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ASK JO: Is there a Toronto Real Estate Bubble that's about to Burst?

Hello Jo,

I would like to ask your opinion of where the real estate in Toronto (especially the condo market) is headed.  The past 5-6 years have been very good, amazing years here in Toronto (and I'm sure that Real estate agents are quite pleased too!).  But real estate, like business cycles, has ups and downs.  Would it be wise to purchase at this time?  Seller's have had their day in the sun, but what about buyers?  I fail to see how a 460 sq ft box downtown at $200,000 can be called "affordable".  Do you see prices cooling off a little or even maybe declining?  Just as a reminder, many stock "experts" forgot about declines back in 2000, but of course we all know what happened.  Are we witnessing something similar right now in real estate?
Thanks very much...

Darren, Toronto

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Hi Darren,

Thank you for your email - I'll warn you right now... this is going to be a looooooooooooooooooooooooooooong blog!

This is a great question and I'm sure it's on a lot of people's minds.  You are definitely correct in saying that the real estate market, like the stock market or business in general has it's cycles of ups, downs and everything in between.  We have been experiencing tremendous growth in inventory and prices in Toronto over the past 5 or 6 years and it's probably actually been a streak closer to a decade of consistent growth.  Couple that with all the stories plastered over the news about the state of the US housing market and you're bound to be a bit frigthened about what might happen in our own backyard.  So are we due up for a correction?  Is there a Toronto Real Estate Bubble that's about to burst?

Again, I wish I had a crystal ball to forecast what's going to happen in the future as nothing is ever for sure, but since I don't, I can only aswer with the information that is available right here and right now.  Being involved in the local Toronto real estate market day in and day out, I have a first hand look at what's really going on.  Sometimes to my surprise, the market out performs even my expectations (and I'm not complaining since I obviously have a vested interest), but when we step back for a minute to take a look at the core fundamentals that are driving the market, you'll see that things are still strong for good reason: steady population growth and solid employment figures. 

In fact, at the Coldwell Banker Terrequity Realty Breakfast of Champions, our Broker of Record spoke of the current market conditions and provided some predictions for the year.  Click here to take a look at the slides. 

On top of that, I recently read an article about the high costs of waiting to get into the market which speaks along the same lines.  Click here to read the report.

I don't know if this provides you another level of comfort, but I'm actually still sniffing around for properties for myself.  I'm a very conservative investor as I really don't like taking chances with my hard earned cash - I do believe in taking calculated risks and real estate is definitely one of them as I still believe in what I do and what I sell... for as far as I can see, there isn't any obvious indication that things are going to slow down anytime soon (for certain types of properties and certain locations).   Even though you may not think so, we are fairly affordable when you compare Toronto to other major cities in the world.  Our centralized lending practices are super safe compared to the US with the cost of housing moderated at a rough maximum of 32% of gross income and 42% of total financial obligations and any home purchase with a downpayment less than 25% insured (by Genworth, which was formerly GE Capital and/or CMHC, a crown corporation and one of the biggest money making companies in the country).  It's not like that in the US that's for sure!  Banking is decentralized and mortgages are tax deductable providing more incentive to be leveraged with second, third and sometimes even fourth mortgages on a home.  At the same time, although we are different from the US, our market typically mirrors theirs in some respects, so while the "doom" is not impossible, it may not happen for some time if it does at all.

The caveat to that of course is that not every property is equal and not all homes will experience the same levels of appreciation or decline - the key is to know what to look for.  The average appreciation in the city that you'll read in generic reports or stats shows about 4% to 6% appreciation, but believe it or not, there are actually properties out there that are appreciating in double digits (i.e. one I'm thinking of that sold for the $170s last year in July and are currently selling for the $220s now which is about 22.7% growth in less than a year  - yes, I'm kicking myself for not buying it!).  I can't stress this enough, but they key is to know what to buy and where to buy it... and not everyone (or every agent for that matter) knows that. 

If you've read my Memoirs of a Realtor blog at thinkJoanna.com recently, you'll notice me complaining about multiple offers on every deal that we've been involved in on the buying side over the last couple of months.  We like to steer our clients towards the good properties that have value and help them to see the value... unfortunately, when  you come across those good ones, you have to be ready to act quickly as they don't last for long and often go in multiple offers.  Shortage of "good inventory" in our market is very real and even though the stats show that the total inventory is going up and up and up, there is still a tremendous lack of good inventory.  There's a sea of junk that needs to be sorted through to find the gems.

Ok, true to my word, this is a looooooooooooooooooooooooong blog, so to summarize, NO, I don't think there's a big Toronto Real Estate Bubble that's about to burst in the immediate future, but I do think for some areas and property types (i.e. that 400 sqft box for $200K which is probably in a sub-par location), are due up for a little bit of a correction and prices may well fall.  You make money going in (buying) and not coming out (selling)... so if you buy right and you're in it for the long term, then yes, this is an absolutely great time to buy.  The sun doesn't appear to be setting on seller's of prime properties.

If you want more info on what to look for when buying, click here to read the article I wrote for my real estate column in Blink|Toronto Magazine... or alternately, you can just ASK JO again!

