Why Toronto’s overheated Housing Market is unsustainable

While Canada’s high-flying housing market continues to stabilize, it’s increasingly evident that one city — Toronto — is a glaring exception.

In sharp contrast to price moderation in most cities and a significant drop in Vancouver, where buyers are being priced out of the country’s costliest market, Toronto buyers are on a spending spree — one that looks as if it won’t end well.

I would feel a lot better if I were counting half as many cranes — TD Bank chief economist

New figures from the Canadian Real Estate Association show prices up by 10.5% in Toronto over the past 12 months, the only major city with a double-digit gain. In contrast, Montreal gained a modest 3.7% and Vancouver is down by 3.1%.

On average, national home prices in March, influenced by the big Vancouver market, edged down half a percentage point from an exceptionally high level this time last year.

This is in line with the expected trend for a relatively flat market this year, said Sonya Gulati at the TD Bank. TD predicts that national prices will increase 2.1% for all of 2012 as sales flatten.

The bank calculates the average national price is probably 10 to 15% above a sustainable level, but doesn’t foresee any big drop, Gulati said.

Instead, it expects prices to drift down gradually once interest rates begin rising, probably in mid-2013. Its forecast is for a decline of 3.6% in 2013 and 4.3% in 2014.