David Rosenberg: "This Is A Bubble Of Historic Proportions"

Tyler Durden's picture

Shortly after we remarked most recently on the unprecedented Canadian housing bubble that has migrated from Vancouver to Toronto, Gluskin Sheff's Chief Economist David Rosenberg joined the growing chorus of calls for government intervention into the Toronto housing market. In an interview on BNN, Rosenberg, who correctly called the U.S. housing bubble in 2005 when still at Merrill Lynch, said the massive deviation from historical norms has him drawing comparisons between the two situations.

This bubble is on par with what we had in the States back in ’05, ’06, ’07,” he said. “We have to actually take a look at the situation. The housing market here is in a classic price bubble. If you don’t acknowledge that, you have your head in the sand.”

Rosenberg warned unchecked increases in home prices are becoming a social issue. “It’s not an equity, it’s not a bond -- it’s where people live,” he said. “Where home prices are in Toronto, they absorb 13 years of average family income. That is completely abnormal. We’ve never seen this before.”

“We’re out of equilibrium, and when we’re out of equilibrium, or there’s some sort of market failure, are there grounds there for government intervention? I think even the most ardent libertarian would say ‘yes'." Rosenberg said there are a trio of levers the government can pull to cool down the market. Authorities can address supply, which he said has already been “kiboshed.” Interest rates can be raised, but Rosenberg doesn’t believe the Bank of Canada will do that.  Or new policy can be drafted to address the prevalence of speculation.

“These are not prices driven by the local fundamentals -- this is the foreign buyer coming in,” Rosenberg said. “Toronto has really emerged as a first-class city, not just politically, not just culturally and economically, but also in terms of being a major financial centre. But if you’re going to ask me at this stage, ‘do we need to approach taxation of this capital coming in differently to curb the demand?’ [That’s] absolutely right.”

And just to make his position clear, Rosenberg also an op-ed in Canada's Financial Post on the topic, titled simply enough:

"Make no mistake, the Toronto real estate market is in a bubble of historic proportions"

by David Rosenberg

The concerns about froth in Toronto’s housing market are not likely to subside given the sticker-shock from the latest report from the Toronto Real Estate Board.

As per the March report, the average single-detached house in the Greater Toronto Area (GTA) sold for $1,214,422 last month up from $910,375 in March of last year — that is a 33 per cent YoY surge, and follows a 16 per cent run-up over the prior 12 months.

Whatever the term is for an acceleration in an already parabolic curve, well, that is what we have on our hands today.

And it isn’t just detached homes seeing this degree of rapid price appreciation — the benchmark single-family home selling price was up 29 per cent YoY, the benchmark townhouse price was up 28 per cent and the condo/apartment composite was up 24 per cent.

This is a bubble of historic proportions.

Not only to have home prices in the GTA now absorb an unprecedented 13 years of median family income, but to have 30 per-cent-ish run-ups against a backdrop of a 2 per cent inflation rate, wages that are barely going up 2 per cent as well, and nominal GDP growth of around 4 per cent. This should put 30 per cent into some sort of perspective when we conclude that what we have on our hands is a near three standard deviation event.

That alone qualifies as a bubble — if you don’t like that term, then call it a giant sud. In the past, Toronto home prices went up at an annual rate of 4 per cent in real terms, in the past year they have surged by nearly 30 per cent.

Some context, however, is needed here.

First, this aggressive increase in home prices in Canada’s most populous city has come (at least in part) due to strong competition among potential buyers for comparatively scant homes for sale.

Active listings of homes available for sale in Toronto plunged 35.2 per cent YoY in March, which means that the months’ supply of houses on the market is a miniscule 0.65, down from 1.18 last March — for reference, a “balanced market” sees a months’ supply figure around 6.0. The average home that was put up for sale remained on the market for just 10 days, down from 16 days a year ago.

These measures of “tightness” in the market are without precedent — not even the red-hot late-1980s bubble experience could ever compete with today’s backdrop.

As well, the sales-to-new listings ratio sits well into “sellers’ market” territory at 70.8 per cent, which compares to 69.4 per cent a year ago — a ratio between 40 per cent and 60 per cent is considered indicative of a “balanced market.”

