The brave economists at the TD Bank are gamely attempting to accomplish several impossible tasks at once. Their latest “housing bubble watch” begins with the warning:
– no one knows if there is a housing bubble in Canada, and “it is, by definition, impossible to identify a bubble before it bursts”.
Okay, one question mark still prominent, several left to go.
TD tries to factor out the human factor in housing markets with what they call the “irrational exuberance factor”, which is defined as “the ratio between the 12-month percentage increase in inflation-adjusted average home prices and underlying supply and demand conditions.”
Even more mystifying, TD tries to analyze market demand without any reference to the basic human need for housing.
TD’s conclusion: Calgary, Edmonton and Vancouver may be facing trouble, but central and eastern Canada appear okay when it comes to housing markets.
That’s good news for Torontonians, where the average home price in 2006 is $351,680. To pay for that home using a conventional mortgage, a Torontonian will have to put down $87,920 (a pretty incredible feat for most households) and come up with about $1,700 monthly for the mortgage. Add in municipal taxes and energy costs, and the total bill for shelter for even a prudent household will be at least $2,000.
To afford that bill, ahousehold needs an annual income of $80,000 orup.
Here in Toronto, only slightly more than one-quarter of the city’s 943,075 households earn an annual income of $80,000 or more.
The vast majority of Torontonians haveliterally been priced out of the private ownership market. It’s not exuberance, rational or otherwise, that keeps them on the sidelines.
It’s a low income relative to market costs.
Something that the TDeconomists have missed in their detailed calculations.
– Michael Shapcott