Updated January 10, 2008
The real estate market in the Greater Toronto Area Toronto has been on an up-swing for a long time now, and clients ask us what are the prognosis. Can this level of activity last? Can the pricess keep going up? Are we going to see another 1989 crash?
2005 was a record-breaking year. 84,145 properties changed hands, the largest number ever recorded by TREB. The average price rose by 6% - a healthy but not excessive amount. In the City of Toronto (E01 to E11, C01 to C15 and W01 to W10) the average price rose by 10 percent to $361,055.
2006 real estate sales did not exceed the 2005 records, but came fairly close at 82,969. The average price increased by a modest 5.4% to $351,941. Last quarter of the year was slower than the first quarter. The number of sold properties was lower by 10.9% than in the first quarter, there were 47% fewer listings taken, but the inventory of available properties was higher by 6.6%. The comparison with the fourth quarter of 2005 is more favourable, with the number of sold properties lower by only 2.6%, 2% more listings taken, and 5.6% higher inventory.
2007 beat the 2006 records. 12% more sales were recorded (11% more than in the previous reccord-setting 2005). Average prices rose by seven percent to $376,236, and the average time required to seel a property went down to 32 days from 34 required in 2006. The number of listings taken in 2007 fell by 1.8%, and the average sell-to-list price ratio stayed constant at 98%.
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.
Our dollar is high, hovering around par with the US dollar and giving us an increased purchasing power,
Inflation, although higher than last year, is still low at only 2.4%, 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 fuelled some frantic activity in December. That activity may slow down in February, when the new tax comes into effect.
Real estate remains a sound investment. In the last 11 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 90 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 still 7% lower than the inflation-adjusted average of $402,457 of 1989.
Experts predicted that in 2006 in Toronto we should see a slow-down in the number of properties being sold, with that number falling down by about 4 percent, but with the prices still rising by an average of 4%. In reality, the number of properties sold was lower by only 1.4%, and the prices increased by close to 5%. The high level of home ownership was the main reason quoted for the expected slow-down, additional reasons being the rising interest rates and other costs of home ownership. Although the TD Bank economist predicted a stron market for 2008, the new land transfer tax may slow down the sales.
Using average house prices from just over 50 years, corrected for inflation (for comparison purposes I brought the historical data up to today's equivalent values), I 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.
At the end of 2003, when the average house price reached $293,067 (which, corrected for inflation amounts to $310,502, the price line has crossed over the trend line. But the increase rate is moderate, at 7% for a year-to-date average.
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.
