Debunking the Myths of the Housing Bubble

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These days it seems that you can’t read a Canadian financial publication without reading something about the “Toronto Housing Bubble”.

It is true that pricing has been rising rapidly in the last several years, but does this truly indicate a bubble?

Bust or boom?

Economists across the country have been warning the Canadian public of a housing bubble as far back as 2011. And yet, here we are almost half a decade later, and home prices show now signs of cooling down. In fact, the opposite is true.

Average home prices jumped over 20% in 2016 to $974,698. Economists argue that this increase in pricing makes purchasing a home for first time buyers or the younger demographic with incomes in the range of $40,000 to $60,000, out of reach.

Furthermore, the pessimists say that current housing prices in Toronto are up 22% year-over-year which is too high of an increase to be sustainable.[i]

What is driving increased housing prices?

So what is driving the increase in housing prices and will they continue to rise or is this in fact a “bubble”? Some economists and real estate gurus agree that this hot market is still going to increase.

In 2016, the metropolitan area of Toronto’s population grew to 5,928,040, up from 5,583,064 in 2011. That’s an average of roughly 70,000 people per year. The number of new housing starts over the same period is extraordinarily lower and most of them are one and two bedroom condos.

Can the rising house prices continue?

Whether or not home prices can continue to rise in the GTA will depend on a number of factors but we suspect we still have not seen the peak of the housing market, and the following proves why:

Housing shortage – it is no secret that Toronto is facing a housing shortage. Take a look at the Toronto skyline and you will spot cranes upon cranes. As long as there are more buyers than there are homes (supply), prices will continue to rise (demand).

Demand – Toronto homes are highly appealing to many buyers. In fact, Toronto is one of the top 5 hottest housing markets on the globe! Rising prices or not, there is no lack of demand for Toronto properties.

Low Interest Rates – finally, the extremely low interest rates set by the Bank of Canada make it possible for those selling homes to do so at a higher price tag. After the crash in 2008, interest rates were lowered to stimulate the economy and have seen only modest increases since that time. Since people are paying considerably less interest on their mortgages than they have in the past, they can afford to spend more on housing. Accordingly, this has driven more buyer competition into the market causing prices to rise.

Of course, if prices continue to rise, some new home buyers might be forced to leave Toronto in favour of more reasonable housing markets. Can incomes keep pace with the rising costs of housing and will there be enough good paying jobs available for these new homeowners?

Time will tell. But in the meantime, Toronto is the hot spot for the housing investor.

 

[i] http://business.financialpost.com/personal-finance/mortgages-real-estate/theres-a-new-culprit-for-torontos-brewing-housing-bubble-move-up-buyers

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