It wasn’t supposed to be like this. Our recovery from the Great Recession happened faster than expected, we got in the mood to buy again, and the housing market spontaneously returned to bidding wars and double-digit gains. Experts say we’re in a bubble that’s ready to pop. The question is, how bad will it be?
Christopher Wahl
We’ve seen bubbles before. The last time the market went pffft was in the spring of ’89. The country entered a deep recession, mortgage rates hit 13.5 per cent, and the market was glutted with condos that speculators couldn’t off-load. Over the next seven years, the price of resale houses downtown dropped by 28 per cent. Owning a house was a burden.
The birth of the current bubble-like conditions can be traced back to 2008, when we smugly discovered our market was safe from the financial evils that led to the housing collapse in the U.S. We were intoxicated by good news: speculative investing was comfortingly low, our interest rates dreamy. Neighbourhoods like Parkdale, the Junction and Leslieville were lusted after by young couples and families in want of $400,000 fixer-uppers. The upwardly mobile had ballooning debt and stars in their eyes. Among the singles flooding into sparkling new condominiums were women in their mid-20s to late 30s, a boom demographic. One industry source estimated that they represented 40 per cent of the market, significantly higher than a decade before.
Demand was also driven by new arrivals. Everyone wanted to live here: almost half of the 250,000 people who immigrate to Canada each year settle in the GTA, and for many, the natural course of events is to plant roots by buying fairly inexpensive condos or suburban starter homes—affordable by international standards. For a big city, Toronto was a safe investment and a relative bargain.
Prices briefly flatlined in 2008, the same time city hall doubled the municipal land-transfer tax (which added as much as $10,725 to the cost of a $750,000 property). But the party raged on, and by last July, with Mark Carney declaring the recession technically over, the market resumed its climb. Even the high end rebounded: in Toronto, more than 2,300 homes with a value of over $1 million sold in 2009. From last fall through the early spring of this year, sellers did extremely well—particularly within the high-demand $500,000-to-$1-million range. Buyers, however, had to endure adrenalin-pumping condition-free offers and bidding wars. “I’ve been selling real estate for almost 20 years, and that was the craziest the market has ever been,” says Kara Reed, an agent at Chestnut Park. By the end of the first quarter of this year, the average house price was $427,948, up from the 2009 average of $395,460.
The warning signs of an impending pop are plentiful. The banks, inspired by the perkier economy, began to push their rates up. Jim Flaherty, in a fit of finger wagging, rolled out new CMHC rules that effectively ended real estate speculation by requiring buyers of non-owner-occupied places to make a minimum 20 per cent down payment, up from five per cent, to qualify for insurance. Then Carney announced a possible Bank of Canada rate increase by early summer, signalling the end of extreme low-interest debt. Unless we fall into unforeseen economic peril, rates will only go up from there, likely to double digits by 2020. When current five-year terms come to an end, those borrowers among us who bought houses they could ill afford on 35-year amortizations will either have to find extra money somewhere or they’ll be forced to sell.
While most economists, brokers and market watchers agree the bubble won’t continue to inflate, they’re divided on the severity of what happens next.
@Freakanamikes,
Go buy all the real estate you want if you think it’s such a good investment. Nobody’s stopping you.
It’s still cheaper to rent by half.
March 17, 2011 at 1:41 pm | by Are you kidding me@Are you kidding me
Your last comment has a bitter tone to it and I don’t blame you. When you are unable to win an argument using poorly formed logic and evidence (look at the stability in our real estate market) that is contrary to everything you predicted, I am not surprised.
And for the record, I would never go out and buy a whole bunch of real estate. That would be silly, almost but not quite as silly as your doom and gloom predictions ;)
My main point was simple. I believe that home prices in GTA’s established neighborhoods will remain stable and will increase over time. I never once implied that it is the best investment out there and one should buy as much as possible.
March 21, 2011 at 12:41 am | by FreakanamikesOne suggestion for the future. If you’re going to make doom and gloom predictions, try to have informed facts as the basis for taking an extreme position.
I have only pointed out that this market is mathematically unsustainable — and it is.
It’s cheaper by half to rent. I’ll still take 50% discounts where they’re offered. You’re welcome to pay double and speculate.
My perspective is based on math. Yours is based on feelings.
