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Bubble Trouble

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.