Toronto Real Estate – The Inevitable Rise or Crash?
Toronto
Last week CIBC issued a housing report predicting the inevitable rise of Toronto Real Estate. Of course, this report supports the thinking of some very talented economists, but there are other very accomplished people who predict the exact opposite. Who is right?
The Inevitable Rise
CIBC maintains the record breaking rise in Toronto’s real estate prices and rents are the result of municipal governments’ underestimating how many people would be moving to the GTA while also failing to increase the housing stock as prices surged and rental vacancy rates plummeted.
The bank also believes the federal and provincial governments’ attempts to cool speculation, discourage non-resident buyers, and reduce the size of available mortgages for Canadians may moderate prices in the short term but will fail in the long run. CIBC believes Toronto real estate prices will bounce back unless municipalities begin pro-actively planning their neighbourhoods and re-adjust their forecasts of required housing. We believe the key points from the report are:
Government Efforts to Curb Demand Will Fail – Current Government efforts to cool demand can only have short term success.
Measures to Create Supply Will Fall Short – Municipal governments will continue to struggle to forecast how much housing is needed and will not approve enough supply to meet forecast demand.
Inevitable Rise in Home Prices – Although prices may moderate in the short run, they will inevitably rise because the underlying fundamentals won`t change.
Agreeing to some degree with CIBC, The Canadian Real Estate Association (CREA) has forecast some moderation in the real estate market in 2018. Scotia Banks latest newsflash seems to suggest prices have more upside because Canadians will find ways to sidestep new mortgage rules to buy a home at current or higher prices.
The Inevitable Crash
Many experts believe that Toronto real estate is in bubble territory regardless of the supply and demand conditions and await the inevitable crash. They conclude that prices are simply too high when compared to Canadian incomes and have surpassed the maximum share of average take home pay that a household can devote to housing. Some notable bubble proponents are Union Bank Suisse (UBS), Moody’s Credit Rating Agency, CMHC, the U.S. Federal Reserve and Steve Eisman, who is famous for managing a fund that made over a billion dollars due to the 2007 U.S. housing crisis. If you want to replicate the “Big Short” Steve Eisman says CIBC is the bank most exposed to risk in the event of a housing correction.
The key themes coming from theese reports are:
House Affordability is at a Record Low – According to Royal Bank, buying a house in Toronto would cost over 80% of a median Toronto household income, before taxes.
Government Wants Lower Prices – New mortgage rules, foreign buyer taxes, a push to build affordable rental stock, and the knowledge that government will continue intervening until Toronto real estate prices cool off, should lead people to expect a soft to bumpy landing.
Further Price Gains are Impossible – Toronto real estate prices doubled in 13 years, while rents and income rose by less than 10%.
The Real Estate Market has Cycles – New York and London peaked in the late 1980s and it took decades for someone who bought at the peak to break even. Likewise, Toronto saw a downturn in the early 90s that took over a decade to return to its peak. Toronto was spared a correction during the financial crisis which leads market cycles theorists to believe a Toronto real estate price correction is overdue.
What you need to know
Your home is a place to live and is separate from your investment strategy. If you feel you need to own in order to be happy then buy a home that doesn't put too much pressure on your finances.
If you want an investment talk to an investment advisor and consider diversification.
With rates rising, the government intent on pushing prices down, income growth flat, and home prices breaking records every year, we believe there is better chance of prices dropping than continuing to rise.
