"No Housing Bubble In Toronto"

On Tuesday the Bank of Canada announced it would keep interest rates at 1%. No surprise there.

What's also no surprise is this Toronto Star article by Robin Wiebe. A senior economist at the Conference Board of Canada, Robin has written "No Housing Bubble in Toronto" another propaganda piece from the socialist rag that the Star is. One of the first Canadian papers to practice yellow journalism, it should come as no surprise that this article presents "little or no legitimate well-researched news."

Toronto’s housing market has not received anywhere near the attention that has been paid to the Vancouver market and its reputed housing bubble.

That's right. According to Robin, Vancouver isn't in a bubble either.

The good news is that the situation in Toronto had nothing to do with speculation — which can lead to a bubble — but was driven by economic fundamentals.

Past tense. As if the fear of a bubble is over and the doom-gloomers were wrong. Either way, economic fundamentals based on artificially low interest rates and a government entity that offers low cost mortgages with small down payments and easy terms isn't exactly something to cheer about.

Sales started to rise rapidly in the second half of 2009, boosted by low interest rates and the economic recovery that followed the financial crisis.

Here's where Robin goes wrong. There was (and still is) no economic recovery, just false prosperity brought about by cheap credit. But let's follow his logic:

Also fuelling sales was the anticipation of tighter mortgage rules. Since sellers were still cautious about putting homes on the market following the recession, home buyers had relatively few units to pick from.

With housing demand exceeding supply, it is not surprising that prices soared by about 19 per cent over the winter of 2010, to the delight of sellers, whose reaction was to put their homes on the market. By spring, the increased supply was beginning to trim price growth, although it remained in double digits for several more months. Around the same time, mortgage rules were tightened. Buyers, already spooked by big price hikes, retreated from the market.

Sales plunged — so did growth in prices. In the fourth quarter of 2010, annual price growth was closer to 5 per cent. That got some analysts nervous that the housing “balloon” was about to burst. But in truth, the market reacted exactly as the economic fundamentals would dictate.

Flawed economic fundamentals. The market is still obeying the laws of supply and demand, Robin is right in that regard. The problems occur when one examines the fundamentals and sees that this "boom" in housing has been fueled by artificially low interest rates. With a central bank, a country's interest rates aren't set by the market and therefore don't reflect the true supply and demand for credit. The Toronto housing boom isn't backed by any actual savings, it's dependent on cheap credit.

The added knowledge that mortgage interest rates will remain low for some time has further comforted purchasers.

Exactly. If rates rise, the bubble bursts. Although rates don't have to rise for the boom to end. External events can always lend a helping hand (perhaps this is why Flaherty is so concerned about Europe's debt crisis).

Sales have edged higher and annual price growth has exceeded 8 per cent in recent months. Once again, listings are beginning to rise, which is expected to slow price growth. Therefore, Toronto’s market is not only balanced, but is also perceived to be balanced by most, and no one is talking about a bubble anymore.

Just because one ceases to look at the moon doesn't mean it no longer exists. The laws of economics are global and work regardless if we believe in them. Robin's argument rests on the assumption that since the Toronto housing market is obeying supply and demand, there isn't anything to worry about. In truth, the imbalances won't become apparent until the boom is over. Hence why the boom turns to a burst, or to put it another way: the bubble bursts.

The balance between producers and consumers is artificial; cheap credit distorts the price system and leads to malinvestments.

In truth, there was never a serious bubble threat in Toronto. Even in Vancouver, the speculation about a housing bubble is overblown.

If you say so....

Toronto’s housing market has a bright future, given expected strong population growth.

Same arguments the Americans used in 2006.

The bottom line: economic fundamentals work. House prices reached double-digit growth when demand was much stronger than supply. As supply and demand lined up, growth in house prices slowed. The only thing that popped in Toronto was the fear of a housing bubble.

The bottom line: Robin Wiebe is a moron. Or rather, a propagandist for the Canada Mortgage and Housing Corporation, where he worked for 18 years. He may not even realize how wrong he is, with a Masters in Economics from the University of Guelph, he was most likely taught Keynesian macroeconomics, told to manipulate variables in complex equations to arrive at solutions so distant from reality that the conclusion must have been along the lines of: well the models are right, it must be the economy that's wrong.

The real bottom line is that all artificial booms ends in a bust. Canada is no different; Toronto and Vancouver are in a real estate bubble.