Toronto Real Estate NOT overvalued says latest BMO Nesbitt Burns analysis.
One of the questions I’m often asked by clients these days is ‘Are we experiencing a Toronto real estate bubble?’ and ‘Does it make sense to purchase East Toronto real estate in the current market?’.
Historically, East end Toronto homes, meaning Riverdale, Beaches, Leslieville and the entire Danforth area have been more affordable than homes in the central districts or even the west end, for the same size home.
However, prices in East Toronto rose considerably in the last 18 months, even in district E03, which includes Danforth Village, Danforth Mosaic and East Danforth, (up 12% from 2009 to June 2010). Does this increase mean Toronto is in a real estate “bubble”?
In my opinion, no. It would be fair to say Toronto properties have been somewhat overvalued in the recent past (according to the ratio of wages to mortgage payments), but the price correction we have seen over the last few months has led to the current balanced market which gives a slight edge to buyers. Does this mean you can now afford more house than six months ago?
Not necessarily. Tighter mortgage regulations and fluctuating interest rates have offset some of the price correction. On a positive note, homes have become slightly more affordable overall, according to real estate analysts at the Bank of Montreal. Affordability (house prices as related to income) is a key indicator of a real estate bubble.
The two charts included here show how prices have moved over the past 20 years according to affordability. Chart #2 shows that at the end of the 80's when inflation jumped, interest rates went up to 18% and house prices rose dramatically while incomes did not, there was indeed a Toronto real estate bubble. Homes became unaffordable and people just stopped buying. House prices fell significantly, especially in Toronto, and some homeowners found that their homes were worth less than the amount of their mortgage, putting the brakes on sales. Prices didn't rise again until the economy and employment recovered and interest rates fell.
Chart #1 shows that the extremely low interest rates we've had for the last while has kept us close to the norms on the affordability index. The last balancing or softening of the market especially, has brought us away from any talk of a Toronto real estate bubble.
While there may be a further slight drop in house prices, this will likely be matched by fewer listings as sellers will want to wait until the market swings up a bit more, keeping prices more or less stable.
Of course the old real estate adage still applies -" The best time to buy real estate? 20 years ago!" What will we be saying 20 years from now?