No wonder nobody wants to list their home! It’s become such a valuable asset.

But you see, this is where the danger comes in: when people start to view their house as some investment as opposed to a home — a place to raise the kids and play with them in the backyard.

A house is an asset indeed, but should never be compared to a stock or a bond or even other investable properties. It is a place to live.

Unlike a stock, which you can sell anytime and tuck away the winnings, if you sell your house, well, you still need a roof over your head. A stock with a dividend gives you an income stream, as does a fixed-income instrument. Unless you are a landlord, your house is burning cash (utilities, property taxes, maintenance), not bringing in cash.   

So there are indeed some supply and demand fundamentals that are underpinning prices. Insofar as the demand is rising because people think they are investing in something hot just because of the accelerating momentum, well, these people are going to end up being pretty big losers. For if the government catches a whiff that it is now speculative fever that is dominating the uber-hot housing market, well that could very well elicit a response (as in capital gains taxes for those who sell within a year or two).

At some point, a correction would be very healthy because on the other side, owners of homes will then realize that no, they did not win some lottery, and will finally be willing to start listing their property, especially those who deep down want to sell (it could well be that the move-up buyers would like to sell but can’t afford that mansion of their dreams).

Not to mention first-time buyers who do not have the income for a down payment that any lender would consider appropriate. After all, we have hit the bizarre stage where a typical home now (and we are talking about a bungalow in Pape Village, not exactly an estate on Warren Road) would absorb 13 years of median household income.

Not even in the late 1980s, did housing get this expensive on this basis, and we know all too well how the Bank of Canada ultimately reacted and what happened next. Stephen Poloz is definitely no John Crow — though things can always change.     

One caveat should be noted because what is different this time around (oh, how I hate using that phrase) is that Toronto has emerged as a world-class city and the foreign buyer is clearly having an impact.

So while Toronto residential real estate is indeed expensive for the locals, it is far less so for foreign investors, especially for Americans who can buy Canadian assets at a 25 per cent discount from a currency perspective.

In the mid to late 1980s, Toronto did not have the Rogers Center. It did not have the Raptors. It had no decent hotel outside of the Four Seasons and the Windsor Arms. Truly great restaurants were not to be found (unless you want to count Winston’s!). There was no Drake. And Toronto FC was not in existence. Not to mention there was very little in the way of a theater district.

While the separatist threat in Quebec gave Toronto the mantle of being Canada’s financial center back in 1976, the city was never seriously viewed as a global player in this respect until very recently. With more than 250,000 employed in the financial services sector, Toronto has very quietly emerged as the second largest financial hub in North America (after New York). Of the 84 cities surveyed in the 2015 Global Financial Centres Index, Toronto ranked 8th!

So while prices may seem a little nutty, it is important to note that Toronto is a major financial, economic and cultural centre, and when compared to its peers globally, prices appear far less crazy, too.

This doesn’t make the current price action justified based on local income fundamentals, but based on the foreign incomes of those wanting to establish a toehold in a stable Toronto amidst a sea of global instability, the prices are not that much out of whack.

As per data compiled by Global Property Guide, Toronto home prices on a U.S. dollar per square metre basis rank just 14th in the world, well behind the likes of London, New York, Paris and Tokyo.

And at the same time, if you are a family in say, Brooklyn Heights looking to buy property in Toronto it would only absorb six years of income; and if you reside in Santa Monica and feel like dipping your toes in the Toronto real estate market, it would only take up four years of your annual median take-home pay. The same (four years) holds true for those wealthy enough to be living in Knightsbridge.

You see, when Toronto home prices are measured against incomes in other places of the world, it is not nearly as onerous (especially in Canadian dollar terms).

In other words, many well-heeled foreigners can far better afford what the locals can’t afford here, and housing in recent years has truly become in internationally-traded asset class (though I wouldn’t recommend ripping out the foundation and exporting the structure anywhere).

So it goes without saying that if the name of the game is to tame the flame then have the foreign investor share the blame. A tax on foreign transactions, as was already done in Vancouver, seems like a pretty good idea. And the government can at the very least use the revenues to either provide greater tax incentives to build and/or provide tax relief for the low/mid income entry-level buyer who is struggling to cobble together the funds for a down payment.

