Via Financial Times

The American music producer, songwriter and fashion designer Pharrell Williams peered out from towering video screens at a public square in downtown Toronto and announced that he was co-developing a new condominium project in the city.

“Physical space is only a backdrop,” his voice intoned on Tuesday last week.

The backdrop to Mr Williams’ debut as property developer — a midtown two-tower project dubbed “Untitled” — is a Toronto housing market that is rapidly on the mend after a two-year slump. Earlier that day the city’s real estate board revealed the price for a typical home in the Greater Toronto Area jumped 5.8 per cent in October from a year ago to $810,900, just shy of an all-time peak reached in 2017.

The property market rebound in Toronto, and to a lesser extent Vancouver, is boosting Canada’s economy at a time when it faces headwinds from various trade wars and low oil prices that are weighing down the provinces of Alberta and Saskatchewan.

But it is also making life difficult for Stephen Poloz, governor of Canada’s central bank, who is hesitant to join the global rate-cutting party for fear of exacerbating dangerously high household debt levels.

“[Mr] Poloz has to walk a fine line,” said Benjamin Tal, deputy chief economist with CIBC World Markets. “He has to keep the dollar relatively low, but on the other hand he doesn’t want to pour fuel on the fire.”

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Mr Tal believes the Bank of Canada will compromise with a one-off rate cut at its next meeting on December 4.

Signs of exuberance in Toronto’s housing market abound. The city’s skyline is a forest of cranes. There were 120 at the last count in July, according to the Rider Levett Bucknall crane index, more than America’s three-largest cities — New York, Los Angeles and Chicago — combined.

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Of the 5,000 properties listed for sale in Toronto, nearly half have an asking price of $1m or more. Only one house is available for less than $500,000 — a falling-down bungalow.

Vancouver has also seen a recovery of sorts. In October home sales soared 45 per cent from a year earlier, even though prices declined 6.4 per cent to a typical $992,900 over that time. It was the slowest price decline in months, suggesting a correction that began in June 2018 is moderating.

Economists point to several factors behind the rebound, most importantly that mortgage rates fell in lockstep with plummeting global bond yields this year.

2019 Hollywood Film Awards - Show - Beverly Hills, California, U.S., November 3, 2019 - Pharrell Williams accepts the Hollywood Song Award for
Pop star Pharrell Williams is co-developing a condominium project in Toronto © Mario Anzuoni/Reuters

Canada is also experiencing its fastest population growth since 1990, while jobs and wages are on the rise. In September the employment rate for those aged 25 to 54 — prime working age — hit 83.6 per cent, the highest level since Statistics Canada began tracking the measure in 1976.

It is a far different picture in western Canadian cities hit hard by low commodity prices. In Alberta, where business investment, household spending and labour markets are all deteriorating, house prices in Calgary have been on a steady decline since 2015.

Yet even with most other housing markets in Canada gaining strength in recent months, the sector has yet to see anything like what Mr Tal calls “the crazy years” of 2015 and 2016, when nationally prices climbed 15 per cent annually and as much as 40 per cent in certain markets. That surge prompted regulators to impose measures aimed at preventing risky mortgages and curbing speculation.

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When the Bank of Canada made its most recent rate announcement last month Mr Poloz credited those measures for removing “froth” from the market. “The housing market had a weak year or so, but it’s coming back across the board, so that’s all encouraging,” he said.

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However, household debt concerns have not lessened. Canadian households now carry $2.2tn in debt, a sum equal to 101 per cent of Canada’s gross domestic product. That exceeds the peak household debt-to-GDP level reached in the US during the Great Recession. Bank of Canada statistics show mortgage credit is growing at its fastest pace since 2017.

“The housing market might take another jump again, but people are at a level of debt now that’s so bad they can’t kick the can down the road any more,” said Scott Terrio, a consumer insolvency expert with Hoyes Michalos in Toronto. Figures from the Office of the Superintendent of Bankruptcy Canada show consumer insolvency filings climbed 8.5 per cent in the 12 month period ending in June, the first annual increase since 2010.

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Rising prices in Toronto are driving some people out of the city. Ainslee Tracey, a realtor in London, Ontario, a two-and-a-half hour drive west of Toronto, has seen an uptick in people who feel priced out of Toronto and its immediate environs. She recently sold a home to a young woman originally from London — where the average price is less than half that of Toronto — who, after attending university in Toronto, decided to flee. “She was able to find a job here and relocate back to this area knowing that home ownership here is actually affordable,” said Ms Tracey.

Mr Williams’ entrée into Toronto real estate struck a nerve with some. Jagmeet Singh, the leader of the left-leaning federal New Democratic Party, tagged the musician in a tweet and asked if the project would include an affordable housing component. “Asking for working class people who can’t afford rent in 91 per cent of Canadian cities,” Mr Singh said.

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Observers are waiting to see whether prime minister Justin Trudeau will follow through on his election vow to address affordability concerns. He promised to expand a programme that lets first-time buyers tap government funds for a portion of their down payment in exchange for an equity stake in their home. At the same time Mr Trudeau pledged to tax foreign speculators with a 1 per cent levy on vacant homes owned by non-Canadians.

Mr Williams is not the first modern musician to take an interest in Toronto real estate. In March 2017, just as Toronto’s market was topping out, thousands of people attended a so-called “Real Estate Wealth Expo” in the city for tips on how to strike it rich by buying property. Among the headliners that day: the American rapper Pitbull.

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