36 Flamingo Rd, listed by Harvey Kalles Real Estate agent Esther Osher.
Why are we fascinated by the ongoing media predictions of a Toronto real estate “crash” – one that hasn’t actually happened, despite years of worrying, wondering and waiting?
The prophecies of Toronto’s real estate crash have only continued into this spring, but whether they’ll actually come true is a different matter. Whether or not you think Toronto is in for a correction depends a great deal on how you read the numbers.
For example, The Economist thinks Canada’s housing market is a bubble due to burst, based on polling data from prospective buyers:
Home sales in March were 15% down on a year earlier. Buyers are in short supply. A recent poll showed that only 15% of Canadians are likely to buy a home in the next two years, down from 27% last year—the steepest decline in the 20-year history of the survey. After a big boom, the housing bust will be a wrenching affair.
First-time buyers are more likely to enter costly bidding wars, but seasoned veterans aren’t often willing to join the fight. And the total number of willing first-timers is lower: Millennials saddled with student debt can’t afford down payments. No, not even Canadian Millennials. And with the recent changes to the mortgage rules, they have even less opportunity to do so. So the buyers who should be leading the market sometimes can’t.
However, there are other market forces at work here, such as new arrivals to Canada – many of whom are wealthy; remember that Canada is the 8th most popular destination for the world’s wealthy to live – or families who need more space than the current market of apartments and subletted condos can provide. So as much as the picture looks bleak for many Millenials, it isn’t so for global money, or for the many affluent families who are purchasing the million-dollar semis in the Beaches and the Annex.
One big question here is whether potential sellers are willing to lower their prices. Statistics would seem to indicate that they’re not: sales are down, but prices are up. It will take special circumstances for homeowners to decide that Toronto is no longer desirable, whether it’s an inability to climb steep basement stairs or rising property taxes or a lost job or pension. But many homeowners may simply decide to ride it out and work on becoming mortgage-free before buying their next home — which in turn means a market slowdown. This is great news for anyone selling re-fi, but it’s frustrating for new buyers.
This isn’t to say that there’s no hope for the market. As The Financial Post points out, the Canadian and American real estate markets are different, which means they have reacted to the 2008 mortgage crisis and its surrounding recession in different ways:
Canadians have more equity in their homes than Americans did, the default rate is lower, the sub-prime market is tiny, and mortgage interest is not tax-deductible, so there’s no incentive to build up debt.
Finally, mortgages are structured as recourse loans in which assets other than the house are held as collateral. That makes Canadian homeowners less likely to walk away than their American cousins.
Canadians may simply be slower to move on home sales than Americans, which means that their market will naturally be slower. But as for a big crash, a bang rather than a whimper, only a few events can bring about such a consequence:
- A sudden rise in the interest rate – this is unlikely.
- Some kind of highly unlikely major disaster in Toronto that makes the whole city seem undesirable as a place to live (and no, the Rob Ford scandal doesn’t count).
- A sudden change in the GTA that makes outlying areas more desirable to those committed to living in Toronto (improved transit, services, shopping, etc.). This is the most likely of these scenarios, and in fact is already happening on a very gradual level, but for many reasons – proximity to the city and jobs, the desirability of many old Toronto neighbourhoods, simple prestige – the allure of the city of Toronto isn’t going anywhere. It will always be desirable.
We’ve already seen a cooling in the market year-over-year from 2012 to 2013: inasmuch as there was ever going to be a “crash”, this is probably it. But a burst bubble, US-style? Not going to happen, in our opinion.