07 Sep Toronto Housing Market Crash
Toronto Housing Market Bubble
Toronto home prices are still in record territory even though more sellers are listing. Demand for GTA housing is strong due in insufficient supply. And new construction starts were down again in September. So what would cause demand to collapse amid a glut of homes on the market?
Watch the interest rates as overindebted Toronto home owners begin to feel the pain of increasing mortgage payments. There’s more to the bubble burst however. After you read the 15 factors, you’ll see how they could combine to start a crash.
It’s the fall season and the most recent Toronto housing market update suggests the market may be in for a correction. The fall always has a depressing effect on markets and the September report showed lower prices and huge increases in listings.
Previously, young millennial first time buyers kept the Toronto market alive. With higher interest rates, more strict mortgage stress tests, poor jobs report, and continuous insecurity for the auto sector, the possibility of a bubble burst will be present in 2019 and 2020.
The saving grace in this is the powerful US economy which could spill over into Canada and Toronto. Trudeau could have thrown manufacturers, oil producers, and dairy farmers under the bus. It’s a complicated matter not governed by statistical equations. Let’s take a look below at these key Toronto housing crash factors.
US Trade Relations Hitting Bottom
The writing has been on the wall. Trump promised to put America first and now we’re seeing his real view of Canada. We’re only waking up to the possibility he’s been playing everyone to ease them into his support of US businesses. If US auto manufacturing is to thrive, Canada’s auto sector (and Mexico’s) may need to go. China’s is already being blocked.
During Canada/US trade negotiations, Canadian trade reps and Trudeau insisted on dairy and culture protection, and are willing to throw Canada’s auto sector and housing market under the bus so to speak. This week’s loss of 60,000 jobs in Ontario is only adding to the tension. A failed deal could balloon that number.
It could be the Bank of Canada believed this moment would arrive given how Trudeau was governing, how trade negotiation would go, and how Trump wants to revive the US. They knew, which is likely why they announced they’re leaving the door open for rapid rises in rates. Those higher rates keep investment money in Canada but kills demand for homes.
The threats to the GTA housing market are more immediate now. After hearing Ontario’s real budget deficit is $12 billion this week, Doug Ford has disappeared regarding Toronto’s housing market. And Mayor John Tory is making more weak promises over affordable housing.
With the US pulling auto manufacturing back into the US, our auto industry has become unwanted. Without a trade agreement this week, the tariff contagion could spread to other industries, including dairy and the oil patch.
It’s very unfair for the President to pit big US companies with low taxes against Canadian companies. Even with a cheap Canadian dollar, we need the same access to US markets, and we may not have them shortly. Could any trade team deal well with the US? Likely not. I stated 2 years ago that Trump wants to rebuild their auto industry although his agreement with Mexico is surprising.
If there’s been a perfect time to sell your home, this is it.
And with US President Donald Trump’s 2018 state of the union speech, it looks like the US is on its way to its biggest economic growth in history. Without the full benefits of NAFTA, Canadian economic predictions are troubled, and if oil prices rise too high, the Ontario economy is looking risky.
And for Ontario, the picture is less positive:
- the TSX stock exchange is one of the worst performing in the world
- the NAFTA deal may be cancelled and full tariffs applied to Canadian exports
- the TPP deal would open up Ontario to cheap Asian competitors
- the price of oil is rising and raising Ontario’s costs of doing business
- real estate is very expensive
- rent to income ratios are extremely high in GTA
- interest rates are climbing
- consumer debt is maxed out
- the Ontario government is anti-business and anti-housing growth
- Ontario’s taxes can’t generate enough money for infrastructure improvements
- the CAD is rising and eroding Ontario’s competitive advantage
- Canada has been near last in direct foreign investment for many years
- US tax rates have plummeted giving companies reason to relocate there
- cash strapped, stressed out Millennials will finally give up on the dangerous gamble of buying a home for $600k+
- the Federal Government may raise the Capital gains tax
The debate raged last year, but it looks like Douglas Porter (his most recent thoughts) might have it right in his forecast.
Here’s Douglas Porter again on Feb 1 saying there is no immediate danger:
The Americans too are worried about a housing bubble in 2018, yet their economy is on a definite upswing. The amount of money being repatriated into the US (Apple bringing in $450 billion) is incredible. All that investment money is coming back home to create jobs in the US. Of course there will be a spillover into Canada.
Huge personal debt and a vulnerable economy combined with Millennial desperation and huge immigration growth are fueling some sort of event.
Everyone’s wondering what will start the avalanche. The election of the PC party in June could create the euphoria and optimism that will inflate prices severely next summer. There’s some risk in it, however the benefits will be tremendous for anyone in Ontario looking to buy their own home.
