Are Toronto Real Estate Prices Going to Fall?

Are Toronto Real Estate Prices Going to Fall?You have probably seen recent media articles about a coming slowdown in the Toronto real estate market, most notably a front page headline story in the July 16 Toronto Star about the impending “downturn” that made it sound like it’s inevitable that prices will fall over the next year or two. The truth is, it is extremely unlikely that prices will fall.

The fundamental issue behind the predictions of falling prices is affordability. For example, Capital Economics has said that the ratio of house prices to household incomes is 25% higher than the historical norm, and that means that prices need to go down by 25% to bring them in line with this measure of affordability. Sounds reasonable, but in fact it’s overly simplistic. Affordability has to do with the relationship between total carrying costs (mortgage payments, taxes and utilities) and household income, and these costs are actually in line with historical norms because of the low interest rates that we are presently enjoying. While it is true that a sudden increase in interest rates to “normal” levels would hit the real estate market very hard, it is very unlikely that this will happen any time in the next year or two. The most likely scenario is an increase in the bank rate of 1% or so by the end of next year, and the corresponding increase in fixed rates will probably be even smaller. The latest statements from the Bank of Canada suggest that rates will not stay much longer at the current ultra-low levels but also that rates will probably stay well below historical norms for years to come.

The outlook for the Toronto market is explained in very commonsense terms by the Toronto Real Estate Board’s Senior Manager of Market Analysis, Jason Mercer in a recent presentation (click below to view the presentation). In this presentation, Jason describes how affordability, as defined above, has remained in a narrow range since the 1990’s, and is projected to remain in this range for at least the next couple of years. The bottom line is that prices will most likely continue to rise through 2012, perhaps not as quickly as they have this year, but still at a very respectable pace, around a 3-5% annual rate. The market will become more balanced, with better selection for buyers and hopefully fewer bidding wars, but it will keep going up.

If all of this is true, then it is obviously risky for buyers to hold off in hopes that prices will come down. In fact, even if it’s not true, it would still be very unwise for buyers to wait. Here’s why: the only plausible reason for prices to fall would be a dramatic increase in interest rates. For example, if five year rates were to increase to, say, 6% (still quite low by historical standards), this would translate to an increase of about 50% in mortgage payments, and it’s simply not conceivable that prices would fall by anywhere near that much. So, even if prices fall, it will become more difficult for buyers, and especially for first time buyers trying to take that first step up the real estate ownership ladder. If you are thinking about buying, the sooner the better!

As for the rest of this year, the market is relatively quiet right now, but this is entirely normal for July and August, as many sellers & buyers take the summer off to enjoy our relatively short warm weather season. I expect that we will see a return to intense activity and bidding wars after Labour Day, though hopefully not quite as crazy as in the spring.

  • Anonymous

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  • Daviosul

    Wow real estate agents writing an article to telling us now is a good time to buy!  Never seen that before ahahaha

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