Bubble or No Trouble? The Toronto Real Estate market!

For the last 13 years I have regularly admonished the media when they inappropriately spoke about a real estate boom or even worse a “Bubble” that did not exist. The reality is that in the greater Metro Toronto Area and even likely including the Golden horseshoe area, there has not been a bubble since 1987-89. (See chart on right) From January 1997 until December of 2007 prices rose on average between 4-6% per annum. This steady appreciation was consistent also with the period prior to 1987. It is important also to note that these trends were based on the average of the Metro area and did not reflect aberrations in districts and/or neighbourhoods. The Metro Toronto real estate market is made up of a mosaic of hot, cool, static and cold areas. Some districts have fared better than others while some have been fairly constant in appreciation.

From around 2006 I had begun to warn of a change in the market place. This was clearly based on affordability or rather a growing lack thereof. Although, homes have increased between 4-6% per annum for the past 10 years, as pointed out earlier, employment income, has only increased on average between 2-3% per annum, thus creating what is known as an “Affordability Gap”. Simply put we knew that eventually we would not be able to afford the average home. The question then became “when”.

To fuel the fires, the lowering of the down payment requirement to 20%, 40 year amortization, Zero down financing and our illustrious mayor’s Toronto Land Transfer Tax all contributed to 2007 being a record year. We just put off the inevitable.
Then in June 2008 things changed. We witnessed the first signs of change on the heels of the world financial meltdown. Within a matter of months the 11 year seller’s market turned into a buyer’s market. The average price of a home in Toronto went from a high of $395,866 in May of 2008 to a low of $343,632 in January of 2009. That is an average decline of -13.2%, in just over 6 months. Then just after a 6 day record, interest rate reduction in early April 09, the market, against all odds and predictions, began to reverse itself. Within another 6 months the market topped out at $423,559 in October 09. That was an unprecedented gain of +24.3% representing a total fluctuation of 37% in 13 months. We are once again in a seller’s market. With current low interest rates almost the lowest inventory levels in 13 years and demand dramatically exceeding supply, I believe that for the first time in 21 years the proverbial “Bubble” could actually be almost upon us.

This current appreciation cannot be sustained over the long term and a correction once again appears imminent. The question is timing. So what to do if you need to make a real estate move within the next 3 – 6 months? Experience has shown that it all depends where you live. Each neighbourhood has to evaluated individually and timely information will tell you right away how your market is right now. Even in ever changing markets there are always opportunities.