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Toronto real estate market crash: Is it really possible?

by Taylor Pipe on 08 Apr 2021

Will the housing bubble burst and are experts projecting a possible crash?

Since the onset of the COVID-19 pandemic, house prices across Canada have soared to higher levels than we ever thought possible. Canada's housing market has been red-hot, particularly in Toronto, Ontario. With more people having the ability to work from home, the demand for single-family homes has skyrocketed. At the same time, interest rates have been at a historical low, which is making the thought of investing in a mortgage more appealing for Canadian families.

For years, the housing scene in the capital of Ontario has been steadily increasing. Buyers have been relocating and buying houses in neighbouring communities, like the GTA and Hamilton due to lower home prices and better quality of life. Given the situation surrounding the COVID-19 pandemic and property ownership, it's never been a better time to buy or sell your home. However, officials are saying that Toronto may be at risk of a decline in home sales and the market could crash in the coming months.

Tiff Macklem, Governor of the Bank Of Canada said in an interview with the Financial Post that the bank is seeing worrying signs of Canadians taking on too much debt and overextending their finances for a chance to break into the Canadian housing market.

But this begs the question: will the bubble really crash?

The rising housing market in 2021

This year has shown that our housing market is undergoing serious growth in 2021. Prices are soaring in the city, and this increase may stun the market and lead to an oversaturated real estate market with many trying to sell their homes to cash in on these astronomical prices. Houses are seeing offers exceeding their asking prices by as much as $100,000, or more! In February, Toronto broke records with an average house price of $1.04 million. Trends are forecasting that this could be as much as $1.1 million by the end of April 2021.

Real estate prices are becoming unattainable for many hopeful property owners today. Another thing that's troubling is the amount house value is rising. From 2019 until 2020, the average house price increased by 21%. Many investors are counting on their property to appreciate significantly due to these current trends. This also means that mortgage rates are inevitably going to rise as well. Come time for mortgage renewal, will everyone who bought into the market with low rates be able to keep up?

housing market

National overheating and condo capitalism

It's not just Toronto real estate that's seeing an exponential rise in house prices. Across Canada, mortgage rates are low and sales demand is high. Supply may not be able to keep up with this runaway market in 2021. This is why a lot of new buyers are seeking opportunities to purchase a condo.

Since people may not be able to afford a single-family home in Toronto, the next best and cheaper option would be to purchase a condo. The thing is, a lot of people are buying during the pre-construction phase, which has its pros and cons. But this is a trend that's hindering the opportunities for buying a condo post-construction.

The demand that we're seeing as far as securing a mortgage and housing is going to have a lasting impact on the Toronto real estate market for years to come. At this rate, there won't be enough housing for people in Toronto and many will have to locate to commutable cities. The other thing to take into consideration is how this will affect rental markets across the country.

The scooping-up of properties in the big city has made rental prices skyrocket as well. Apartments that were once $800 per month have increased to $2,300 in a matter of short years. This makes it hard for lower-income Canadians to be able to afford to live and contributes to a global homelessness problem. It's also a rising issue for immigrants or students coming into the country who rely heavily on renting in the big city.

A possible solution from down under?

One of the ideas floating around to help Toronto's housing market is to adopt policies similar to those used to cool New Zealand's housing market. The news has covered the steps this country has taken to improve the affordability of real estate in New Zealand and to give buyers a fighting chance.

In 2021, Jacinda Ardern, Prime Minister of New Zealand, announced a multi-billion dollar plan to decrease the risk of New Zealand's housing bubble bursting. New measures introduced include assistance for first-time buyers, regional price caps, and a $3 billion basic infrastructure plan to help create more houses to keep up with demand. However, it's going to be a while before these measures can actually make an impact.

The Canadian real estate market may benefit from taking a page out of New Zealand's handbook to lower house prices and create more affordable housing. It will definitely take some interesting methods to help stabilize the Toronto real estate game and allow investors and families to have access to lower prices.

The current seller's market

Although the ideas proposed by New Zealand's government may sound like a decent solution to the housing crisis ravaging Canada today, there would definitely be dire consequences. Many investors count on their house appreciating and when prices are so high, the last thing a homeowner would want is the risk of their home losing value by thousands of dollars. There would need to be some type of protective legislature for anything remotely like this to happen in Canada.

Although experts are saying a housing crash may be on the horizon, data has shown that it's a very hot seller's market and has been since the onset of the pandemic. The way this is going, it looks like investors are going to have to own property to purchase property in Toronto's market. If a buyer can get in on this perhaps short-lived pandemic-fueled pricing, they might as well!

