06/08/2017 03:04 EDT | Updated 06/08/2017 03:14 EDT

Toronto's Housing Bubble Seen Spreading In Bank Of Canada Heat Map

A strong economy can't explain the Toronto region's house price growth, the bank says.

  • Fastest price growth is in areas surrounding Greater Toronto
  • Strong economy can’t explain soaring prices
  • Panic-driven 'fire sales’ could hit Toronto’s housing market, BoC warns

Average home prices in some regions surrounding Greater Toronto have jumped by 40 to 50 per cent in the past year, according to data in the Bank of Canada (BoC)’s latest Financial System Review.

In its biannual survey of Canadian finances, the bank published a heat map of property price growth around Canada’s largest metropolitan area. What it showed is a rapidly-spreading price bubble: The fastest price growth was seen in the areas surrounding Toronto, rather than in the metro area itself.

“Prospective homeowners priced out of the GTA have looked increasingly farther in search of more affordable housing, bidding up prices throughout much of the Greater Golden Horseshoe area,” the bank’s review stated.

“As a result, prices in the areas surrounding the GTA have increased at an even faster pace than they have within the GTA.”

The bank’s review comes as evidence mounts of a slowdown in Toronto’s (perhaps formerly) heated housing market. Sales fell 26 per cent in May, compared to the same month a year earlier, while new listings soared nearly 50 per cent.

Prices were still up from a year ago, by about 15 per cent, but that is a much slower pace of growth than was seen just a few months ago.

Panic-driven ‘fire sales’ could hit Toronto’s housing market

The BoC noted that “strong fundamentals” are holding up the region’s housing market. Mortgage rates are low, job growth is strong and there is some added pressure coming from foreign buyers, the bank said, though it’s hard to estimate how much.

But “these fundamentals cannot readily explain the pace of the price increases seen in the GTA over the past 18 months,” the report said.

The bank said it sees signs of “extrapolative expectations” in the Toronto market — a fancy term for real estate speculation.

Condo towers along Toronto's waterfront. The Bank of Canada says it sees signs of speculation in the city's housing market.

It noted that property prices have grown faster than rents, making real estate investments less lucrative. Yet the pace of investing has sped up. That creates a potentially "destabilizing" environment, the bank cautioned.

“When expectations reverse and prices recede, investors may quickly sell their assets, possibly leading to fire sales with adverse consequences for the rest of the market.”

A correction in Toronto’s housing market, as well as in Vancouver, is one of two key risks to Canada’s economy that the BoC outlined in its report.

The other related risk is rising household indebtedness, which makes Canadians more vulnerable to economic shocks.

The bank says there is a “moderate” chance of a housing correction in Toronto and Vancouver, but if one were to happen, it would hurt the country’s economy and destabilize the financial system.

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