Tuesday, May 30, 2017

Is the current slow-down a harbinger of Toronto real estate market’s bust?

According to Goldman Sachs (via http://business.financialpost.com), there is a 30% chance that Canada’s real estate market will experience a correction of 5% or more, after adjusting for inflation. The investment bank’s report names Canada the second most overvalued real estate market and puts it in third place among G-10 nations in terms of risk of a real estate price correction.
But is the current slow-down in the GTA market a harbinger of that magnitude of correction? According to zolo.ca, the average price for a property sold in Toronto from April 24 – May 22 was 0.1% lower than a month earlier. The housing inventory went up by 25% while the number of units sold was down 7% which suggests that the sellers are trying to cash in on the high prices but the buyers are no longer as active as before.
Average Sold Price in Toronto in 2017 (source: zolo.ca)

The market slow-down may be happening due to problems with subprime lender Home Capital and the tax on foreign buyers of real estate introduced in Ontario a month ago. The price slow-down may be temporary, as Vancouver’s case suggests, given their tax on foreign buyers slowed the market down only for a while, and price growth resumed as other fundamental factors remain unchanged.
The Bank of Canada will likely leave interest rates, a major factor for real estate values, unchanged well into 2018, despite the improving economic growth. Ian McGugan in his column in the Globe and Mail suggested that to avoid a real estate market bust, the government should take such drastic steps – implement a tax on the gains from the sale of principal residences, demand higher down payments and restrict people’s ability to use their retirement savings from RRSP accounts to buy a house. However, the author admits that any politician who would suggest anything like that would be slashed to shreds by mobs of hedge-clipper-wielding homeowners.
Ukrainian Credit Union Limited

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