Updated January 4, 2013
Over the course of last year we have seen and heard in the media comments about the precarious state of Toronto real estate market. The media expected balanced market in 2011, and that did not happen. For 2012 we saw predictions of an inevitable drop in prices.
Instead, the first five months of 2012 saw a frenzied market, with more properties being sold, buyers eager to compete in bidding wars, and a strong gains in average prices.
That changed in June, but only with respect to the number of transactions. Throughout the remainder of 2012 fewer homes and condos were sold every month, resulting in a drop in yearly MLS sales in the GTA by 3365 listings (3.8%). All that drop, and even slightly more, happened in the City of Toronto, where 3440 fewer listings were sold (9.6%). Outside the City boundaries some of the municipalities recorded moderate increases in the number of sales.
Average property prices increased, with the highest growth in low rise residences. 2012 average price for all property types was $497,298 - almost seven percent higher that in 2011. The highest price gains of 7.17% were reported for detached homes. Prices of semi-detached residences rose by 6.51%, of attached homes by 6.27%, of condo townhouses by 3.64%. Average price of condo apartments rose by only 1.56%.
In 2012 11,990 more properties were listed in the GTA, 4088 of them in the City of Toronto. The average sale to list price ratio for the year remained the same as in 2011, at 99%.
Several factors affect our real estate market.
- The interest rates remain 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.
- Change in mortgage lending rules in the second half of last year reduced the amount of loan for which the first time buyers with low down payment would qualify,
- Properties selling for over 1 million no longer qualify for government insured mortgage, and
- Young people, immigrants, and foreign investors are still 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 in 2009, and Harmonized Sales Tax came into effect in July of last year. The later does 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 16 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 152 percent. In contrast, the increase in average house price in just 5 years between 1984 and 1989 was an astonishing 175 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 increased only 13.4% from the 1989 level.
Using average house prices on record since 1953, 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'. Red 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. The rate of price gains since 2008 is a bit lower that the one which led to the 1974 correction, and that correction was significantly milder than the 'bubble burst' of 1989, but led to a 10-year period of stable prices, especially when these prices were corrected for inflation.
In 2005, when the average house price reached $333,852 (which, corrected for inflation, amounts to $377,870), the price line has crossed over the trend line. But the increase rate was moderate. The brief correction which happened in 2007 - 2008 was more of levelling off the prices, similar to the period between 1957 and 1960. After that brief correction the prices continued to rise, and the increases were quite substantial since 2010. These increases, however, are not as steep as those of the period between 1985 and 1989.
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'.
Price increases since 1996 were much more gradual that in the period between 1985 and 1989, and follow a gentler curve than the ones leading to the past two peaks of 1974 and 1989. Although the angle of the average price line is steeper now than it has been since 1996, it is still gentler than during these two peaks that led to the 'bubble burst'.