Hope that shines some light on the real deal with the current Toronto Real Estate Market.  Cheers until next time.

Jo


Posted on Tuesday, April 3, 2007 at 12:30AM by Registered CommenterElaine in | Comments7 Comments

Reader Comments (7)

Of course, all these immigrants can afford 500 000 dollar home, right?

There has never been so high rental vacancy rate in Toronto and so cheap rents. Now the rents are lower then 10 years ago. So if you are investing in rental property I have a bad news for you...There are many rental property owners that are selling now... Including whole rental buildings refurbished as condos...

And all this overbuilding. So many new condos everywere, so many new houses (just look north of Major Mac)

So many 'executive' towhhomes and houses without any land and in bad locations with just 20k spent in 'luxory' upgrades.

The employment rent is deceiving, many people make just enough to pay the rent, they could never afford a home.

The affordability index is the key indicator to look at. 2 years ago it was 4.4 for Toronto (severely unaffordable), now is climbing over 5.

This index shows how many years of before tax income is needed for a household with an avarage income for a city in order to afford avarage home.

Don't compare Toronto with Vancouver, there are not hundred thousands immigrants from Hong Kong here..

What amazes me are all these people that buy new 'luxory' homes in crappy locations without any land. In 20 years you money will be gone.

And these high maintenance fees on new condos...
It is really amazing how the people are ripped off of their money with these property taxes and high maintenance condo fees...

What do you expect from a city where people live in basements...named apartements.

Go to USA or anywhere in Europe and find a place where people pay astronomical rents to live under ground and I will legaly change my name to an_idiot.

Or and of course, there is no enough land in Canada right? Just 10 milion square kilometers...

And with this nice climat...
And with this strong Canadian Dollar.

Toronto more expensive then San Diego? Excuse me...

A home that cosst 500 000 USD in San Diego would cost over 700 000 Canadian (soon to be over the USD) in Toronto.

To pay taht much for the luxury of freesing cold in the winter and awfull humid summer...

A yes, with very low avarage income (way bellow San Diego for example).

If you are investing in Real Estate in Toronto you need profesisonal help...
From a psyhiatrist...

And all thes 'huge' condo bedrooms (2x2 meters.)...

And all these builders makind 100 percent profit on their homes and condos...

And all these agents ripping you off of your money...
No wander nobody wants to see a housing bubble in Toronto.

But don't worry, tomorrow the prices will pass Paris and New York.






May 30, 2007 | Unregistered Commenterclaudius emperor
I am very much in agreement that affordability in Toronto is becoming another "Nortel". Yes the economic fundamentals of strong immigration, job growth and still historic low lending rates bode well for real estate and its marketing. Much like stocks look attractive with their growth rates, it doesn't mean they are affordable. Nothing grows to the sky.

I long for the day when the public decides to stop paying huge commissions to have their homes sold. The advent of the internet makes it real easy to market a property. Homes sell in a matter of days today without having to spend big money marketing the property. This will come to an end, and just like every other economic cycle it will come without warning.

Igmore the marketing of real estate and use your gut. Is 400 a sqft to stare at a highway a good investment in the long term? You decide.
July 8, 2007 | Unregistered CommenterTom
Well, an_idiot, try renting a place in New York City, or San Francisco, or London, or Paris, and you will find both rental and housing prices to be much higher than Toronto.

$500K in San Diego does not go far, even after the correction. It is certainly not comparable to Toronto.
September 6, 2007 | Unregistered CommenterInvestor
Well, it is now in Oct and the housing market is not slowing down a bit...I guess as soon as the canadian dollar starts to drop, ALL investor from other countries will withdraw their investment...then you'll see the bubble go pop....
October 20, 2007 | Unregistered CommenterEric
The bubble will deflate in 2008 - definitely in the commodity poor provinces. Canada always lags the UK and US and the Realtors and banks talked up the market and made optimistic forecasts in those countries up until the last. Now those forecasts are revising sharply downwards and negative. It's coming and watch out for negative equity - 10% deposits prtect the banks not you.
June 7, 2008 | Unregistered CommenterSamkin
The bubble will deflate in 2008 - definitely in the commodity poor provinces. Canada always lags the UK and US and the Realtors and banks talked up the market and made optimistic forecasts in those countries up until the last. Now those forecasts are revising sharply downwards and negative. It's coming and watch out for negative equity - 10% deposits protect the banks not you.
June 7, 2008 | Unregistered CommenterSamkin
This Blog is over a year old, however I think NOW is the best time to bring back this topic. For one, Toronto is MUCH closer to a real estate crash than anytime before. Certainly people can't predict this catastrophe, just like the Lehman Brother's bankruptcy, no one knows the day or the hour. People, however know it's on the horizon. In Canada, we did not have a catalyst like the Subprime Mess to burst the real estate bubble. Do some research and you'll see Toronto's fundamentals are similar to the US! Our inventory per capital is the SAME as the US. You will see many vacant houses and condos in the market from the over supply. Good luck and make smart decisions.
September 16, 2008 | Unregistered CommenterSuper Lehman Bros

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