Updated January 6, 2010
Real estate market in Toronto experienced just a short period of low activity and soft prices at the end of 2008 and beginning of 2009. The sales gained pace in the spring, and 2009 ended with a 17 percent increase in the number of sold properties from the previous year.
It was expected that the introduction of Toronto Land Transfer Tax will put a damper on the real estate activity, and it is possible that without it the sales would have been even stronger. 2009 was also a year of low inventories, and that caused bidding wars, especially in the central districts. Low interest rates and increased consumer confidence caused previously hesitant buyers to start an active search for a new residence.
The average home price in Toronto increased by a moderate four percent, to $395,460. We hope that an increase in real estate listings in 2010 will bring a more balanced market conditions and a sustainable pace in the price increases.
There are several factors at play that affect our real estate market.
Although the interest rates have risen somewhat, they are still at their historical low, lowering the real cost of purchasing a house, townhouse, condo apartment or loft, at least for the length of the mortgage term. The recent increases have neither dampened the activity down in any significant way, nor remarkably reduced affordability.
Inflation is extremely low at only 0.96%, and
Young people, immigrants, and foreign investors are fuelling the demand, while older generation stays longer in their homes.
The province imposed a freeze on urban boundary expansions, which means that land prices are bound to increase. Increased land values lead to an increase in property prices. Increases in single family development charges in the City of Toronto will increase the cost of newly constructed housing, which is already suffering from the higher materials and energy costs. New Toronto Land Transfer Tax was introduced last year, and Harmonized Sales Tax is coming in July. The later will not have a great impact on purchases of resale homes, other than adding to the closing costs, but will be felt by buyers of new construction.
Real estate remains a sound investment. In the last almost 14 years, since the end of March 1996 (the lowest point in the recent years) the average value of a house in Toronto rose by approximately 99.5 percent. In contrast, the increase in average house price in just 5 years between 1984 and 1989 was an astonishing 168 percent. Houses were often re-sold several times each time selling for a higher price. Such frenzied market had to burn itself out. If we take into account inflation, average house prices have not reached yet the 1989 level. They are 4.7% lower than the inflation-adjusted average of $414,327 of 1989.
Using average house prices from over 50 years, corrected for inflation (for comparison purposes we brought the historical data up to today's equivalent values), we produced the following graph. The average prices are courtesy of TREB.
As you may see on the graph, during this time span there were two significant 'spikes' in house prices, and three 'dips'. Blue line denotes the trend. Each time the average prices rose above the trend line a 'correction' ensued. We can see that correction on the graph below as a result of late 2008 and early 2009 market conditions.
At the end of 2003, when the average house price reached $293,067 (which, corrected for inflation amounts to $327,461, the price line has crossed over the trend line. But the increase rate was moderate, at 7% for a year-to-date average.The recent brief correction was more of levelling off the prices, similar to the period between 1957 and 1964.
When the prices rise faster than the trend suggests, the market eventually slows down. Whether the prices become stable, following the trend line, or actually drop, seems to depend on the speed with which the price increases happen. The steeper the angle of the curve representing house prices, the more likely is a price 'correction'. If the interest rates continue rising, the affordability will erode and the demand will slow down.
Price increases since 1996 are much more gradual and follow a much gentler curve than the ones leading to the past two peaks of 1974 and 1989. In the long term the average real estate prices seem to follow the trend line.
