Two big banks are waving red flags about Toronto housing prices, calling them "simply unsustainable" and a "bubble" in separate reports.

The Canadian Real Estate Association said this week that average house prices across the Greater Toronto Area hit $727,300 in February, a figure that has risen by more than 23 per cent in the past year.

The group said hot activity in and around Canada's largest city is "without precedent" and that it's skewing the national average higher.

"It's pretty much the best time to be selling a Toronto home in at least 30 years," BMO economist Robert Kavcic said, noting that feverish activity is spilling over into neighbouring regions.

"The strength now also spreads as far as Guelph and Barrie, where average prices are pushing 30 per cent year over year, [and] even London and Windsor are seriously gaining momentum," Kavcic said. "Supply-side fundamentals have been left in the dust."

Much has been written on the difficulties that new buyers are having in the Toronto area, and Kavcic's colleague Doug Porter expanded on that notion Friday morning with some hard numbers to show just how "other worldly" prices have become.

Porter tells the story of a hypothetical couple, Dudley and Darlene Doright, successful young high-earners looking to start climbing the property ladder.

By diligently saving, they have managed to hoard away $100,000 as a down payment for a home, which they are looking to buy because they just had a baby.

Both earn high incomes, but for the purposes of Porter's exercise, he assumes that one will stay home without an income for a while. The other will go to work and earn $225,000 a year.

"This still places them on the very cusp of the legendary 'top one per cent' of all income earners in Canada," Porter notes — but adds that even they can't afford to buy once you break down the numbers.

Their sizable down payment means they can qualify for a home costing $500,000, but anything above that would require the additional cost of mortgage insurance under new rules announced last year. But under those same rules, "anything above $1 million is immediately off limits, since it wouldn't qualify for insurance," Porter noted.

Factoring in the cost of that mortgage insurance and estimating basic costs such as utilities and property taxes, Porter tabulates that the Dorights could afford a house of just over $987,000.

house-graphic

"Surely, this will be enough to afford a reasonable place?" Porter asks rhetorically. "That depends on your definition of reasonable."

The average detached house in the city itself now costs $1.57 million, CREA says, and in the neighbouring suburbs it's $1.11 million.

A semi-detached in the 905 area could be had for well under their budget at $700,000, Porter says, but "they're not that common in that region, and their price has shot up by 33 per cent in the past year."

Add it all up, and the Dorights exemplify a sobering reality: even people near the top one per cent of all income earners in Canada "are at best able to afford a semi-detached home on the fringes of Toronto, or maybe a low-end detached home verging on teardown status," Porter said.

"Now just imagine the predicament a more typical couple of more modest means faces in the current market environment."

TD's take

Housing prices are not just a problem for people in Toronto and its environs. The growing bubble could soon threaten Canada's entire economy, TD Bank said in a report Thursday.

Higher house prices have been juicing Canada's economy not only via transaction fees and taxes, but also by a phenomenon known as the "wealth effect."

Broadly speaking, the wealth effect means that when people see the value of their houses go up on paper, they feel richer, so they go out and spend real money on other things.

That spending boosts the economy, but it can't go on forever, TD warned. "Home prices across the GTA and surrounding areas appear to be detaching from fundamentals and are simply unsustainable," the bank said Thursday in its quarterly forecast for Canada's economy.

If the bubble pops, it won't only be over-leveraged Torontonians who bear the brunt.

The good news is that sort of shock "typically requires a trigger," and the bank sees nothing on the immediate horizon likely to set off a chain reaction.

After having taken multiple steps to cool the market from a policy perspective — including higher mortgage insurance premiums that kick in today — Ottawa's likely staying on the sidelines for now.

And the other element fuelling high house prices — low interest rates — are unlikely to disappear any time soon. That means "in the absence of government policy intervention or a sharp movement in interest rates, momentum is likely to keep the Toronto housing party going for at least a few more quarters," TD said.

The risk remains that some factor will eventually take away the punch bowl, and when that happens, there could be a lengthy hangover.

Porter notes that when Toronto prices peaked in 1989, it took Toronto prices nearly two decades to recover, once inflation is factored in.

As TD put it: "This pace cannot last forever."