“This is either a pause in the bubble and inflation is going to resume into even more stratospheric levels, or this is the start of a hard landing,” said Hilliard MacBeth, portfolio manager at RichardsonGMP and author of “When the Bubble Bursts: Surviving the Canadian Real Estate Crash.”
Should you list and sell your house now? Will interest rates and inflation, and government policies lead to a catastrophic housing and economic collapse in Canada in 2018/2019? Could our prime minister mismanage the economy?
In the booming US, they’re asking similar questions about a housing market crash. That would make a Toronto market crash more plausible. Yet many see the market ready to boom. Very confusing, but let’s take a look at the Toronto market crash scenario first and see all the factors to consider before you buy or sell your home.
2018, 2019, 2002 or Beyond?
If it’s not a question of if the Toronto market crash might happen, then might a questio of when — 2018 or 2019? Or will the crash threat simply fade as demand for homes weakens? Lots of uncertainty and not much consensus.
There’s a list of the crash factors however if they line up in a certain squence, it might be enough to set the house of cards plummeting. Is the key crash factor financial, political, or would it be a sudden loss of consumer confidence in real estate and the Canadian economy?
Much of Canada’s prosperity comes via natural resources and trade with the US. Despite all the optimism, trade restrictions (Bombardier loss) by the US are no joke as are falling commodity prices. And if you were a bank, would you want to lend out billions to young first time home buyers in the face of an unstable government and economy?
I just read a story about a company that is ready to help buyers rent to buy so they don’t have to pay a downpayment in some cases. Is the same scenario we had in 2006 and 2007?
Provincial Governments and Drastic Actions
The Ontario Premier impulsively reacted with the foreign buyers tax which helped cool demand, but the crash may not be about the flame. It may be about the fundamentals of a Canadian economy which has the least direct foreign investment of any G20 country and a shaky trade deal with one country which seems to blocking imports of our wood and oil.
The Ontario, BC, and Canadian federal governments have been so negative, repressive, and unsupportive of the contribution of real estate to the economy, that those actions are the key to a disaster. Continued suppression of land development for housing is creating a true housing crisis.
1 million new immigrants are arriving in Canada by 2020, it’s sets the stage for desperate buying (the dreaded housing bubble) and bigger opportunities for rental property investors.
Some experts suggest a crash is impossible, while other expert predictions (from TD’s Bank President), support the theory that rising unemployment and rising mortgage rates would be needed to begin the landslide.
Canadians have one of highest per capita debt levels of any G7 nation. With the NAFTA deal in trouble, we could see those rise. So when someone asks “should I sell my house” in Toronto, the response depends on whether the government will change course and help in a massive housing development program.
What Causes Housing Bubbles to Form and then Burst?
What causes a housing market bubble? What factors could burst Toronto’s bubble and possibly send the economy into a skid? Most of those factors are listed below.
Persistently insufficient housing supply during a strong economy balloons markets unreasonably.
Bank governor Poloz said that interest rates could move “in either direction.” He emphasized that the Canadian economy was still highly susceptible to shocks, and a cooling housing market combined with debt worries are still worthy of concern – from the Fool.ca
Vancouver’s real estate market is just like Toronto’s and is in the midst of a correction.
The lack of rentals is the “biggest pain point for our city,” With 100,000 people moving to the Toronto area annually, the region needs about 30,000 rental units. Toronto has about 1,500 coming on stream” from Toronto Star report.
What exactly happens in a real estate market crash? Here’s one answer:
If a bubble were to burst, the real estate market would slow to a crawl. “You’d probably see very little transaction volume,” said University of British Columbia professor Thomas Davidoff. “People would be locked into their homes and their mortgages.”
In a crash, you couldn’t sell your home since buyers would just wait forever for the market to hit bottom and fewer could get financing to buy it.
Lots of questions to ask such as “is this just a monster luxury home problem?” If the market plummets, what will it mean if I have an underwater mortgage and can’t renew at higher mortgage rates? Are my relatives wise to buy right now? Will a crash have an effect on employment in the Toronto area? Consider this from a report on CBC:
1 in 10 wiped out by 20% correction — “A badly managed downturn in real estate prices could wipe out the wealth of a large number of Gen-Xers and Gen-Yers. We need to recognize that young families are the most likely group to be plunged underwater by a nasty housing correction,” said CCPA economist David Macdonald.
Sound scary? Then let’s take a real, no holds barred look at the real estate market in Toronto and the factors that could create a crash because our assumptions might be false.
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This report from the CBC tells us a lot about the whole business of forecasting crashes (and that they haven’t happened)
Prices keep rising. Bearish predictions that Canada’s housing market is about to crash, and calls for the government to cool hot markets, have been around for at least that long.
