It’s expensive to buy property here (Image: Katrin Shumakov)
The sense of foreboding that’s lurking around Toronto’s real estate market can be distilled down to one relatively simple phenomenon: a lot of observers are concerned that prices have moved way out of equilibrium and that there’s an unavoidable correction on the horizon (economist speak for a big drop in home prices). That sense of foreboding became even more acute earlier this week with news that Toronto is the second most expensive city for homeowners in Canada (as always, Torontonians nervous about their home investments can take comfort in the fact that Vancouver is even more out of whack).
Earlier this summer, The Economic Analyst, a blog by college professor and financial adviser Ben Rabidoux, offered a particularly compelling—and chilling—explanation for what’s in store for the housing market:
None of this is particularly new. In fact, in a 2005 paper, the OECD recognized the massive, anomalous rise in price and rent ratio across Canada. With the exception of a brief dip in 2008 and 2009, we know that prices have far exceeded rental growth since 2005. What does this imply for future price movements?
…when the price to rent ratio is too far out of whack, the bulk of the movement to realign the ratio occurs via a change in house prices rather than a change in rent. In other words, when the price/rent ratio is at historic highs, as it is in Canada, it is likely that the realignment will come by falling or stagnant house prices rather than rapidly rising rents.
Basically, for much of the last 30 years Canadian cities have had a predictable balance between property values and rent. But that means that to rectify the current imbalance, either rents have to rise or prices have to drop. The problem is that if Rabidoux is correct, the latter is much more likely than the former—which means Toronto homeowners are right to be feeling a wee bit wary.
• Examining house prices and rents in major Canadian cities [The Economy Analyst]
“That sense of foreboding became even more acute earlier this week with news that Toronto is the second most expensive city for homeowners in Canada”
Why would the “news” that Toronto’s market is the second most expensive in the country be scary?
We’re the largest city and the financial capital of the country. This shouldn’t frighten anyone, it’s just logical.
August 25, 2011 at 12:15 pm | by Kiyoko“That sense of foreboding became even more acute earlier this week with news that Toronto is the second most expensive city for homeowners in Canada”. News? Is there a Torontonian surprised by this? Did anyone expect Toronto to be, say, below Hamilton, despite being Canada’s largest city and the financial engine of the country? I think not.
Furthermore, relying on one measure (the price to rent ratio, for example) does not give a holistic and accurate assessment of the real estate market. Other factors, such as the unemployment rate, population growth rate, and interest rates play an important role in predicting the real estate market.
August 25, 2011 at 12:16 pm | by TorontoDudeThanks for the mention. I should note, in response to TorontoDude, that I have also analyzed house prices relative to inflation, personal disposable income, and per capita GDP. None of them are pretty…
http://www.theeconomicanalyst.com/content/tv-appearance-does-toronto-have-housing-bubble
August 25, 2011 at 12:26 pm | by Ben RabidouxI guess I should also respond to Kiyoko’s misguided comment:
“Why would the “news” that Toronto’s market is the second most expensive in the country be scary?”
There is a huge difference between nominal prices and the concept of ‘expensive’. High nominal real estate prices that are supported by underlying fundamentals are not a concern. That is, if incomes are higher in one area, you would expect prices to also be higher. But the rise in one should mirror the other over long enough time horizons.
The problem arises when house prices move well beyond what incomes, rents, and per capita GDP would warrant. That’s my concern with the TO market. It will always be nominally more expensive than other markets, but affordability must improve.
August 25, 2011 at 12:50 pm | by Ben RabidouxIf people read every negative article and believed every naysayer out there, our society would never move forward. Everyone would cower and hide. It’s always good to have other people’s opinions but you always have to wonder where the negativity is coming from or what the writer’s true intentions are. Mostly I think people get off on scaring other people because they want to be the first ones to call it or at least remind people they said so. Thankfully, we’re humans and we like to take risks. Otherwise, if we believed these naysayers all of us would not buy a house or spend ‘any’ money and the number of houses sold next month would be ZERO and these naysayers will say ‘I told you so’.
