An economist at BMO Capital Markets recently said that the real estate market in Toronto and surrounding areas is a bubble market. And while rising prices and dwindling supply have been a fact of life in the Toronto real estate market for the past couple of years, it has to be argued that we’re not in striking distance of where it is possible for the bubble to “pop”.
Definition of a housing bubble
A housing bubble is an increase in property prices which is driven by demand, usually due to limited supply. Once demand reaches a certain point, real estate speculators begin to enter the market, which can further drive up price. The bubble pops when demand decreases, either due to a new abundance of supply or other factors, such as a serious downward slope in the overall economy.
It walks like a duck, but doesn’t quite talk like one
It is true that prices and demand have risen significantly in Toronto and the GTA. Additionally, CMHC has put forward the theory that speculation is driving up the Toronto and GTA real estate markets. But a very important condition to the bubble bursting just doesn’t exist in the Toronto and GTA market – and that condition is decreased demand.
One of the only things that could decrease demand significantly is an increase in inventory, which isn’t likely to happen any time soon within the 416 area code. The boom in the GTA is a direct result of rising prices in Toronto pushing buyers into a cheaper location – many of these buyers would prefer to live in Toronto to avoid long commutes to work. The only place we can really see expanded inventory is in surrounding GTA communities, as development in Toronto itself is limited by space. While demand may dwindle in the GTA once new builds happen in outlying communities over the next few years, that demand for a home close to work will always be there in Toronto itself. If anything, this will depress housing prices in the GTA slightly once new inventory is released onto the market.
Economy another potential external factor
If conditions continue with the status quo, the only other item which could affect the real estate market – and which would affect it no matter what the housing prices and demand were like – is a significant downward tick in the economy. The most recent outlook maintains that Canada’s economy is growing, with a slowdown in the real estate sector in Vancouver pumping the brakes a bit on growth. The elephant in the room is how many protectionist trade policies the U.S. is planning on putting in place in the next year with the renegotiation of NAFTA, although the current administration’s signals during Prime Minister Trudeau’s recent Washington visit pointed to Mexico, and not Canada, being the major target in NAFTA renegotiation.
So is the proclaimed “bubble market” really just regular growth in the Toronto and GTA real estate market? While the rise in housing prices and increased demand may make it look like a bubble market, the Toronto Real Estate Board (TREB) argues that the supply levels for real estate being at their lowest levels since 2000 is the critical factor in rising prices. It is predicting another year of double-digit growth in housing prices. So if it is a bubble, it’s going to keep on growing for at least another year.
The main concern of the Toronto Real Estate Board for the current market is how many buyers will get pushed out of the market with rising housing prices and new federal mortgage rules which put home ownership effectively out of reach for first-time buyers in expensive markets like Toronto – this is justifiable as these people may just move out of the area, instead of being future Toronto and GTA real estate homebuyers.
Those who can’t move will rent, making this market a hot one for those who have considered real estate investment in an income-producing property. Contact Highgate today if you want to find out how you can capitalize on these market conditions with a property management company and real estate broker built to serve current and future landlords.