Toronto, Vancouver at risk of correction, TD warns, after January home sales and prices surge

TORONTO – Surging sales in the piping hot areas of Toronto and Vancouver last month prompted certainly one of Canada’s big banks to express concerns Tuesday the cities might be vulnerable to a house price correction.

The Canadian Real Estate Association reported Tuesday that sales of existing homes rose by eight per cent in January compared to a last year, as the national average home price soared 17 per cent.

But it had been the sales figures for Vancouver and Toronto that drew considerable notice from economists.

The average sale price in greater Vancouver rose 32.3 percent year-over-year to nearly $1.1 million, during greater Toronto it climbed 14.2 percent to $631,092.

The Mls benchmark price – an amount that CREA says is more representative of the marketplace – rose to $775,300 in great Vancouver, a rise of roughly 21 percent when compared with January 2015. In greater Toronto, the benchmark price climbed roughly 11 per cent year-over-year to $578,400.

TD economist Diana Petramala said some of the strength within the Toronto and Vancouver markets might have been bolstered by buyers wanting to get in to the market before new mortgage deposit rules took effect Monday.

New federal regulations require larger deposit on homes that cost between $500,000 and $1 million.

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“While we continue to believe that things just can’t get any hotter, markets in B.C. and Ontario continue to prove us wrong,” Petramala said in a note to clients.

Petramala said although foreign investment and immigration are likely to provide support to the Toronto and Vancouver markets within the months ahead, she raised concerns about whether sky-high home values in those regions are sustainable in the long run.

“Every month of double-digit home price growth raises the chance of a deeper home price correction in the future,” Petramala said.

A correction is defined as a drop in value of at least 10 %.

Every month of double-digit home price growth raises the risk of a deeper home price correction on the road

The price gains in Vancouver and Toronto fuelled a boost in Canada’s national average home price in January to $470,297, CREA said.

When excluding Ontario and Bc, however, the average sale price actually edged lower by 0.3 percent from a last year to $286,911.

Regional differences stemming from the impact from the oil price shock will probably continue throughout this year, said BMO economist Robert Kavcic.

“Those markets exposed to oil prices are correcting,” he explained inside a note.

“The uber-tight big-two cities are benefiting from lower rates of interest than we otherwise might have seen had oil prices not fallen, while other people are scattered in between.”

On a month-to-month, seasonally adjusted basis, CREA says national home sales rose 0.5 per cent in January, compared to December of this past year.

Meanwhile, the amount of new listings on MLS declined by 4.9 percent in January compared to December.

“Tighter mortgage regulations that work in February may shrink the pool of prospective homebuyers who be eligible for a mortgage financing and cause national sales activity to ease within the months ahead,” CREA chief economist Gregory Klump said in a statement.