So yes, in this sense, I would be advocating a Robin Hood style of economic policy.

Indeed, what may be needed is a very progressive tax on foreign buying of local residential real estate in the bid to cool demand and reverse the exponential surge in home prices — a surge that is creating tremendous social problems by crowding out young families (or individuals) from chasing the homeownership dream (a typical response is for these folks is to go out and buy a condo instead, but the reality is that average prices here have also skyrocketed 24 per cent in the past year and are in a bubble of their own).

Everyone says that the Bank of Canada cannot raise interest rates to curb the excess demand because of the deleterious effect this would have on the economy writ large (for example, taking the Canadian dollar back up to or above 80 cents which would thwart our export competitiveness which has become a longstanding role of the central bank).

Be that as it may, the home price surge in the GTA over the past year has impaired homeowner affordability to such an extent that it is basically the equivalent of the Bank of Canada having raised rates 150 basis points — actually a 200 basis point increase if you were to look at what home prices have done to affordability ratios over the past two years (so you can’t have it both ways; the price action is basically equivalent to having five-year mortgage rates closer to 5.75 per cent than the actual posted rate of 3.75 per cent).

Barring a bold move by the government to bring home prices to levels consistent with domestic economic fundamentals as opposed to income levels from well-heeled buyers from the U.S., China, and Europe, maybe it is time for the Bank of Canada to start playing a role and follow the Fed on a gradual rising interest rate path.

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FreeShitter's picture

I would be a rich motherfucker if I had money on everytime I hear about bubbles, the end is near and this is it, this is the big one elizabeth Im coming to join you honey.

SmackDaddy's picture

It's about to be a holocaust there shekelberg

Insomnant's picture

Well it is (((David Rosenberg))) warning us!

New_Meat's picture

Assessment isn't a prediction.

Only thing wwong with Rosie, is, well, he's a Yankees fan.  As we all know, Yankees Suck!

johngaltfla's picture

Rosie is right.

The Canuckistanis are trying to unload their Florida and Arizona vacation homes asap while we are at market peak so they can pay off their igloos and survive the crash.

Of course, just like 2007, everyone gets fucked.

Lube up baby, lube up.

New_Meat's picture

I think this is where I came in--talking about crackaz 'n' shit ;-)

Manthong's picture

Oh heck…

So a little price appreciation happens and everybody’s panties get tied up in knots.

cheka's picture

rosie has been wrong for a long LONG time.  a lot of us underestimate the lengths that frbny will go to, to protect the 30 billion per year in HOLIDAY bonus pool payouts

tc06rtw's picture

 What actually  IS  “different this time”  is that the average citizen is —
     aware  of the bubbles,
     desires  them  &
     wants  them to keep inflating…
and  will vote against  a candidate whose intent is to deflate them.

Nemontel's picture

Not really, most people have no fucking clue about basic economics whatsoever.


Houses Depreciate's picture

That's right. Let's get these prices down lower... much lower.


Remember..... Nothing accelerates the economy, creates jobs and raises the standard of living like falling prices to dramatically lower and more affordable levels. Nothing.

Deep Snorkeler's picture

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Special Guest: Dick Cheney: "Bird Hunting Along the Rio Grande"

Takeaction2's picture
Takeaction2 (not verified) Deep Snorkeler Apr 7, 2017 5:54 PM

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Now that I posted this on ZH...I am sure they will vanish.  Anyway....be patient...they pop up all the time.  

They are well worth this little amount of money.

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Seasmoke's picture

I'm waiting for the new CD to come out.

How to bomb innocent civilians for the Zionists puppetmasters.

curbjob's picture

"One Bubble to rule them all"

"One Bubble to end them all"





What is; Federal Reserve notes ?

chickadee's picture

Bank of Canada Governor Poloz has shown a totally wreckless attitude toward this housing bubble. In fact, if one was deliberately trying to sabotage the country's economy by creating a housing bubble, the policy measures one would pursue would be identical to those taken by Stephen Poloz. A worse candidate for the job could never have been chosen.

BurningFuld's picture

We need lower interest rates....NOW!!!!!! Fucking retard.

