Why you don’t have to be afraid of a Toronto housing bubble

In a research note released to clients last week, Bank of Montreal chief economist Douglas Porter says that, with home prices up more than 25% in January compared to last year, there is indeed a Toronto housing bubble. Prices have soared such that anywhere that is commutable from the GTA — and the circle of commutable is ever-increasing — that even in Guelph, the average home price is approaching half a million, at $475,717. (In Aurora, the hottest market in the GTA in January, prices went up 55% from $914,061 in January 2016 to $1,415,649 in 2017, according to Toronto Real Estate News. Yikes!)

While a “bubble” is a pretty meaningless term, the report says “most can agree it’s when prices become dangerously detached from economic fundamentals and start rising strongly simply because people believe they will keep rising strongly, encouraging more buying.” It’s our own perpetual motion machine.

The problem with bubbles is that they burst. But don’t lose hope. Remember that if you own a home and don’t plan to sell it anytime soon, any dip in prices is purely a paper loss (and may even do your property taxes a favour). Over the long term, prices trend upwards, so unless you’re in a hurry, you’ve got nothing to worry about.

Similarly, as long as you can afford your mortgage, a price dip doesn’t have to affect you negatively. Timing the market is tough for professionals, let alone the average homeowner, so don’t be scared to buy if you can genuinely afford it and want to own a home now. Again, any loss in “value” is just a perception until you try to sell it. Basically, the best thing you can do in uncertain times is batten the hatches and prepare to wait it out.

So who should be keeping a close eye on the bubble? Flippers and speculators. It’s been a while since flipping homes was a licence to print money — homes these days often sell for ridiculous prices thanks solely to the land they’re on or the neighbourhood they’re in (remember that 1,500 square foot Don Mills two-storey that went for more than $2 million?), so flipping doesn’t automatically offer a quick turnaround on investment and hasn’t for some time. You may also have cause for some concern if you’re on the brink of a life event than can affect your livelihood, such as retirement or divorce.

The good news is that, according to Robert Kavcic, a senior economist at BMO who talked to Global News, we’re more likely to be facing moderate decreases followed by a plateau than a significant price event that will upset the whole apple cart. Unlike in Alberta, where a great deal of the economy is tied to one industry, a price correction in Ontario is likely to be less extreme. While interest rates seem due to climb somewhat, they’re unlikely to hit the incredible double-digits of the ‘80s again according to most experts, and while recent changes haven’t profoundly affected prices, the government has demonstrated with recent mortgage change rules that they are willing and able to step in to help stabilize the market if necessary.

Yes, you’d be wise to keep your mind open and your emotions in check if you’re navigating a home purchase now, but it seems those in the know hold the same trusty opinion that always made the most sense — don’t buy unless you can afford to, and don’t not buy because you’re scared. Do what makes the most sense for you and your family in the interest of building a beautiful life. Maybe it’s time we stopped looking at real estate as a way to make us all rapidly wealthy and started to once again look at it as a foundation, both literally and figuratively.