Toronto Real Estate Market Crash Overdue in 2018/2019?
When we begin counting the many reasons why and when the Toronto real estate estate market might implode, we might agree it is a possibility now. TREB’s market report next week will tell us if it’s already started.
Is the Big Toronto housing crash coming in 2018? Would it precede or follow a Toronto stock market crash? In this post we’re going to explore the crash factors, some of which are getting noisy. Check here if you’re looking for the latest US housing bubble report.
The Ontario government’s disturbing strategy now is now working within an economy on the downturn and a smaller tax base. Wynne is rightfully concerned about the TPP trade deal threat which holds little promise for Ontario manufacturing. With the US pulling auto manufacturing back into the US, our key industry is threatened.
Companies here are facing a rising loonie and looking longingly south at the low tax rates there. You can read the other reasons for a doom and gloom picture for the Toronto housing market below.
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, the Canadian economic outlook is troubled, especially if oil prices rise only moderately, putting the economy in no mans land.
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 or manfacturing exports down
- 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 high
- 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
Are Canadians thinking crash?
From the Bank of Canada governor to expert authors, there’s a dull roar of people warning about a Toronto housing crash. Are they contibuting and pushing or is this just plain fact?
Now we’re into 2018, home sales are slow, sellers are definitely getting nervous, and younger buyers more frustrated. More worrisome is the recent troubles in the stock market, with the rising dollar and rising oil prices which just hit $66 per barrel.
The debate raged last year, but it looks like Douglas Porter (his most recent thoughts) might have it right for a 2018 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. The key is rocketing demand (like we saw in spring 2017) combined with intensive government meddling, during a time of economic prosperity.
The key may be market susceptibility, instability, caused by investor uncertainty. After a charged up price index, an event occurs that sends investors scurrying fast. It could be foreign investors or Canadian investors. Only if the economy suddenly loses its strength and people find themselves without jobs will they default and abandon their underwater mortgages, as they did during the US economic recesssion. When bank governors begin to use vague, waffling language, it creates the kind of uncertainty investors dislike.
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 has shown volatility of late. It looked like the market was coming back but it has leveled off again.
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. The market might not burst until 2018, but it could heat up badly in April, May and June to begin the freefall.
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 http://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 2018 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.
Kathleen Wynn and John Tory aren’t talking about the crash possibility and the various mayors in Vaughan, Richmond Hill, Aurora Newmarket etc aren’t saying much either. They’re enjoying the tax haul, but they realize Canadian consumer debt is a huge matter. If mortgage rates and unemployment rise, we’ve got a crash type situation on our hands.
With high home prices come new home construction and if you’ve been to Aurora Newmarket, Bradford and King township lately you’ve seen the huge growth in new communities. But the demand far outstrips supply. The fact is Toronto is a hot market and prices aren’t slowing.
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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