GTA Real Estate: Bubble, Bust or Buy?

With the amount of information circulating it's hard to predict just what our Real Estate market here in the GTA is going to do or how we're going to end up.  Many of my clients say that it feels like a scary time in real estate.  Do I sell? Do I rent? Do I buy? Can I even get a mortgage with the new rules in place?  

The best time to make a decision is when you are informed, prepared and have a plan.  Here's some information...

Take a look at this as reported CBC:

The Organization for Economic Co-operation and Development ranks Canadian real estate the third most overvalued of the 34 developed countries assessed by the group, based on two metrics tracking what homes cost compared to incomes and rents.The Paris-based OECD, which monitors and compares wealthy nations, recently released a report that ranks its 34 member countries based on two broad housing measures:

• The price of the average home compared to what it could be rented for.

• What the home costs compared to the average salary.

• Check out our interactive map tracking house prices across Canada  http://www.cbc.ca/news/interactives/housing-canada/

According to that analysis, Canada has the third most overvalued real estate in the developed world, just behind Belgium and Norway, which are deemed to have the frothiest real estate market under the OECD's terms.

Based on rents, Canadian real estate is overvalued by as much as 60 per cent, the OECD says. In terms of prices to incomes, Canada fares a little bit better, but the OECD suggests the country's real estate is still as much as 30 per cent overvalued.On the opposite end of the spectrum, the OECD says real estate in Japan, Germany, South Korea, Ireland and Portugal is undervalued. In almost all those cases, home prices should be higher than they are, considering rents and income levels.Based on the numbers, the OECD places Canada in the fifth of five baskets — one where real estate seems overvalued but prices continue to increase.

"This is the case in Canada, Norway, New Zealand and, to a lesser extent, Sweden," the OECD says. "Economies in this category are most vulnerable to the risk of a price correction – especially if borrowing costs were to rise or income growth were to slow."The latest data from the Canadian Real Estate Association indicates the average Canadian home was worth $380,588 in April — 1.3 per cent higher than it was in the same month a year earlier.

As reported by the Financial Post:

TORONTO — It’s looking like an unsettling spring in Canadian housing, a market that has proven far more even-keeled and less scary for investors in recent years than in the United States.In what is traditionally the best season of the year for real estate agents, Toronto agent Ecko Jay says the industry is seeing far fewer buyers, a result of tighter lending rules, high prices and fear of a bubble. In Toronto alone, sales dropped 40% in the first quarter from a year earlier, making homeowners and investors jumpy.

“Some people want to cash in and pull out now,” said Jay, a 26-year veteran of the Toronto housing market, noting some are spooked by worst-case predictions of a 20 percent drop in prices from current levels.

“They say, ‘Before it gets low, let’s sell,’” Jay added. “And some of my clients want to sell and rent, hoping that when it goes down they will pick up something at a better price. Nobody has a crystal ball.”But then there are Canadian policymakers, economists and market watchers who have the next best thing to a crystal ball. Their data and analysis point not to a bursting of the bubble like in the United States in 2007-08, when prices from peak to trough dropped 35$, but rather a gentle easing in Canadian housing prices, or perhaps just a momentary pause.

Naysayers believe Canada may be too optimistic and relying heavily on that old saw that Canada is not nearly as reckless as the United States. After all, the debt-to-income ratio of Canadians is at a record high, close to the levels experienced in the United States before its market crashed, and home ownership is at nearly 70$, also a record and five points more than its neighbours to the south.

But Canada does have some things going for it, most notably a move by the government to tighten mortgage lending rules four times in five years, most recently in July 2012, which has taken some buyers out of the market, dampening demand.“If you look at the developments over the last year in Canada and compare them to the situation in the U.S. before the crisis, there is a clear difference,” said Julien Reynaud, an economist at the International Monetary Fund who follows Canada.“It is not just a question of housing supply and demand; it is rather a difference in the system of mortgage finance.”Canadians have more equity in their homes than Americans did, the default rate is lower, the sub-prime market is tiny, and mortgage interest is not tax-deductible, so there’s no incentive to build up debt.

Finally, mortgages are structured as recourse loans in which assets other than the house are held as collateral. That makes Canadian homeowners less likely to walk away than their American cousins.

“What makes Canadian housing different makes it stronger,” says Tom Lewandowski, who analyses Canadian banks for Edward Jones in St. Louis.

And finally this from TREB (Toronto Real Estate Board):

June 18, 2013 -- Greater Toronto Area REALTORS® reported 4,620 sales through the TorontoMLS system during the first two weeks of June 2013.  This result was up by 4.7 per cent compared to the first two weeks of June 2012.  Year-over-year sales growth was driven by the regions/counties surrounding the City of Toronto.  Home sales in the City were basically flat in comparison to last year.
 “The expectation was for an improvement in home sales in the second half of 2013.  Early June results are in line with this outlook.  Many households have adapted to stricter lending guidelines and have renewed their search for ownership housing,” said Toronto Real Estate Board President Ann Hannah. “It is also important to note that new listings were down over the same period.  With sales up and new listings down, market conditions became tighter.  This supports the moderate to strong rates of price growth reported for most major home types, including condominium apartments,” added Ms. Hannah. The average selling price for the first fourteen days of June was $536,141 – up by 3.8 per cent compared to June 2012. “While price growth has been driven by low-rise home types this year, condominium apartment price growth has improved since March.  Despite higher inventory levels, there have been enough buyers relative to available listings to support condo price appreciation,” said Jason Mercer, TREB’s Senior Manager of Market Analysis.

What's my opinion?  I think we are in the midst of a very cautious market where both Buyers and Sellers are nervous.  Nervous to Buy, Nervous to Sell.  Sellers obviously want the maximum dollar for their homes while Buyers want the best deal possible.  That statement will remain true no matter what the market does and as a Realtor, I will always adhere to getting the best value, best dollar and best deal to the best of my abilities no matter where we are in the cycle.

Do I trust the Condo market? Not so much.  It's the one area, based on my expertise that here in the GTA I can honestly say I see as a tinderbox just waiting for ignition.  I believe it will ignite and drop.  But in the same breath - if you own a Condo doesn't mean you need to sell it, it just means that if you plan on selling it, my opinion is to make that happen sooner rather than later.  

I personally believe it's time for a correction.  With values soaring almost out of reach of most pocketbooks, at some point, something is going to give and over the course of the past year we've seen a slowing.  What I sold in 2 days with multiple bids last year is taking much longer with less interest.  

In the long run, there will always be buying and selling.  There will always be people in need of homes and people with reason to sell them.  As your Realtors, its up to us to make sure that we use every tool we've got to serve our clients to the best of our abilities.  

If you ever have any questions regarding real estate buying, selling, home preparation or any type of real estate concern, please, as always, email nicole@gtalisted.com or visit the website at www.gtalisted.com

Nicole Kreutzberg
Realtor
Sutton-West Realty Inc.