In the eyes of the average Toronto resident, our local real estate market is seen as overpriced and unaffordable. The media has also portrayed current home prices as unsustainable and due for a major price correction. But why then, do the values of homes in most of Toronto´s neighbourhoods continue to consistently increase?
With concerns mainly based on high Canadian household debt and disparities in rent vs. home value ratios, one could expect these fears to be true. But although valid, these are not the only factors affecting our market from either a local or international perspective.
We would need to further consider the following:
1. Weak Canadian Dollar: Toronto is a sought after real estate market for foreign buyers. These investors and/or end users seek a safe and stable economy in which to allocate their funds and shield their assets from potential international risks. They will aim to pursue investment properties that can hopefully generate a positive cash flow or use these homes for purely functional purposes, such as for housing their families. Be it one case or the other, the current exchange rate between the Canadian and American dollars are providing them with an extra incentive to buy locally. With a nominal 25% variation between currencies, our housing inventory presents itself to them at a discount.
2. Limited Inventory: Toronto experiences a so-called two-tier market, where both the house and condo segments have very unique characteristics. On one hand the condo market has a constant supply of new inventory, with a somewhat straightforward pricing structure. On the flip side, we have the freehold market with a significantly limited amount of houses available. Their prices, unlike the ones in the condo market, are mostly driven by the market´s short supply and high demand. As this trend continues and sought after locations increase in value, many buyers are priced out from buying a house in Toronto. They are inevitably forced to reconsider the condo market or venture further away into the GTA for a suitable home.
3. Lower Mortgage Rates: The Canadian economy has struggled recently with low oil prices and with a potential recession looming. In an effort to mitigate this risk, the Bank of Canada has cut rates twice so far this year. In doing so, it has not only focused in keeping the economy afloat, but also given prospective buyers an extra incentive for securing a home in the short term. Although a side effect, these low mortgage rates continue to be the true driving force behind pricing of our local real estate market.
With this rate scenario, more prospective buyers will be lured into seeking home ownership. In the short term, buyers will surely benefit from their increased purchase ability, but general access to low cost borrowed resources will most likely trigger the increase of home values once again.
It will only be when interest rates start to slowly increase, that we will actually see an adjustment in the upward trend of home prices. But with higher mortgage rates in play, lower home prices won´t necessarily mean that housing will be any more affordable then, than it is in Toronto today. At least not for buyers relying on borrowed resources.
In the end, current low rates will reflect affordability as a reference to a buyer´s access to a higher amount of funds, but not so in their ability to find fairly priced homes to call their own. Sellers will most likely continue to have the upper hand, at least for now.
Real Estate Sales Representative
RE/MAX Hallmark Realty Ltd.
Jose & Claudia
RE/MAX agents since 2001, avid negotiators and passionate for what we do. Buying, selling or renting your home with us has never been easier!