in Montreal. His speech was made to a group of economists and bankers, but his text serves as a reliable and convenient primer on the global economic crisis. You’ll find the complete speech,  “Rebalancing the Global Economy,”  on the Bank of Canada web site.

Globalization 2.0

In essence, Carney proposes that the world is now laying the groundwork for a new wave of globalization. He identifies a series of imbalances which need to be addressed. The challenges include stimulating consumer demand in producer countries such as China; managing fiscal stimulus policies so as to encourage, rather than replace, private risk taking; and increasing coordination among central banks, including greater emphasis on peer and external review. Carney urges all countries to accept their shared responsibilities, which means  “recognizing spillovers between economies and financial systems and working to mitigate those that could amplify adverse dynamics.”

Carney makes some very useful comments on the distribution of risk between the private and public sectors.

We need to think carefully about where risks are best held as we emerge from this crisis. There are two considerations. First, risks that can be priced are best borne by the private sector, whereas uncertainties that have a wide and significant potential impact are best borne by the public sector. Second, risks are endogenous: Public policy and private decisions influence aggregate risk in the system. For example, the widespread private use of collateral to mitigate counterparty risk reduced credit risk but sharply increased liquidity risk. Similarly, the public sector’s recent assumption of some risks creates moral hazard. If left unchecked, this will eventually promote private behaviours that will add overall risk to the system.

Balancing act

After reading Carney’s text, I have a better understanding of the central banker’s focus on balance.  In the global environment, flows and counterflows are the lifelines of prosperity. During the recent global meltdown, Carney writes, “the reverberations of contracting U.S. consumer demand spread rapidly via global supply chains, and a global inventory glut developed virtually overnight. A 3 per cent decline in U.S. consumption of goods over the past six months fed a 20 per cent fall in Asian industrial production. A relationship that had been symbiotic became virulent.” The sudden contractions required dramatic responses from the international system. Today, with reverberations that will last through 2010, Carney favours an orderly retreat of the public sector. “The expedient should not become permanent,” he writes.

Since I’m not a trained economist, there were times when I wanted to use Kevin Kline’s line from A Fish Called Wanda … “What was the part in the middle?” I have an extremely tenuous grasp of Ricardian equivalence, Augustinian economics, and black swans. Still, if you’re looking for an orderly and concise discussion of how we got into the current situation and what should be done, it’s a great read.