Ontario’s housing market ready for takeoff

Economic conditions are ripe to lift the province’s housing market, says CMHC

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Purchase Ontario’s housing market ready for takeoff

Livio Di Matteo
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THUNDER BAY, ON, Feb 16, 2015/ Troy Media/ – The Canada Mortgage and Housing Corporation (CMHC) is predicting that Ontario’s improving economy will lift housing demand in the province.

According to CMHC’s most recent housing market outlook, an improving U.S. economy and a lower Canadian dollar will both boost Ontario’s economy and support new housing construction and sales. An additional kick will be provided by low interest rates, meaning that mortgages rates will be supportive of housing demand.

The CMHC forecasts that prices and sales will rise in Ontario as it moves into 2015 but with some dampening into 2016.

Housing market ultimately local

However, in housing, all markets are ultimately local. Eastern and Northern Ontario, which are dependent on public sector employment and natural resources, will see more limited

Housing market
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economic growth as governments enter a period of restraint and commodity prices remain low, particularly in the mining sector. On the other hand, the Greater Toronto Area (GTA) and its surrounding regions are expected to remain robust in light of the population growth in the area.

Regional variation was a feature of housing prices and market activity in 2014. In the 4th quarter of 2014, the MLS average price in Ontario was $434,606 – up 6.5 per cent from the year previous. The prices ranged from a high of $577,269 in Toronto to a low of $186,644 in Windsor. The robust population growth in the GTA region means that its prices in 2014 remain the highest in the province. After Toronto, the highest prices were in the GTA bedroom communities of Hamilton, Oshawa and Guelph with prices of $404,798, $392,036 and $356,062 respectively.

Housing market
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The lowest housing prices after Windsor were in Thunder Bay at $221,981 and then Greater Sudbury and St. Catharines-Niagara at $240,516 and $253,932 respectively. Cities like Barrie, Kitchener and Brantford were in the middle of the pack, with Barrie at $345,506, Kitchener at $333,955 and Brantford at $279,588.

During 2014, prices did not rise in all Ontario cities. The per cent change in the MLS average price in 2014 was the highest in Barrie at 12.3 per cent, followed by Thunder Bay at 8.4 per cent and then Oshawa at 8.2 per cent. Average MLS prices actually declined in Ottawa, Peterborough and Kingston, with the largest decrease in Kingston at -4.3 per cent.

Of course, the big question is whether Ontario’s housing market is overvalued and, indeed, whether some communities may be more overvalued than others. A potential measure to examine the sustainability of housing prices borrows the concept of the price-earnings ratio from stock markets, that is, the ratio of the price of an asset to its earnings flow. The lower the price earnings ratio (P/E), the less you are paying for an asset relative to what you can earn from it.

In the case of housing, a simple P/E ratio can be constructed by taking the average residential price and dividing it by the average annual rent for a two-bedroom apartment – a measure of the potential cash flow from the housing asset. What the P/E ratio does is relate the market valuation of the worth of the housing asset to the income or return that the asset can generate.

Is housing market overvalued?

In 2014, the price-earnings ratios for housing in major Ontario cities ranged from a high of 38.5 in Toronto to a low of 19.5 in Windsor. After Toronto, the highest P/Es were in Hamilton (35.2), Oshawa (32.3) and then Guelph at (30.0). On the other hand, being economically depressed means that your housing prices are probably not overvalued. Along with Windsor, the cities with the lowest P/E estimate in 2014 include London (22.5), Greater Sudbury (21.6), Kingston (21.2), and Thunder Bay (20.8).

In stock markets, a P/E ratio above 25 is often considered a sign of significant overvaluation and perhaps a speculative bubble. Based on these figures, there may be some overvaluation in a number of Ontario housing markets. However, one also needs to consider the key economic fundamental driving the prices in some of these communities – namely, population growth. The GTA in particular is Ontario’s fastest growing region and most recently surpassed the six million mark – up over 8 per cent from 2011. This region has also been Ontario’s employment growth engine. The high P/E ratios in Toronto, Hamilton and Oshawa would be more of a concern if population and employment growth were stagnant.

Livio Di Matteo is Professor of Economics at Lakehead University.

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