National overheating and condo capitalism

An investor's perspective

The market is booming for anyone looking to cash in on their investment. As an investor, the current housing market is great news because your assets are increasing in value. For example, if an investor bought a home for $325,000 in 2013, it may be anywhere around $650,000 today. Investors would be wise to work the sale during 2021 since data is projecting an increase in sales over the next year.

If the housing bubble continues on the path it's on, it definitely makes for a great time for buying properties. If prospective buyers work with mortgage brokers, they can secure a mortgage for a historically low rate. Since interest rates are so much lower than usual, and the Bank of Canada has agreed to keep it low for at least the next few years, making securing a mortgage and housing easier. The only real issue is if interest rates have to rise dramatically without warning.

How rates affect Toronto real estate

For decades mortgage rates have been in steady decline. This has helped drive the sales of residential properties in cities across Canada. This led to more families buying homes in large cities. Higher interest means high payments per month. This may strain homeowners who don't have the income to support high-interest growth.

But this means that debt per household may decrease. If an increase in interest were to happen, Canadians would have to pay more to service their debt and may become at risk of defaulting on loans. This would also cripple the economy due to the average family not having leftover funds to stimulate Toronto's local economy.

But the good news is that the Bank of Canada has promised that rates will stay where they are until 2023. The Bank of Canada's Monetary Policy Report has stated that the bank is forecasting a 4% increase in economic growth in 2021, and it could rise to five percent in 2022.

The Canadian Mortgage And Housing Corporation, (CMHC) released a report in March that proves more Canadians are taking on higher mortgage debt than ever before. The last thing we need is a global housing crisis post-pandemic!

Can we cool the current housing market?

In a post-COVID world, the upward trend of high house prices may decrease. The sale of a property might not happen within a week of listing, and our real estate bubble may burst. Canada, and Toronto in particular, are in very real danger of experiencing hardships in the coming months and years after the end of the pandemic. Markets may see oversaturation from buyers looking to get in on March 2021 rates and house prices, but they may be too late.

Although the CMHC offers some fantastic programs, like the first-time home buyers incentive, global data is suggesting that Canadians may not see the boom we've become accustomed to over the past decade. We could see a decline in city growth, home sales, and lack of government funding for infrastructure related to creating affordable housing. Government experts need to look at how to manage the real estate crisis we're witnessing in Toronto. As of March 2021, Toronto's home prices were reaching historical prices.

The housing bubble isn't going to burst anytime soon. Investor's looking to sell or refinance their home are taking advantage of this golden opportunity. Toronto real estate has been a game for the past months due to COVID-19. Listings are seeing record-breaking bidding wars and ridiculously high offers. It doesn't matter what city you're in, this is happening nationally.

residential property toronto

Toronto's housing dillemma

At this rate, 2021 will go down in history as a record-breaking year for real estate in Toronto and across Canada. The good news is that the government and Bank of Canada have made this situation somewhat sustainable, but only in the short term. Toronto's real estate market could benefit from some legislature that enables buyers to purchase homes easier.

However, despite millennials' best wishes, housing costs are far surpassing income. Past history has shown that when things inflate this much, the bubble will pop. It might only be a matter of time before we witness this happening in Canada. It's only sustainable as long as we create an environment for thriving.

There is a silver lining to this real estate madness: things like the CMHC exist and are helping lower-income families find the house they want at a rate that works for them. Even though the real estate industry has been booming in the past months, there are programs in place to give people the upper hand. This may give young families a sense of ease when looking at finances.

In March 2021, home sales in Toronto were up 97%, according to Global News. Compared to the same month a year ago, at the onset of the pandemic, it's a dramatic increase. But housing prices in 2021 have increased because there is more demand than supply, which is causing the big squeeze for the big city's real estate landscape.

While the bubble may burst and cause a drop in house prices across the GTA, it's unlikely. These past months have shown that Canadians are looking to invest in housing at an increasing rate. The real issue is if the supply can keep up with the demand and drive home prices down. Despite mortgage debt, Canadians are realizing the true value of homeownership and the memories you can make with your family in your own space.

The Canadian housing market may begin to trend downward when sellers come out of the woodwork after the majority of the population is vaccinated. But it's always best to stay optimistic about housing in today's day and age. If the pandemic has taught us something, it's that anything can happen at any time and best-laid plans can be thrown off by a global virus.

Even if we try to cool our market, who's to say another pandemic won't completely throw it off again and change the way we view housing in Toronto yet again? At least we can make the best of what we have right now.

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