Ooops..not you....Poloz.

2_legs_bahhhhhd's picture

He is just following orders of the deep state. Flood the nation with comme voters, leverage the nations balance sheet to beyond repair, securitizing with the nations wealth. ie: forests,lakes,minerals,roads,bridges,national parks, tax revenue present and future.

I highly recommend reading Confessions of an Economic Hitman. By John Perkins.

Without inflation, everything goes to shit, right now it is going into Toronto real estate. Wait till those peeps find out how much it costs to live in OntarWEowe. It will collapse when the government stops importing wealthy voters, or when there are no more buyers....simple as that.

CPL's picture

It started with Brian 'The Felatio King' Mulroney.  He sold everyone in Canada up river for very little in return.  He was the easiest lay of all the UN delgates and often presented his brown star to anyone with a wallet.  His list of success includes: 

  • Boning the real estate market,
  • Jack knifing the economy,
  • Constructing the mega banks,
  • Turning provinces into piggy banks
  • Killing the european immigration policy.
  • NAFTA free trade agreement (no need to even mention how much every one hates this thing)
  • Shutting down mining, lumber, fishing, farming...business in general.
  • Picked a fight over french language that cost everyone billions in their legal fees.
  • Fucked with the reserves where most of us get our cheap smokes from.
  • Helping get the Canadian black market up and running.

The conservatives here did their jobs and reaped the rewards of getting nearly no representation in the house of commons, yet some how ate the reform party run by Preston Manning.  Which was one of the dumbest things ever done in Canadian politics.  System needed an overhaul, and the cocksuckers flipped the wagon instead of fixing things.  To them, their names are the last names of exiles to the Irish and the Celts.  Their names to be struck down from the hall of ancestors, their family deeds erased and forgotten.

As Lugus of the Celts of the Red Hand and Spear to hold the Torc for the Celts.  They are now the unforgiven to all circles and to be put outside the wall of the gate.  Never to see the green wood or ocean again.  Exile for eternity is their reward for poor work for the common good of all Canadians.  To the tundra they are given and may the wolves and bears eat their flesh before the cold takes their bodies.  Maybe they can pad their bodies with the bankrolls they stole from all of us to keep warm.

<Jazz Hands!>

Is-Be's picture

Man, your curses are a work of art, worthy of a bard.

May the best of your yesterdays be the worst of your tomorrows.

fiddy pence haff pound's picture

you were going pretty well there.

but the Reform stuff was slippery slope.

Then you put the Celts in your crack pipe,

and goodnight, chum.

cesar's picture

True but Carney wasn't any good either - same policies.

Amazing how no one says: Increasine the fucking interest rates Poloz!!!  They are all in on this incredible scam. Pump the economy by inflating real estate. The only major industry that's really doing well in Canada. They have roughly the lowest mortgage rates in the history of the country but no one says - hey hike the rates you idiot!  Oh no let's keep the party going.

Now they want to put a tax on foriegners? They may be part of the problem but most houses are bought by Canadians.  They are all clueless - that's the real problem!

Anarchyteez's picture

For fuck sake. It'll pop when it pops. Until then piss off.

Herodotus's picture

Nobody cares about Canada. 

Thisson's picture

Rosenberg should be ashamed of himself. No, a libertarian would NOT advocate intervention in the market. Let the market solve the problem by building more housing if it's in demand, and get the State out of the way.

Arnold's picture

Plenty of new space available.
Central location.
Large commons space.
Close to shopping and restaurants.

Contact Sears Holding Company.

aardvarkk's picture

The cure for high prices is high prices.

Is-Be's picture

The cure for high prices is high rises.

They offer convenience instead of status.

The land is consolidated into parkland and market gardens, The bottom floors are designated shopping, civil ( schools, halls etc) and railway station.

Much more efficient to heat, cool and plumb.

Will this obvious solution happen? Yes. But not in any Western country. They just gotta have that white picket fence. Well suffer then for your stupidity, fools.

"A house is no more an investment than is a pair of trousers."  Adams, I think

EDIT: Use rebar made from basalt, not steel. Otherwise the whole edifice has but a 100 year lifespan. Pay careful attention.

frank further's picture

"The cure for high prices is high rises.

