Is Toronto's Real Estate Market a Bubble Ready to Burst?

John Pasalis in Toronto Real Estate News

It seems as though any time house prices are on the rise in Toronto, regardless of how modest the increase might be, Torontonians are worried that a real estate crash is just around the corner.  But for the first time in nearly twenty years, concerns of a real estate bubble are somewhat justified.

According to the Teranet National Bank House Price Index, Toronto home prices have appreciated by 15% from the market bottom in April 2009 to December 2009.  Toronto hasn’t seen this kind of rapid price appreciation since the real estate bubble in the late 1980’s. 

There is also a significant imbalance between the supply and demand for houses in Toronto which is resulting in a high percentage of multiple offers for houses which in turn is driving up prices.

But when it comes to deciding whether or not Toronto is experiencing a real estate bubble is the formula really as simple as:

Are there any circumstances where a rapid appreciation in house values does not mean we are in a bubble?  Can a rapid appreciation in prices ever be explained or is it always irrational speculation? 

If we look at the House Price Index for Toronto we’ll find that house prices peaked in August 2008 at 117.29 and fell to 104.01 in April 2009.  Since April Toronto’s house price index has risen to 119.65 in December 2009, a 15% increase.

Is the 15% appreciation in house prices driven by irrational exuberance or are prices quickly making up the ground they lost during financial crisis last year?  House prices in December 2009 are up just 2% over the previous high in August 2008.

 

If we compare Toronto house values to the other five cities tracked by the house price index (see chart) we’ll see that even with Toronto’s rapid recovery in 2009, Toronto home prices have appreciated the least  over the past four years. 

While I don’t think Toronto house prices are in bubble territory right now, we will need to keep an eye on the supply of homes coming on the market and the appreciation in prices in the coming months.

One of the factors behind the low supply of homes in 2009 had to do with lower prices.  Because prices had not fully recovered home owners were reluctant to sell their homes below the theoretical high they would have received had they sold in the summer of 2008.  Now that Toronto house prices have fully recovered I believe we’ll see an increase in the number of houses coming on the market which will slow down the rate of price appreciation. 

John Pasalis is the Broker owner of Realosophy Realty Inc in Toronto. Realosophy Realty focuses on researching Toronto neighbourhoods to help their clients make smarter real estate decisions.

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Comments

[CD Rates]

Looks the only housing bubble in 2010.

[Open House Listing]

Thank you for all the great posts from last year! I look forward to reading your blog, because they are always full of information that I can put to use. Thank you again, and God bless you in 2010.

[Paul]

This absolutely looks like a bubble set to burst when the new HST takes effect and the BoC raises interest rates at the same time. I suspect by this winter, prices will start to come down. Throw in a few sovereign debt defaults in the world, and the panic here will progress the reluctance even further - like it did in late 2008.

[mike]

hmmm something is not right with this chart

toronto gta for instance in jan 2006 was at approx 330k
dec 2009 and toronto was at 411

411k/330k = 24.5%
the chart only shows a max of 20 for toronto gta since july 05 when going back to january 06 its already at 24.5

if we look at july 2005 at the beginning of the chart we notice that between july 2005 and january 2006 it went up a few points approx 3.

the most accurate record i could find was july 05 being around 325k

now if we divide 440k (mid-march 10) to 325k (july 05) we get 36% which now makes the chart look even worse in fact almost double the amount we have on this chart which puts it up there with vancouver and montreal.

also btw the current household income for toronto is 90k (http://www.toronto.ca/business_publications/pdf/2010-february.pdf) and with 490k average home price (http://www.torontorealestateboard.com/consumer_info/market_news/news2010/pdf/nr_mid_month_0310.pdf) which makes it 5.44 or very unaffordable.

[mike]

john,

a bubble's definition is asset prices rising faster then what incomes can sustain.

y/o/y the price of real estate is up 19% or approx 70k in the GTA.
incomes haven't gone up 19%. they are up 1.6% in the GTA (http://www.toronto.ca/business_publications/pdf/2010-february.pdf)

speculation along with easy lending is what is fueling this market.
april might tell another story when new buyers won't be able to get a large mortgage as they have to qualify for 5 year fix (http://edmontonhousingbust.com/files/100308-2.jpg) and wont be able to get away with a 5/35 instead a 10/30 is now the norm and it should be higher. HST will also play its role later on and rising interest rates later this year will finish this off.
2nd home buyers now need 20% down.

nothing here is bullish anymore in fact its the opposite.

what's fueling this great Canadian economy with rising retail store and car sales? the wealth affect. Torontonians are now rich with real estate. they can spend as much as they want now because they have real estate as their collateral. where have we heard this one before?