You think lower prices are doom and gloom. I think they’re a good thing: more families can afford good housing when prices fall.
You pedal fear with your “buy now or be priced our forever” mantra. It is a tacit threat.
On the uneducated your fear-mongering works. The educated know that all bubbles pop.
I’m not telling you what to do. If you think property is a good investment, be my guest.
But all bubbles are riddled with the Freakanamikes cheerleaders on the way up. And on the way down, all bubbles are filled with the Freakanamikes of the world saying “Never a better time to buy”.
Eventually the Freakanamikes of the world pick an issue (Greece, Japan, Portugal, subprime, whatever) and say “Whocouldanode?” That’s the ultimate buy signal.
All bubbles pop. This one will too.
March 21, 2011 at 12:46 pm | by Are you kidding me@Are you kidding me
To accuse me of fear-mongering is a weak method to make a point. Go back and read your posts and it’ll become very apparent that the fear-mongering is hardly coming from me. My tone has been much more moderate than your doom and gloom predictions.
Keep renting my friend and I’ll enjoy my home. To each his own and I look forward to continue proving you completely wrong as I already have since our initial back and forth on this topic.
Your fear about a massive bubble about to pop is completely uninformed and I hope you don’t spout off this BS to your family and friends. They would most certainly be bored by your opinion at best and at worst, would actually take your poor advice.
April 14, 2011 at 11:54 pm | by Freakanamikes@Freakanamikes:
Let’s agree to stop the platitudes and rhetoric.
Show me numbers that make sense to back up your claims.
Let’s see how Freakanamikes math works.
April 15, 2011 at 12:03 am | by Are you kidding meCome on Freakanamikes. Where are those numbers?
I will tell you in advance that if your “numbers” include:
- Foreign money is driving this market (and will continue to send it …. to the moon!);
- Immigrants are flooding into the Toronto market, causing a grave shortage of housing. Soon nobody will be able to afford a house; or
- People just won’t sell then, so you’ll be a renter FOREVER
… then it won’t wash.
I will have a well-thought out, well referenced response for each and everyone of them.
I know you can do better than that, though, Freakanamikes.
Let’s see some numbers.
April 25, 2011 at 4:15 pm | by Are you kidding me@Are you kidding me
I apologize for not checking back sooner and responding to your posting.
Numbers alone will never tell the entire story my friend. This is precisely why, one can never predict any market, real estate or otherwise with any guarantee of certainty. There are so many factors outside of ‘numbers’ that determine where things will go.
Plus, I’m sure your ‘well-thought out, well referenced’ responses will be purely academic and highly theoretical. You strike me as that sort of individual. ;)
We could have endless back and forth on this and I will absolutely not budge from my point of view because I’m confident in my prediction which by the way is based on numbers, along with a host of other factors.
At the end of the day, neither of us is going to concede ground, which is fine. The ‘winner’ of this argument, will be the one who comes out ahead financially as a result of their decision to rent or buy. I put my money where my mouth is and I own a home which I’ve made money on since purchasing.
Keep renting if that’s what makes you happy and if you truly believe that the ‘numbers’ prove it’s better to do so. To each his or her own.
May 8, 2011 at 12:14 am | by FreakanamikesDebates or disagreements don’t have to be won or lost. It is not a binary world we live in.
It’s always healthy to have discussions and get differing perspectives. Perhaps you’ve thought of things I have not and I suspect you’d concede that the reverse could be true.
You mentioned that your prediction is based on “numbers, along with a host of other factors.”
Care to share your numbers and some of your other factors?
I will happily share mine.
May 9, 2011 at 2:31 pm | by Are you kidding me‘Are you kidding me’
You can’t reason with ‘Freak…’
Some people have to experience the pain – to them reason does not exist. Good on you for trying to warn others though. I’m tired getting that deer in the head lights look. Had a friend hang up on me for suggesting he wait to buy a house and he is aware of the state of global affairs. Ignorance is only bliss on the way up, not down.
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hahah July 2010 was a bubble @ $427k avg prices? What do you call it now that they are nearly 20% higher than that in 18 months….a blimp????
March 1, 2012 at 6:25 pm | by teedotCan’t believe there was no pop yet. Starting to think it is different this time…
May 2, 2012 at 1:43 am | by I guess it is different this time