They offer convenience instead of status."

If you want to live as if you are in an ant colony, goodie for you.  Me, I lilke living space and trees.  Just don't force your shit on me.

Womb Service's picture

No. A Libertarian would point out that we have a currency system that is centrally planned by rent seeking bankers and based on perpetually increasing imaginary debt, with interest attached. You can't have a free market without a free market for money. Global bubbles are a direct reflection of this. Endless leverage outbidding even more endless leverage. Housing bubbles are a symptom. A libertarian would point out the problem.

Why would you build more houses when tens of thousands sit empty? There is no supply problem. Demand is fueled by endless fake money. Most of it Chinese.

pc_babe's picture

David ... BTFD

Dan&#039;l's picture

Did Dave just figger it out?? Huh, Dave?

cesar's picture

6 months ago David wasn't quite ready to say it was a bubble but its been a  bubble for several years!  David is the classical economist who 'discovers' the obvious!

And this nonsense about Toronto being "world class".  What culture does Toronto have???  Mostly broadway shows from NYC.

Toronto is prosperous but not a world leader in anything significant!

Toronto used to be a nice city but holy smokes its a nightmare living there now. HWY 401 is the busiest in North America. They crammed Toronto full of immigrants.  Most of the people who live in Toronto weren't born there. Then they inflated the housing market with cheap mortgage funds like a 5 yr fixed rate mortgage @ 2.5% . Now everyone is trying to get rich with real estate.

Bank of Canada doesn't want to rasie rates because they triggered this housing inflation with cheap money. Good luck Bank of Canada - you deserve this mess since you created it!

Deplorable's picture

You are a complete idiot to not sell and move to a cheaper city.

Non-Corporate Entity's picture

It's historic now? Just last year it was epic. I'm calling "Biblical" for 2018...when it's 30G under TRUMP.

1.21 jigawatts's picture

Its hard to take someone seriously when their last name is (((Rosenberg))). 

I always imagine Woody Allen speaking the text as I'm reading.

debunker's picture

cue the violins, blame everyone but yourself.

Sam Spayed's picture

Woody's real last name is Konigsburg.

Md4's picture

If you're not going to ban foreign sales, tax the sale at 100%.

Same with flippers.

We CAN fix this if we really want to...

Start fixing things EVERYBODY needs with the proceeds...like roads.

youarelost's picture

Communists and progressives love the word BAN

Ajax_USB_Port_Repair_Service_'s picture

Bubble. Blah Blah Bubble. Blah Blah Bubble. Blah Blah Bubble. Blah Blah Bubble. Blah Blah Bubble. Blah Blah Bubble. Blah Blah Bubble. Blah Blah Bubble. Blah Blah

Son of Loki's picture

How many times have I heard the RE market is going to crash or correct?

CBs and foreign Loot control the global housing markets.

EndOfDayExit's picture

Well.. We thought we could just keep paying China with all these newly printed money forever? Here's your printed money coming home to roost.

just the tip's picture


the housing market is not the only thing bubbling.  every canadian owns a little piece of this action.  i especially like how the author included that now famous, or is it infamous, cliche', "privatizing profits and socializing losses".  at $16billion, that's one hefty investment.


veeger's picture

rosenberg , goldman , silverstein , schumer , kaganovich , nudleman , stein , rosen , bloomberg , jewbook , the list is endless..............the bubble that everyone should worry about ,, is the jew bubble..............

djsmps's picture

Wow. You're really clever.

veeger's picture

no ... i am not.............unlike a  group i am aware of , although they are not also , scream from the rooftops that they are the smartest tribe in the whole world.....just ask them ,,,,,,or yourself...

Herdee's picture

Marc Carney is a great bubble blower don't you think? Wherever he goes he just blows bubbles. He's moved onto London, England after being the Governor of The Bank of Canada and they have a pretty good one there in England as well. But what else would you expect from a Goldmanite?

artichoke's picture

Is Toronto out of land?  Why aren't developers buying up land, building the usual cheap chipboard shacks with one-side brick veneer the rest tiny cheap clapboards, and selling for $1.5 million?