In fact, prices have risen steadily since the recession of the early 1990s and even the dip during the financial crisis of 2009 was a mild one. “Da Bears may some day be right, especially on the hottest markets, but getting the timing down is half the challenge,” Porter said. A Goldilocks market is not too hot, not too cold. But Canada’s housing market is running both hot, cold and lukewarm all at the same time. From https://www.cbc.ca/news/business/bmo-porter-housing-crash-1.3493809
Nostradamus and the Pundits
Some experts are calling for a housing crash in 2017, based on overheated prices, yet they don’t discuss what might be done to alleviate the problem in the Toronto region. The key issue for the Toronto real estate market, (as it is in the US market) is a lack of housing supply but there are other factors outline below. A host of government leaders have sought to crush land development and have quietly gotten away with their policies. But now the spotlight is aimed directly on them.
Could Premier Kathleen Wynne arrange to cancel the Places to Grow legislation and open up new land to ease home prices? Isn’t that a more sensible thing to do rather than providing more incentives for first time buyers who are up to their ears in consumer debt pondering a very high priced condo or house purchase? Is Kathleen Wynne is precipitating risk factor for a big housing crash in Toronto? Will interest rates rise so buyers would be less likely to bid on homes and condos?
Some would suggest that she and the Liberals are too ideologically driven to flex on that one. Yet Wynn’s approval rating is now below 20%. That is really low so easing up when the Federal government is crack down on mortgages doesn’t make a lot of sense. Her super low rating means Ontario doesn’t want her as Premier anymore and out of desperation facing years more in office, she could do something risky to seek approval. Wynne is a sell now factor.
More Foreign Investment Needed
The high demand for homes and property from foreign investors from China and the Middle East and the US, has been a wonderful thing for Ontario and Canada. If not for real estate, the world has no interest in investing in Canada. Foreign investment is at its lowest level in 60 years which means no one is going to save us.
Federal Justice minister Bill Morneau recently announced measures to cool the Toronto market, however experts feel the Feds can’t do much, in fact the Feds have said that themselves. They believe the provinces should be managing their own affairs. That brings it back to the Wynne government who has used risky, sudden measures. So when ministers start using words such as fragile, you’ve been given fair warning about a potential crash.
Justin Trudeau should be travelling and posing for cameras on the subject of why investing in Canada is wise. New free trade deals with ailing South American countries won’t work because we have nothing to export and they don’t buy our stuff. Without financing, the Ontario companies don’t stand a chance competing against well funded foreign firms. A low dollar and access to the US market is all we have.
If the Toronto Housing Market does Crash
If a housing crash is imminent, you’d be wise to unload your property now during the winter. Is 10 or 20 thousand dollars worth missing out on the greatest real estate cashout of all time? Up or down market, a wise person would answer the question of “Should I sell my home now” is in the affirmative.
Toronto Housing Market Crash Factors
What are the economic and real estate market factors that affect your selling decision?
- strength of the US economy
- GTA economy and employment starts to fall
- Canadian consumer debt reaching lmits
- NAFTA agreeement conflicts and refusals
- US restrictions on imports from Mexico and China begin to topple their housing markets
- immigration levels drop off
- add on taxation by Ontario, city and Toronto governments
- soaring home prices fall
- moderate new home construction – abandoned security deposits
- government meddling with property use
- mortgage rates rising faster
- number of millennials buying homes drops or house prices are out of reach
- Wynn and Trudeau don’t have a handle on the economy
- political pressure to keep home prices up to protect homeowner’s equity and credit situations
What the Heck Happened in Vancouver?
The booming Vancouver real Estate market plunged not long after the foreign buyers tax was implemented. That hurt speculators and Asian buyers who were finding a way to invest in Canada. It was good for BC renters, but not good for Vancouver. Foreign investors will have lost some trust in the BC government. These sorts of radical taxes and regulations don’t go over well with investors.
Unfortunately, the pain of high rents and no vacancies was too much for the Vancouverites to to bear and they pushed the tax through. The Asian money soon transfered to Los Angeles and Seattle where potential is so high.
Will the bubble burst in Toronto soon? A lot of buyers and sellers and mortgage lenders are struggling with that question.
Does the Past Tell Us Anything?
If the past does tell us anything, it tells us we’ll probably make the same mistakes again about forecasting crashes and bubble downturns. If we look at Toronto home prices over the past 60 years, we’ll see that they’ve just kept rising. Even the great recession cause only a small blip and the US recession of 2007 didn’t even leave a dent. As long as there’s a lack of development land, the price will speed up like an angry commuter on Indy 400 (or 404 or 401) and inevitably crash.
The last thing we’re left with in pondering the possibility of a Toronto housing crash in 2017 is what starts an avalanche? Is a stock market crash in 2019 a possibility that will affect your decision to buy?
Here’s a few resources on the bubble issue:
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