The Toronto housing bubble: Turns out, it's just a myth

TorontoMagnifying glass

Remember the Toronto housing bubble? The one that was going to topple the entire Canadian housing market and led to a series of new restrictions on home loans? Funny story – it turns out, the bubble never really existed in the first place.

A new report from the Royal Bank of Canada indicated that, rather than being a wildly out of control market locked in a death-spiral hurtling toward imminent doom, the Toronto condo rush was actually a reasonable case of supply and demand.

"Based on market activity to date, the total number of new housing units (condos, single-family homes, and others) completed by builders has not exceeded the [Greater Toronto Area]'s demographic requirements and is unlikely to do so by any significant magnitude in the next few years," according to the report. "The strong presence of investors in the condo market raises the risk of a mismatch among the types of units supplied and ultimately demanded for occupancy, but, at this point, we do not equate this risk with a bubble."

In fact, many of the concerns regarding the Toronto market appear to have been overblown, RBC suggested:

• Estimated population growth in Toronto is roughly 100,000 people per year, which translates to about 38,000 new housing units per year
• Builders are expected to complete roughly 25,000 units per year over the next two or three years, but this rate is at the top of their current capacity
• Despite fears that the market would be heavily skewed by investors, the report found most projects only had a 15 to 40 percent investor involvement, and many of those investors were using the property to generate rental income, not property "flipping"

As the new mortgage rules kick into effect, RBC said there will be an overall easing of housing prices in the area, as well. Prices in this once-heated market could start cooling down by between 2 and 7 percent over the next couple of years.

Average Canadian home prices
Despite the new mortgage rules, the continued presence of low mortgage rates in Canada has helped the overall market stay strong. The most recent "House Price Survey and Market Survey Forecast" from Royal LePage found that, on the whole, home prices across the country rose between 3.3 percent (for condos) and 5.5 percent (for detached bungalows) in the second quarter of this year compared to the same period in 2011. All the growth wasn't just concentrated in the city's big cities, either:

"We have had three years of solid house price appreciation in almost all regions of the country," said Phil Soper, president and CEO of Royal LePage Real Estate Services. "Confidence in Canada's real estate market is sound, but home prices cannot grow faster than salaries and the underlying economy indefinitely. Some regions have reached or perhaps even exceeded the current upper level of price resistance as buyers have embraced an era of historically low mortgage rates."

The results of the survey showed a wide price variance in different regions on the country:

• St. John's on the eastern edge of Newfoundland saw the strongest price growth, with detached bungalows rising 12.3 percent and standard condos rising 9.4 percent
• Only Regina outpaced St. John's in terms of condo prices, with those properties climbing 10.2 percent, though detached bungalows in the area only saw a 2.4 percent rise
• In New Brunswick, Saint John saw the sharpest home price declines, with detached bungalows shedding 2.7 percent of their worth, and condos dropping by 8.1 percent

What's going on with the housing market in your area of Canada?

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