Toronto Housing Market Crash

Toronto Housing Market Crash

Toronto Housing Market Bubble

Reports about the potential of a Toronto housing bubble and crash have been around for many years. UBS has rated Toronto as one of the world’s most likely cities to crash.  It was even ahead of Hong Kong.

In 2020, prices were inflating fast, far above the means of investors, home buyers and renters. If any disruption of employment and the economy should occur, we could see prices plummet.

Well, that disruption of employment is happening now. And the bleak spring outlook due to the Corona Virus shutdown could conceivably push this market into disaster territory.  The plummeting Toronto stock market adds fuel to this bursting bubble scenario.

Toronto was Rated the Most Vulnerable Housing Market

Given how Toronto area wages are not good and debt levels are very high, home buyers and mortgage holders are vulnerable to this economic downturn in Ontario.

Toronto house and condo prices have hit record levels and due to a severe ongoing shortage, prices this spring would have soared if not for the Corona Virus impact.  More investment money was pouring in to purchase a small stagnant pool of homes and condos. With average condo prices past $600,000, the bubble scenario is plausible. Especially since lower priced markets including condos are typically bought by lower income buyers. That group may be drying up very fast. Who would risk buying a condo right now?

As mentioned in the Housing forecast report for Toronto, governments were now planning to pour money into the housing market to the tune of billions. This would help unless the believe the housing crisis just got solved.

Condo and apartment prices were far outstripping wage growth, and with insufficient home listings and rentals available, price pressure is intense.  Governments have worked hard to push high density housing in Ontario, thwarting borrowing and housing development. That’s what created the price pressure.

Now with construction cranes everywhere, could the big crash event be upon us? What is the event that launches it?

What Could Cause it to Crash?

An economic shock such as the Corona Virus pandemic which could deflate the global economy and reach the stock market.  This week, the Corona Virus’ effect on China’s economy showed in a big drop in US stock markets. Global markets are beginning to suffer as the China supply chain is impaired. China’s latest economic reports on manufacturing and exports is alarming.

The price of oil is perched at $29 as travel and goods transportation has been curtailed (as I suggested previously). The fact money has not made its way into the gold and silver market, and other metals is alarming. Right now, people are hoarding cash, particularly US dollars.

Young millennial first time buyers inflate the Toronto market and with a downturn, these buyers are first to go under. If global interest rates are rise due to the global recession (US economy and stock markets are strong) it could result in a fast withdrawal from buyers.

The fear or prediction of a crash has been around a long time in Toronto, and the city has kept escaping a catastrophe. But highly indebted Millennials pouring into the market just as speculators do too, meeting a potential global economic crisis could be the event that drains Toronto’s luck.

US Trade Relations Still Weak

President Trump promised to put America first and Canada is not considered vital to their success.  Alberta oil may not ever get to US markets and oil could dive in price.  The tax loss to the Federal government would be devastating.

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.

The Ontario economy has been doing well:

  1. the TSX stock exchange has picked up considerably
  2. the NAFTA deal is looking okay
  3. the price of oil is falling and could lead to lower fuel prices
  4. real estate is on an upward tear
  5. rent to income ratios are extremely high in GTA and rising
  6. interest rates are ultra low but what if they rise?
  7. consumer debt is maxed out and bankruptcies are brisk
  8. Ontario’s taxes can’t generate enough money for infrastructure improvements
  9. the CAD is stubbornly too high and erodes Ontario’s competitive advantage
  10. Canada has been near last in direct foreign investment for many years
  11. US tax rates have plummeted giving companies reason to relocate there

Screenshot courtesy of UBS. Cities most likely to form a bubble.

The debate raged last year, but it looks like Douglas Porter (his most recent thoughts) might have it right in his forecast.

 

Chart courtesy of trebhome.com

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  

Find out how the Toronto Real Estate market shaping up.   Check out more detailed market updates and forecasts for of MississaugaVaughan, Richmond Hill, Aurora, Newmarket, and Bradford.

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.

If you’re thinking of selling your home to get in on this Toronto market winfall, you need to find a real estate agent.

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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

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.

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 cash out 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 limits
  • NAFTA agreement 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

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.

 

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Homebuyers are still willing to look beyond the green spaces belt, but they’ll look at AuroraBradford, Mississauga, and Newmarket first before heading north.

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