5 reasons Toronto house prices won't crash in 2016 - Action News
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TorontoAnalysis

5 reasons Toronto house prices won't crash in 2016

After Toronto's record year in 2015 for both the number of homes sold and the average price, the question is natural: when will it end? The answer: not in 2016. There are five main reasons why this won't be the year of Toronto's housing crash.

The naysayers insist the bubble has to burst sometime, but no signs indicate it'll happen this year.

The average house price in the GTA reached $622,217 in 2015, up 9.8% from 2014. It marks the 19th consecutive year of increases, according to Toronto Real-Estate Board figures. (CBC News)

After the Greater Toronto Area'srecord year in 2015for boththe number of homes sold and the average price, the question is: when will it all come crashing down? The answer: not in 2016. Here are five reasons why this won't be the year of Toronto's housingcollapse.

1. Supply and demand

It's the simplest rule of market economics and it applies to Toronto's real-estate market. The population keeps growing, and people have to live somewhere.

There's little room to build more single-family houses to increase the supply. The demandfrom families who want to live in the city with a patch of grassremains huge. The number of new listings on the marketcontinues to beoutstrippedbythe number of buyers.

Sceptics have been predicting for years that Toronto's real-estate market is on the brink of a crash. Will 2016 finally be the year the bubble bursts? (CBC News)

As for Toronto'scondo market, it's a myththat it'soversupplied: the inventory of unsold condos is shrinking, and with first-time buyers nearly priced-out of the house market,the demand for condos remains steady.

"I don't see themarketfalling at all in 2016," said JohnPasalis, presidentof Realosophy, a Toronto real-estate firm. "We're getting further into this imbalance where demand is exceeding the supply of houses coming on the market."

"Usually when the market's slowing down and prices fall, you can see signs of that well ahead of time," Pasalis said in a phone interview. "When you look at the momentum in Toronto'smarket, it's not going in that direction."

2. It's the economy, stupid

If the economy shrinks, jobs disappear andpeople are forced to sell their homes. Supply goes up,demand is down, soprices drop.This has happenedtwice in Toronto in the past 30years:a quick dip inthe 2008 recession, and a deep collapsein the early1990s recession. There is no recession on the horizon for the GTA in 2016.

Mortgage rates are expected to rise in 2016, but not at a pace that will cause Toronto's housing market to collapse. (Julie Gordon/Reuters)

"The fundamentals facing Toronto's housing marketare generally quite decent," said Robin Wiebe, a senior economist with the Conference Boardof Canada think-tank. Itforecasts economic growth of 2.8% for the metropolitan area in the coming year and predicts employment will grow too.

Ontario's economic growth has actually been rathersluggish the past six years,yet Toronto's house prices have just kept soaring. The average sale price in 2015 was 64% higher than in 2008. So even if the economy sputters, house prices are unlikely to tank.

3. Mortgagerates will rise, but gently

It's telling that the Royal Bank's announcement that it willpushsome of its mortgage rates up by just 0.10% onFridayactuallyqualifies as news.

"It would take quite a significant increase in mortgage rates to trigger a crash," saidSherry Cooper,chief economist atDominion Lending."I don't think interest rates are going to rise dramatically."

"We forecast interest rates will be relatively benign through 2016," said Wiebe.ForToronto'shousing market to crash,"you'd have to see a really large spike in interest rates or a really large drop in employment," hesaid. "It always could happen but that's not what us or anybody else frankly is expecting."

4. There is no 'bubble' to burst

You've heard it before:the bubble has got to burst. Investment expertHilliardMacbeth predicted last spring that Canadian houses prices will crash by as much as50%. David Madani, the Canadian chief economist ofglobal forecasting firmCapital Economics,warned of a housing priceslump backin 2011.He did itagain in 2013.And hedid it again last spring.Financial authorGarth Turner has been predicting a crash steadily since 2009, whenthe market rebounded following the recession.

"Toronto's not a bubble by any definition," Pasalis said.

Wiebedescribed a bubble as"when people buy houses purely for speculative reasons, with the sole motive of making money." He said that's not what's driving Toronto's market now.

The time that Toronto's bubble trulyburst was inthe early1990s. Thatfollowed a crazy period when the average house pricedoubled in just three years. GTA houseprices have not risen at anywhere near that pace anytime in the past two decades.

5. Affordable housing options remain

There's no question it's getting more difficult to afford a house in Toronto, with prices rising so much faster than incomes. But Wiebe points out the averageprice of a condo is roughly half that of a single-detached house. "If somebody is looking for a single detached home in the old city of Toronto, it's going tobe expensive, but that is not the only housing solution available."

The supply of unsold condominiums in the Toronto area is shrinking, according to figures from Canada Mortgage and Housing Corporation. (Makda Ghebrelassie/CBC)

"I don't think we'll see a crash because the average household is still in good financial shape," said Cooper. "Yes, it's true that debt-to-income ratios have risen, but household wealth has increased more than household debt."

"Most people still want to own their own home," she added. "They may have to have a much longer commute to work and live in much smaller space butI don't think the basic psychology is going to change."

Cooperpredicts Toronto housing prices will rise in 2016, just more slowlythanin the past few years.