As anyone with even the most causal interest in real estate knows, much ink has been spilled on the topic of the "bubble". Perhaps the first point of understanding is the difference between a "boom" and a "bubble" - terms that are used well beyond real estate, including the technology sector and stock market performance. Essentially, a market boom is when the economy is growing at a notable rate and this growth is well-supported. A bubble, on the other hand, is an economic cycle defined by rapid - and unwarranted - escalation of asset prices driven by exuberant market behaviour, followed by a contraction.
Why do bubbles grow then burst? Both economic and social factors play a role. In the case of 1989, economic drivers of the bubble included low interest rates and low unemployment. The key social factors were a large inflow of immigrants and changes in workforce demographics. Remember, in the late 1970s/early 1980s, many women newly entered the labour market which contributed a substantial boost to many household incomes by the end of the decade. While the social trend of more two-income families could have fuelled sustainable market growth, Canadian Census data show a significant rise of lone-parent families between 1986 and 1996, speaking to a rising divorce rate. Over time, changing family structure was both an economic driver for the hot housing market and a social factor underlying the bubble's burst.
Many analysts read today's situation as similar to that of 1989. While markets do correct themselves, or are purposefully corrected through rate changes and/or public policy, one indicator that we may be repeating history are mortgage payments as a percentage of income. When housing prices rise so high as to break with market fundamentals, we have a problem.
The emoji graph below is taken from a brief, yet comprehensive, Maclean's article in April which we urge readers to check out. Tracing the views of six players in the Canadian housing market since 2009, the interactive graph tells a story of emotional change - from calm, to cautious, to near frantic.
What do we hope for? While we encourage a strong housing market as crucial to a strong national economy, we want to see a reasonable approach taken by our economic and political leaders that provides a "soft landing" and eases Torontonians out of bubble-bursting anxiety.
Following the Ontario government's introduction of a 15% foreign buyer's tax on April 20, house sales in the GTA did fall by 26% compared with the same period last year. That said, the foreign-buyer's tax is not the driving causal factor as foreign buyers were not a large enough part of the market to cause such a significant decline in home sales. Domestic buyers - namely those investing in income-generating properties to rent or flip - have a role to play, as many are treading cautiously.
Whatever comes next, be sure you contact us to Stay Savvy.
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