Toronto’s Goldilocks Real Estate Market Continues… For Now

GoldilocksFrom early 2009 until early this year, the real estate market in Toronto (and in Canada generally) was very strong. Interest rates were at all time record low levels and the economy was improving, albeit rather slowly. There were warnings (sometimes quite shrill) about the likelihood that real estate prices would fall, both because interest rates were expected to move upward and because economists were concerned that the ratio of house prices to household incomes was getting way out of whack compared to long term trends. But the interest rate increases never came, and the price:income ratio was never really an issue because buyers make their decisions based on what they can afford, not on what they earn. And affordability remains very good because of interest rates. Overall, this period was “just right” for a healthy real estate market: the economy was strong enough to keep consumer confidence high, but not strong enough to push up interest rates.

Since this summer, however, the tone has changed. Gone are concerns about higher interest rates, as the central banks in both the US and Canada have indicated that rates will stay pretty much where they are for some time to come. And maybe even go a bit lower. Now, the concern is about the continued health of the economy. In the US (not to mention Europe), there are increasing concerns about the economy returning to recession, and both the government and the federal reserve seem to have pretty much run out of ammunition to fight this off. The Canadian economy is of course heavily dependent on commerce with our friends to the south, so if the US economy contracts this will be bad news for Canada indeed.

There is still hope that the fears of renewed recession are over-exaggerated, just as the fears of rising interest rates were. If that turns out to be the case, then our “just right” economy should continue along with our Goldilocks real estate market. If the economy slows down significantly, however, then buyers may become a bit more reluctant to buy, partly because they may fear that prices will fall, partly because they will feel less urgency to buy, and partly (in some cases) because they may fear for their jobs.

For now the market remains very strong. We are emerging from the summer doldrums, and the data so far indicates that the fall market is picking up quickly, as expected (see the chart below). Whatever happens with the economy, it would seem that a hot fall market (from September through November) is a foregone conclusion. The spring market next year is another story, however. Let’s hope that the economy stays in “OK” territory and that we experience no more than a bit of a slowdown and leveling off of prices.

Toronto Area Prices Mid September 2011