If you are actively following the downtown real estate market, you know most of the escalation in Toronto property prices are the result of a mismatch between supply and demand. This is predominantly in the single-family housing market, where fierce competition and precedent-setting bidding wars are pushing prices high - and then higher.
There are reports from analysts that are fearful, however, the bulk of media reports are a little more tempered. Why? Because there’s no sign the downtown Toronto housing market is going to stabilize - let alone crash - in 2014. When there are 32 offers on a house at Bloor and Symington, it means the next day there are 31 Buyers licking their wounds who remain desperate to buy. That’s not to deny I’m a little freaked out by the speed at which prices are escalating. After all, I’m a realtor who started his career at the start of the 1989 market crash - when Buyers suddenly stopped buying because prices surpassed their means - which sent property values spiralling 35 percent down over a six year period. Kind of like what happened with the global sub-prime mortgage crisis in 2008, most everywhere else in the world.
While a number of economists, analysts and media pundits have expressed concern that housing prices are continuing to climb to unsustainable levels, many of them are leaning towards correction over crash, when it comes to characterizing the market - and what’s in store for the coming months. While many experts disagree over degree to which the market is over-inflated, what has been determined as the true barometer of the market is that of affordability. And urbaneer.com agrees. Blingo!
Affordability & the Toronto Homeowner
The property ladder is a great analogy, because it not only depicts the shape of what a healthy resale market traditionally looks like, it also represents the climb that the young must undertake to jump in and move up as they mature and their lives evolve.
While the continued low-interest-rate environment fuels what is considered ‘affordable’, the escalating property values, placed alongside the opportunity to accumulate dangerously high levels of debt that are mostly interest payments, create a potentially dangerous situation.
To illustrate that point, one needs look no further than the bidding wars that frequent the Toronto property market. To win the competition, Buyers are obliged to make stupendous bids to acquire the most optimum property they can afford knowing that - even if it’s ‘precedent-setting’ - it will still be a sum far less than what far-out future values hold. And they’re ok with this, because they’re not planning to sell for a decade or three.
There is sense to the madness of paying a premium today rather than tomorrow. If housing prices are escalating at a rate that exceeds incomes, then very soon a Buyer won’t be able to afford the very properties they’re considering now. As housing prices increase, the quality of dwelling a buyer can afford diminishes, and if their income doesn’t grow then the gap widens. The end result (and potential problem) in this market phenomenon, is that home buyers have no choice but to take on more debt - which is for many feasible and well-managed under the current state of low interest rates and today’s property values. But what if property prices pulled way back? What if interest rates leapt? And (shudder) what if both of these scenarios happened at the same time? This is not to deter a purchase that serves your needs both now and in the foreseeable future. What this does underscore is the necessity of understanding your property purchase, not only in the context of how it meets your needs at the moment, but also how it would move alongside market adjustments and how you might address some of the variables.
Another phenomenon that is becoming more commonplace in this city is the growing reliance for First-Time Homebuyers to reach out to the Bank of Mom and Dad to fund down payments. There is evidence that First-Time Homebuyers are increasing their budgets, in part to field the increase in required down payment to mirror the increase in property prices.
What all of this does indicate, is that there has been a serious shift in the dynamics, behaviours and attitudes towards the traditional march up the property ladder, and is a telling commentary of what some of the potential collateral damage could be from getting side swiped in a swiftly-moving property market. Part of understanding the market is how to capitalize on its opportunities- whether that means finding your dream home or building up your investment portfolio. Urbaneer has several decades of keen observation of and participation in the Toronto property market. You’ve got all the information and data - but what does it mean for you? At Urbaneer, we’re here to help!
Note: this is an excerpt from urbaneer’s full Spring Forecast. You can click HERE to read it in its entirety.
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