Red Hot or Red Alert? Urbaneer’s Spring 2015 Toronto Real Estate Forecast Part 1

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Welcome to the latest edition of urbaneer’s seasonal prognostication: Our Spring Forecast for 2015!

In this first part of the forecast, we are going to discuss various analyst predictions as well as the role of affordability, debt, and emotional constitution in shaping the Toronto property market. In part two, we’ll take a look at interest rate drama (yes, drama!) and the ever-changing condominium market. (Note this is an excerpt. You can read Part 1 in its entirety here).

There has been no shortage of analyst predictions in the last few months, each varying slightly in their overall message and tone. A few are alarmist, while others are hopeful and only offer casual warnings. Some portend that the market is in for a soft landing, while many shout dire warnings that homeowners best brace themselves. However, the common thread through all of these pieces is that home prices in many markets, including Toronto, are overvalued. The question is: how much? Is there a bubble brewing, or is this a case of water cooler chatter that has snowballed?

For instance, a chat with RBC’s CEO David McKay might leave you brimming with optimism. In a recent article from the Globe and Mail entitled “RBC CEO David McKay bullish on Canadian housing”, he counters criticism from some analysts who say that the Toronto housing market is dangerously overheated by decidedly marking the single family housing type as the culprit for runaway prices. He goes on to explain that other factors (economic promise, strong immigration numbers) will continue to buoy the market.

Then there are those abundantly more cautionary in their advice.

In a report that looks at the potential threats to the Canadian economy, The Bank of Canada suggested back in December that housing prices were overvalued by up to 30 percent in some markets. Similarly, the Economist magazine issued a dire warning, suggesting that prices in Canada (mostly centring around super-hot Toronto and Vancouver) are overvalued by upwards of 25 percent.  

Both looked at a price-to-rent ratio (which some suggest is not overly accurate) as well as examined the gap between median income and housing prices. This gap is particularly telling and hones in fairly accurately on the potential vulnerability that encircles a hot market like that of Toronto, where it is all bidding wars and high fives when you secure the property you are after (likely after several kicks at the property can). It was determined that, in Toronto, the ratio of home prices measured against estimated median family income showed that house prices were 7.7 greater than average household income. Yikes.

The problem there is that, unless you are a rock star, CEO, software guru, or Hollywood starlet, chances are that your income is not ramping up in tandem with the escalation in property prices. This results in one of two things: people get sidelined in the market (which sets off a chain reaction of demographic shifts, including major lifestyle changes), or that weak spot of vulnerability sparked by household debt balloons; these high prices (and low mortgage rates) are pushing homeowners to take on more and more debt.

Cheap money goes far to help stimulate the economy, because it encourages people to borrow. It also runs the risk of removing that barrier built by pragmatism between wise finance and risky finance. That barrier gets worn even more thin in a market like Toronto, where emotions carry even more weight, because market momentum is stronger and lasts longer.

The hotter the market gets, the more emotion plays a role. Here’s a common scenario: you set out in your property hunt with a budget (probably not at the absolute top end, so as not become ‘house poor’), but after months or years of looking (and losing out in deals) sheer fatigue will propel you to the top end of that budget. Your motto quickly shifts from ‘prudence’ to ‘pay any price’ because the head gets completely shut out by the heart. And understandably so. House hunting in this market requires an emotional constitution made of steel in order to weather the major highs and major lows. (Read our recent post:  Dear urbaneer, Why is the market so hot?) We understand. We really do, and are here to help you through.

Real estate is a dynamic entity that is fluid and fast-moving, which presents certain risks if you don’t know what to expect. At urbaneer, we're committed to source and deliver real estate data and news we consider relevant for your real estate dealings. Stay tuned for Part Two, where we discuss the influence of interest rates, commentary from the Bank of Canada on Toronto real estate and more on the ebbs and flows of the condominium market.

And please remember, we are always here to help.

~ Steven and the urbaneer team

We're here to earn your trust, then your business.

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