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Where is the Mississauga, Toronto GTA Real Estate Market Heading?

This is a common question from most people I run into these days.

Historically, the real estate market runs in cycles of a five to seven year period.  During the late 1980's we say prices double in the a period of about 3 years.  There was a frenzy of activity during that time period as many potential buyers felt a sense of urgency to 'get into' the real estate marketplace.  Consumers felt that if they didn't buy a home 'soon', they would never be able to afford a home in the GTA.  Of course, with all boom periods there was a bust.  On March 14th, 1989 (if I remember correctly) the Bank of Canada raised the benchmark prime interest rate a full one-half percentage point in an attempt to put some pressure on the hot marketplace.  The next week, on March 21st, the Bank of Canada increased the prime rate by another one-half of a percentage point.  This ended the boom and started the slide.  The real estate market became unglued at the seams and prices began their decent. 

Some of you will remember in the spring of 1989 there was a financial advisor from Wood Gundy who predicted a 25% drop in the real estate market.  Shortly after making his remarks, he had to make a public apology for predicting such a ridiculous drop in market prices.  I think they may have fired him, but I am not sure.  Unfortunately, his prediction came true and it was actually much worse than 25% in some locations!

The period from 1989 to 1995 was a bleak period for real estate in the GTA.  Activity was limited and each year prices continued to fall.  See a graph of those price declines. A major recession hit Toronto hard and the job market was also compromised.

It wasn't until 1996 and 1997 before the market started to post some positive figures.  We all breathed a big sign of relief as the market was finally showing signs of recover.  Unfortunately, for people who purchased a home at the peak of the market in fall of 1988 or spring of 1989 (I am one of those people, we bought in October of 1988 and closed on January 29th of 1989!), it would be many years before their investment would be at a break even point. 

Today many people ask me to comment on the state of the real estate market as many of you are wondering if this present cycle is nearing the end and if so, will prices begin to drop and when and by how much!

There are many fundamental differences between today's real estate market and that of the late 1980's.  During this present cycle the average residential price has increased by between 3% to 8% per year.  This kind of growth seems sustainable by the economy, unlike the boom of the mid to late 80's where it was inevitable to bust.  In fact, it has only been the recent years that prices have finally climbed back to the levels of the peak of 1989.  We finally surpassed the peak of 1989 in 2002, see the graph here.  When you adjust for average inflation during the same period, we are not at the same level of prices seen in the late 80's, those years were almost on fire!

Additionally, in the late 80's when the market was 'red hot', many real estate 'investors'  never contemplated the worse-case scenario of a market correction, let alone a free fall.  These investors bought numerous properties and often were only hoping to 'assign' the property for a heft profit.  (Assignment means to transfer the right of a property ownership via their agreement of purchase and sale before the intended closing date, without having to close on the transaction - a nice scheme).  When the market crashed, many of these investors were not in a financial position to close the purchase.  New home builders were demanding $40,000 and $60,000 deposits in the late 80's and did not allow people to just walk away from their deposit.  Many were sued and many people went bankrupt in the early 1990's.  Consequently, this created a huge supply and glut of inventory of real estate on the market which contributed to the decline in housing prices.

I would add the fact that the bubble of 1989 was not only investor fueled, but partially had it's roots with the 'female' spouse entering the workforce in the early 1980's and by the mid 1980's most family incomes had doubled. This gave families almost double the purchasing power compared to the early 80's and with interest rates down in the mid 80's affordability was greatly improved.   The mood was almost euphoric.

My opinion

I have studied and graphed the GTA Real Estate market prices in 1989 compared to the period since the fall of 2001, see the graph at:
http://www.mississauga4sale.com/TREBprice.htm#graph

Clearly the recent price increases in Toronto (GTA) has not spiked as it did in the late 1980's but we seem to be teetering at an unprecedented GTA housing price point.  We may soon go over the 'bubble' of $300,000. People ask all the time, 'how much higher can the market go' ... only time will tell.  International economists often quote that Toronto and the GTA are well below international prices.

Of great interest to me is the fact that the average price data in the mid to late 1980's did not include regions other than Toronto and immediate surrounding cities. Currently, the average price includes cities as far away as Burlington, Oshawa and Barrie, where prices are well below GTA prices, thus pulling the average down. This implies that average GTA prices are probably much higher than what the average price indicates, and I think that many will agree that Toronto prices are more than double what they were in the late 80's even though the average Toronto single family residential price is only about 7% higher than it was in 1989

One thing that indicates possible serious consequences is that recent residential vacancy rates are nearly double compared to the past 20 years. Currently it is difficult to rent a property these days, unless you are prepared to accept lower rents. If rental rates collapse, I believe that could trigger a drop in real estate prices across the GTA.

I find it very interesting that people are now talking about a slowdown, or adjustment or voicing some concerns about he current state of the market.  I also have noticed there have been some articles in the press and on television talking about our hot GTA market and whether or not the economy can sustain it and whether or not purchasers can afford much more.  Some people comment that if the interest rates were to increase from the current levels of about 5% to 9% (and this is not unimaginable) then about half of all recent new purchasers would lose their home.  If this were to happen, the bottom of the market would fall out and we would be into another free fall and slip into another recession. I don't think the Bank of Canada would ever raise prime rates by that amount or that quickly, knowing the certain outcome of such an increase.

Reasons why this may not happen now

Today, investors are mindful of the need to evaluate the worse case scenario.  Additionally, builders will no longer allow assignment of properties and often will not allow you to resell your condominium for a profit.  Consequently when you purchase a brand new property you must close the transaction.  This change has helped ensure that the problems of the late 1980's do not happen again.

Interest rates in the late 80's were at double digits, 10% or greater.  Today were are very fortunate to experience incredibly low interest rates.  We've been at or near historic low interest rates for some time now, see graph of historical interest rates here.  Today you can find a 5 year mortgage interest rate for under 5%

All of these factors lead me to believe that even though the real estate market has been bullish for many years, reasonable prices and affordability are still very much present.  Additionally, the GTA has been the preferred place of residence for many new immigrants, this combined with a healthy job market should help page the way for continued real estate growth in the GTA.

It is important to understand that while prices have appreciated in the GTA, compared with most international standards, Toronto is still considered to be an undervalued and affordable city relative to all other major world class cities.

I believe that barring a national or international crisis or event the real estate market should continue to do well in the GTA and prices should escalate 3% to 8% this year.

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