In: Real Estate News24 May 2011
More and more people are speculating that we are in the midst of a Toronto Real Estate Bubble. In Toronto, the MLS average house price has been increasing for the past 14 years, and 2011 is no exception. Over these 14 years, the average price has gone from $198K to $457K. A rising average house price is no surprize. No one would expect the price of housing to remain constant. It should increase as inflation increases, demand increases, and as salaries increase. However, the question is now whether it is increasing too quickly.
In the past 3 years, the average price for a home in Toronto has increased by approximately $80,000. From $379K in 2008 to $457 in 2011. When we examine this recent surge in prices, it is difficult to point out one specific reason or driving force. There has not been an increase in the Toronto population and there has not been a dramatic increase in salaries. Interest rates have been low, and steady, for the past 3 years. Without a specific driving factor, this is leading some people to speculate that we are in the midst of a Toronto Real Estate Bubble.
The thing about bubbles is that just when you think they can’t go any higher, they do. Then at the next higher peak, everyone says that there is no way they can go higher. Then they do. Again. And again. It’s for this reason that it is almost impossible to know when a bubble will burst. It could have been easy to say that 2009′s real estate high was the peak. “10 years of growth. This must be the top”. You would have been wrong. Same applied to 2010 and now in 2011. Is this the top of the bubble? Will the market crash? Odds are the you are just as likely to be saying the same thing in 2012 and 2013.
However, the market will correct or “burst”…eventually. But some people have been predicting the market will crash since 2008. In 2008 they said “sell your home at the top”. “Don’t buy now”. “The market will crash from these highs.” Now in 2011, they are still saying the same thing. Even if the market “crashes” and the average price drops by $80,000, we would simply be at the same high that we had in 2008. RIght? The same point applies to the people predicting the housing bubble bursting in 2011 and say “don’t buy now”. Prices might rise in 2012, and 2013 and then drop back to 2011 prices.
Perhaps the best advise is to always analyse your own personal situation, make some calculations, and make a smart move. For example, is it smart to considering buying a $500,000 home in Toronto with $25,000 down at a variable interest rate? What if you are at the top of your budget and will just barely be able to make payments on that home? What if you can rent the same house for less than the interest costs of carrying that $475,000 mortgage?
Housing bubbles have burst in Ireland, USA, Britian, Spain, and many other countries. When those real estate bubbles burst, the people most affected were the ones with little equity and who bought more house than they could afford.
So we may or may not be experiencing a house bubble in Canada. This bubble may or may not burst. But perhaps the best advice is to try and avoid being one of those buyers who buy a home with little equity and who can barely afford a variable rate.
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