The gravity-defying rise in GTA prices continued last month, with average prices 11% higher than last May, and detached homes now averaging $1.15 million, fully 15% higher than when they broke through the $1 million mark just three months ago.
The shortage of homes for sale continues to fuel the market. The inventory of home for sale rose slightly from April to May, but is still very deep in sellers’ market territory. We can expect the normal seasonal slowdown beginning in June and continuing until late August, but even so this year’s summer market will probably be much stronger than in previous years.
Clearly this trend cannot continue indefinitely, if only because prices are rising much more quickly than incomes, and so falling affordability will work more and more against increasing prices as time goes by. So, the real questions are: when will the market slow down; and will we enjoy the fabled (and oh so elusive) soft landing, or will we suffer a sharp correction?
As to timing, at the risk of seeming flippant, I’d have to say “who knows?” Some sort of trigger will be needed to initiate a slowdown or correction and, while there are no shortage of obvious candidates around the world (not to mention the possibility of a completely unanticipated ‘black swan’ event), there is no way to predict what the trigger will be and when it will occur. The only thing that seems clear is that the trigger will probably not come from within Canada. Based on the latest announcement from the Bank of Canada, it would seem that fixed mortgage rates are more likely to decrease than increase over the rest of this year, and there is little outside an increase in mortgage rates that could slow our market down.
As to whether we will see a gentle leveling off or a burst bubble, it seems to me that this depends completely on the nature of the triggering event. There is wide disagreement on the extent to which our real estate market is overvalued – from over 60% (Deutsche Bank), to about 20% (IMF & Bank of Canada), to about 4% (CMHC). Donald Trump’s Executive VP, George Ross, recently said that he believes Canada’s real estate is actually undervalued! So, no help from the experts as to how much of a bubble we actually have and therefore how far down prices might go. On the other hand, there are financial bubbles elsewhere in the world (e.g., China’s real estate market) that could burst at any time, and Canada will certainly feel the the effects of such a financial tsunami regardless of how theoretically our market is over- or under-valued.
The bottom line is that our booming market will end… sometime… and prices will either level off, drop modestly or fall steeply. Sorry, anyone who thinks they know when it will happen and how bad it might get is displaying more than a little hubris.