Is the Toronto real estate bubble about to pop?

Forget about the media frenzy about the Toronto real estate bubble.  Let’s talk about where the real estate market is truly headed strictly based on facts.

Toronto Real Estate Bubble

Describing the real estate market as a bubble may seem drastic.  Even overplayed.

And unlike the media, I want to give you real insight as to what’s happening based on empirical evidence, not just hype.

So let’s talk about what could happen when the government introduces market cooling strategies and how it will affect you.

Government strategies to address Toronto real estate bubble

There has been a lot of speculation as to what the government would and should do to curb the rapid increase of real estate prices.

After all, isn’t the government supposed to step in, affect a seemingly free market, and just make it fair for everyone?

It would make sense to introduce a foreign buyer tax without actually knowing how many foreign buyers are affecting the prices of Toronto homes, right? (sarcastic)

Or what about slapping a speculation tax, considering close to approximately 100,000 homes in Toronto are ‘vacant’ and were likely purchased by speculators betting that real estate will go up forever?

No matter what the government proposes, the overall effort is to help cool the market and make it more affordable for Canadians to buy a home.  Prices have simply gone up so much in this free market and it’s time for the government to come in and affect change.

But why have prices gone up so much?

A 33% year-over-year price increase is certainly not the norm.  And a 15% increase in new listings shows you where the market may be going.

Several factors have contributed to the prices rising at such a rapid rate in the past few years.

Dwindling supply has made real estate seemingly scarce, resulting in bidding wars.

Hyper demand from several types of buyers are driving prices up.

This includes first time buyers, some of which are being assisted by the bank of mom and dad via their home equity money.

Foreign buyers who genuinely want to move to Toronto to raise their family, though some end up leaving property vacant or renting them out assumedly to cash in on the rising prices.

Local investors looking to capitalize on price gains and earn rental income (in spite of how challenging it may be due to acquisition costs in today’s market).

Move up buyers.  Down sizers. There has just been so much demand for buyers coupled with ever dwindling supply.

Could an increase in supply soften price increases?

Time will tell.  Seasonally, we see an increase in the number of homes for sale around March and April.

But if you look at the real estate statistics I monitor and publish every month, you’ll see that new listings in March 2017 have surpassed even 2013 levels.

Could these be homeowners cashing out?

Or perhaps everyone in a rush to make their move now before prices go even higher?

Remember, this statistic shows new listings, not necessarily how many get sold (and sales continue to increase year after year).

Maybe homeowners are anticipating what’s to come from the provincial efforts to cool the market down?

One thing is for certain.  When you affect supply, a ‘cooling’ of prices should follow if the buying activity remains the same.

What happens if buyers hold off on buying?

It’s too early to see if this is already happening on a GTA wide scale.  But from what I see on the market everyday, bidding wars no longer involve 15-20 buyers in a frenzy to win a home.

Now it’s just 2-3.  And that’s if the homeowner is fortunate to be in that situation.

Recently, some homes for sale were taken off the market after a failed multiple offer attempt.

Price low.  Attract lots of buyers. Sell high. Why isn’t it working?

The increase in number of listings has now given buyers more options.

Add to that the anticipation of the provincial program to be introduced in a few days.

And you’ve got buyers sitting on the sidelines, waiting to see what happens.

Is this where the bubble pops?

Time will tell.  But in my humble opinion, the government intervention and any reaction from the buying and selling population would have to be drastic for a ‘bubble’ to pop.

Otherwise, the real estate market may remain stagnant or have what’s been referred to as a ‘soft landing’ — as if a price floor has already been established.

What if you’re buying a home now?

Some home buyers to sit and wait to see what happens.

Bidding wars are not seeing quite the same action as they once saw.

Buyers involved in multiple offers recently saw the number of bids going from 15-20 to 2-3.

If you want to enter the market now, should you buy?

Fundamentals of a great home will remain the same.

Walking distance to neighbourhood amenities, great schools, easily accessible for the commute… these are factors that will always be in high demand.

A good piece of real estate will always be a good piece of real estate.  The only thing that will change is price… and perception.

If buyers perceive the market will ‘cool’ or even ‘crash’, they’re going to hold off on buying.

This increases the inventory, and actually gives buyers more selection and negotiating power.

This is a huge advantage compared to what buyers have seen in recent months and years.  And if you see a great piece of real estate you’re willing to commit to in the long term, go for it.

But if you’re not confident about the market, nor where you want to live, there’s nothing wrong with renting a home.

In fact, if you own a condo, or even a house, and you want to see what happens in the market, sell and cash your equity and rent for a year or so.

Hey, if the market keeps going up, it’s your choice whether to re-enter or wait.

But if the number of homes starts to increase, or if prices cool, you’ll have a great opportunity to find your next home as long as you commit long term.

What about selling?

March 2017 saw a 15% increase in the number of new listings of properties for sale.  That’s a significant number, considering it’s higher than the number of new listings introduced for the month in the past four years.

What does it mean for home sellers?

Are home sellers finally cashing out to take advantage of the 33% average price increase?

If you’re considering selling your home in today’s market, we’ll know in about a week whether or not you missed out on the most advantageous opportunities in 2017.  Namely January up to about the beginning of March.

More homes listed in your market area means more competition.

More competition means you might not get the same number of offers you saw other home sellers getting.

And here’s an explanation given to me by a respected and experienced colleague who has seen the 1990’s collapse.

In today’s market, there’s the actual value of the home, which can be calculated logically, and an emotional value.

This emotional value is a premium buyers pay to win their home.  Who knows how it’s calculated.

Whether it takes $50k or $100k to win a bidding war, that’s emotional value.  The amount you pay as a buyer just to get the house.  With no absolute logic or explanation as to why that figure.

The emotional premium buyers are paying just to get into Toronto real estate isn’t as high as it once was.

When several offers are taken off the table, buyers may end up paying less than what you expect.

Should you price high and wait to see if the market pays your price?

Or should you still ‘underprice’ just to attract offers and hope for the best?

We’ll see what happens

When the government announces its efforts to cool this market, we’ll see how the market reacts.  In the meantime, listings are increasing, some buyer seem to be holding off on their purchases, and sellers are starting to get concerned about not getting the price they want.

If you see real estate as a long term commitment, you’ll be fine.

If you’re investing using sound principles and not just on hopes and dreams that prices will go up forever, you’re okay.

I don’t think the bubble will pop.

But we’ll have to see if I’m right.

 

 

Is the Toronto real estate bubble about to pop?

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