By Lachman Balani
TORONTO: Over the last few months many reports have come out corroborating the stability of the housing market in Toronto and Canada-wide. Some even point out that the plunge of 21% in housing starts in August that negated the effects of the huge jump in starts in July only further cements that future supply will be contained as the trend in the value of building permits has become relatively flat since the beginning of 2013.
Sales in August and September have been hectic with this year’s sales up 21% and 30% respectively each month over last year. Prices average higher than last year. There has been no crash as forecast strongly by Capital Economics and a few others. The Toronto real estate market overall is hale and hearty.
I have, in previous articles, already mentioned that the government’s tightening of the mortgage rules last July would not toll the death knell for the Toronto real estate market nor will the Canada Mortgage Housing Corporation’s (CMHC) recent announcement that it will limit insurance of home mortgages. TD economist Diana Petramala, who specializes in the housing market, estimated rates could rise anywhere from 20 to 65 basis points, or the equivalent of 0.2% to 0.65% due to this announcement.
She noted that historically, this is a minor increase.
“Affordability will still remain in the housing market,” she said.
Which means more people will buy and there will be no crash in the immediate future.
I have in the past given reasons as to why the housing market will not crash in Toronto based on price, affordability and very cheap mortgage rates. But as CIBC chief economist points out in the face of increased mortgage rates: “Overall, the days of very cheap mortgages are going to be replaced by cheap mortgages.” In other words mortgage rates are still cheap by historical standards and so people will continue to buy.
However, let us look at the Toronto housing market from another price metric angle. 25 years ago (the amortization period of a mortgage at that time) the average home price in Toronto was $230,000(see table below from Toronto Real Estate Board) and today it is hovering about $530,000 (from news reports). This means the average home price has only appreciated about 3.4% per year, which by any standard is not excessive and there is no reason for a downward spiral given this scenario.
Let us examine it further. A couple who bought a home 25 years ago at $230,000 and paid 25% down (what was needed in those days for a conventional mortgage) took out a mortgage for $172,500 and gave $57,500 as down payment. Even though the rates were very high then, let us say that over the course of time they paid an average of 5% (very conservative estimate) on their mortgage leading to them paying a total of $358,500 ($230,000 plus interest of $128,500) for their home. Using a very linear calculation, as most people do, the couple says “Hey my home cost me $358,500 and now it is $530,000 – that means an increase of 1.60% per year- like that’s below inflation- so why is anybody saying the Toronto real estate market is overpriced. It’s under priced! What about a return on our investment of say even a puny 3%? Nothing?! And what if we include kitchen upgrades, roof repairs, window replacements, several coats of paint every 6-7 years, redoing basement? Overpriced our home?!?! Heck no, it’s highly underpriced!!!”
As seen in the above simple example- most home owners do not think their homes have increased that much in value as they should have. Their homes have increased in value by less than the inflation rate and there has been no real return on investment- in fact it is a negative return on investment!.
Thus the housing market will still keep marching on.
Take a look at the table below:
Year Sales* Average Sale Price* Year Sales* Average Sale Price*
1988 49,381 $229,635 2000 58,343 $243,255
1989 38,960 $273,698 2001 67,612 $251,508
1990 26,779 $255,020 2002 74,759 $275,231
1991 38,144 $234,313 2003 78,898 $293,067
1992 41,703 $214,971 2004 83,501 $315,231
1993 38,990 $206,490 2005 84,145 $335,907
1994 44,237 $208,921 2006 83,084 $351,941
1995 39,273 $203,028 2007 93,193 $376,236
1997 58,014 $211,307 2008 74,552 $379,347
1998 55,344 $216,815 2009 87,308 $395,460
1999 58,957 $228,372 2010 85,545 $431,276
2011 89,096 $465,014
2012 85,585 $497,301
(Source of table is the Toronto Real Estate Board)