It’s been a while since I felt the need to write a post about a housing market bubble, but the recent 2019 UBS Global Real Estate Bubble Index put Toronto at second greatest bubble risk in the world, so naturally, I have to talk about it.
I think the main thing that put Toronto in risky territory was the fact that home prices tripled between 2000 and 2017. Investors/speculators also play a big role in the new housing market, which in turn supports the rental market.
In recent years (after 2017 up to today), home price growth has slowed down, and it didn’t come crashing down, and there wasn’t a bursting of any bubble. Policies like the mortgage stress test sidelined buyers, so for a good year, there was slightly less demand.
But here’s the thing - demand didn’t slow down enough for supply to be outpacing it. When a market bubble bursts, it’s because demand fell off and supply continued hitting the market at the same if not increased rate. Is Toronto really at risk of demand waning?
That leads to a different question: what exactly causes demand to decrease? Maybe interest rates go up, or economic activity hits a slump and people lose their jobs. There’s also the chance the market gets too expensive for both investors and end-users, and they all back off all at once, leaving thousands of units on the market.
None of this really sounds like it’s happening in Toronto. The tech industry is booming in downtown Toronto, in fact, CBRE says the city is the fastest growing in North America when it comes to tech talent. Investors are still lining up at new condo and new home launches. Families are still planning years in advance and buying pre-construction. And interest rates aren’t projected to go up too much over the next five years.
One other thing to keep in mind is that population growth increases demand significantly. Between now and 2041, the Greater Toronto Area’s population is expected to increase by 2.8 million. In the Greater Toronto and Hamilton Area, the population will be more than 10 million by the same year (3.4 million living in Toronto). At the current annual rate of construction, we’re already thousands of units behind to accommodate this growth.
So, while the UBS report ranks Toronto as the second most risky housing bubble, I feel confident that the market is stabilizing and has already come in for a soft landing. If anything, I think the market is actually rebounding at the moment after a pretty slow 2018.
All that said, the housing market is still exactly that - a market. When people buy stocks, they know they’re taking a risk. Values go up and down. The housing market fluctuates - we’re just not used to big price drops in the GTA because prices have been steadily going up for the last 20 years.
It can happen though, and that’s why I always tell people to invest in real estate with long-term goals. I like saying five years is a good minimum amount of time to hold onto a property. If prices drop, hold onto it, keep living there, keep renting it out, and wait it out. With population projected to increase by millions over the next couple decades, demand will likely remain strong.