August 25, 2011 at 4:47 pm | by OPL@ OPL
Whether someone buys a house or rents, saves the difference, and invests it, they are taking risks regardless.
Rather than brushing off the blogger in question and labelling them a ‘naysayer’, why not address their legitimate and well-supported concerns?
August 25, 2011 at 6:49 pm | by One-dererHey selling home is very difficult and selling your home quickly is more than that. so you should consult and good agent or you can use some of these tips for selling your house fast.
August 26, 2011 at 8:21 am | by sell your home quicklyAnd Toronto is the most livable cities in the world, in one of the most safest and peaceful countries in the world.
Oh yes, a crash must be looming.
Keep dreaming.
August 26, 2011 at 10:53 am | by The PontiffThe supply, especially for houses, is still short while the demand is high. As long as that is the case there will be no correction in sight. Condo market is a slightly different story.
In our neighborhood just now two 3 year old houses were sold, in one week, for a price that is 40% increase from their initial value three years ago…Nice.
August 26, 2011 at 12:19 pm | by GoodTimes“In our neighborhood just now two 3 year old houses were sold, in one week, for a price that is 40% increase from their initial value three years ago…Nice.”
During a time when incomes rose by…?
Exactly! Move along….Nothing to see here.
August 26, 2011 at 1:30 pm | by One-dererHouses are overvalued if people are no longer willing to pay said prices for them. Everything else is just conjecture.
The price of a Manhattan 2 bedroom condo may approach the 1 million mark compared to a similar sized Toronto space, but what exactly does that mean? Is Toronto under priced, is New York overpriced? Is it even fair to compare?
Perhaps the values of homes in a a given locale represent much more than one’s ability to comprehend this “value” metric that is less quantitative than experts would have us believe.
People speak of a %20 correction as a “collapse”, yet a drop in price from 1.5 to 1.2 million for a 4 bedroom home in Vancouver’s Kitsilano may not seem like the kind of correction or “return to fair value” many imagine when drafting stories of gloom and doom.
Renting vs. Owning is not the simple either/or equation either as some neighborhoods are more dense with renters than others. Renting a home at a good price relative to one’s desired location is the end-game, not simply the costs month to month.
Perhaps the relationship between renting and owning moves in flux, where some areas move opposite others, or not at all compared to outlying suburbs. The question is less about “Toronto’s” housing prices and more about regional and demographic trends unique to each city.
August 26, 2011 at 2:49 pm | by jay cobalThis article of Rent/Buy ratio only works for a specific demographic. Most families would rather buy in the ‘burbs then rent south of Bloor for the same monthly price. The bubble is big, but as long as interests rates are under 3% (variable = 2.5% for anyone off the street with good credit) buyers will keep looking at monthly mortgages rates instead of total price and keep inflating the bubble.
August 26, 2011 at 4:18 pm | by HCHey selling home is very difficult and sell your home quickly is more than that. so you should consult and good agent or you can use some of these tips for selling your house fast.
August 27, 2011 at 8:22 am | by sell your home quicklyUnmentioned is the still parlous state of the US real estate market and Canada’s heavy reliance on the stuttering US economy … which will have a negative influence going forward. Also, household debt levels in Canada are at record levels and the deleveraging process is what has large chunks of the western economies in trouble. Canada cannot stay immune to this trend and what this implies for real estate….
August 28, 2011 at 6:56 pm | by No GreedThe CHMC is leveraged 680 to 1. That’s worse than Fannie Mae was stateside before they collapsed. Not only that but the average cost of a house relative to an average salary has gone up 500% since the 1950′s. The housing market buying frenzy here makes me laugh. It’s like watching lemmings. It’s definitely a great example of mass hysteria. I didn’t realize just how much people love banks because they are giving them all their money. This adjustment was due 15 years ago. Prolonging it will only make it worse. Houses are unaffordable and the upcoming recession will trigger a default like we had stateside. Enjoy the ride! Next stop: affordable housing! Adios landlords.
August 31, 2011 at 1:04 pm | by Nostradamus