While some have suggested that the growing housing bubble in Toronto is being inflated by first-time homebuyers, a prominent bear economist identified a less obvious suspect: move-up buyers.
David Madani, an economist from Capital Economics, has suggested that move-up buyers who are leveraging equity in their existing homes are responsible for the large demand that is pushing up home prices in Toronto, according to the Financial Post. Madani, a well-quoted bear analyst on the housing market, predicted a 25% collapse in prices in 2011.
“Toronto’s growing housing bubble is being blamed on desperate first-time buyers chasing a dwindling inventory of homes for sale, but that’s a red herring,” Madani said in a note. “The truth is that it’s mainly being driven by move-up buyers leveraging the equity in their existing homes.”
Citing figures from the Toronto Real Estate Board, Madani noted that 48% of the 113,133 sales in 2016 were for the single-detached home segment of the market, which leaped 20.8% to an average price of $974,698. That price, he said, is beyond the reach of younger households whose median incomes were between $70,000 and $80,000.
Developers and real estate industry participants in Toronto have attributed January’s 22% year-on-year surge in prices to lack of supply, which they blame an inactive municipal government for. However, Madani dismissed that explanation.
“Since these move-up home buyers obviously already live in a home and are largely responsible for the big increases in house prices, it stands to reason that there isn’t a major shortage of housing causing housing prices to escalate,” he said. “Investors are the other reason for rising house prices. There are always shortages of housing for people wanting to buy their third, fourth or tenth property!”
Madani warned that tighter mortgage rules that were introduced last year might not be enough to prevent further increases in prices and “a more painful bust down the road.”
Fitch sees danger in booming Canadian housing market
Could Vancouver’s housing heat be moving to the GTA?