The short answer to that question is “almost certainly yes”. 2013 is ending on a very strong note, with December prices about 10% higher than last year, and bidding wars in the Toronto area still in evidence despite the nasty weather and power outages. Look for the 2014 “spring” market to begin very soon after New Years, and for prices over the full year to move up by about 3%.
The long answer, though, includes a lot less certainty about the future after 2014.
Well regarded economists and economic sources around the world are warning that Canada’s real estate market is seriously overvalued and that we are due for a correction… someday. Almost three years ago, David Madani of Capital Economics predicted a correction of 25% based on Canada’s house price to household income ratio being much higher than historical norms. Since then, prices have continued their upward march; in his defense, Mr. Madani points out that the distinguished US economist Robert Shiller started predicting the US housing collapse in 2002. On the other hand, even a stopped clock is right twice a day.
In May of this year, the OECD said that Canada’s housing was the third most overvalued in the world, based on both price to income and price to rent ratios being much higher than historical norms. Then, earlier this month, Deutsche Bank made headlines by saying that Canada’s housing is the most overvalued in the world, based once again on price to income and price to rent ratios. Very dramatic.
Canadian economists, most notably Diana Petramala of TD Economics, have argued that these overvaluation estimates are greatly exaggerated, and that if price to income and price to rent ratios are properly understood, our market is only about 8% overvalued.
Nevertheless, there seems to be little doubt that Canada’s real estate prices are getting “toppish” and that we are eventually going to see a slowdown and at least a modest correction. Anyone close to the Toronto real estate market in particular would agree that it’s been more than a bit crazy over the past couple of years and, even just intuitively, the trend doesn’t seem sustainable.
The real question, of course, is “When will the slowdown begin?”. The answer has to do, mostly, with interest rates. Mortgage rates have been at all time lows for some time, even after the small upward spike last summer due to “tapering angst”. Low mortgage rates are the biggest single reason why prices continue to rise, since housing costs remain very affordable despite historically high price to income ratios.
After warning repeatedly over the past couple of years about rising interest rates soon to come, the consensus among economists is that the bank rate will not move up much, if at all, before 2015. That means that variable mortgage rates, which are tied to the bank rate, will be staying low for at least another year. Also, the US Federal Reserve has made it clear that their discount rate (similar to our bank rate) will remain close to zero until 2015.
Fixed mortgage rates are tied to the bond market, and it appears that these interest rates will also remain very low for the foreseeable future. The Federal Reserve has finally begun to taper its massive bond buying program, reducing their monthly purchases from $85 billion to $75 billion, but that still represents a large proportion of the Treasury Bond debt issued by the US government each month, so there will be little upward pressure on bond interest rates either.
The bottom line is that, barring some sort of economic catastrophe elsewhere in the world, we will have another strong year in the Toronto real estate market in 2014. The freehold detached/semi-detached/townhouse segment will do much better than the overbuilt condo market, but even condos will likely continue to hold their own, as the hot rental market will encourage investors to hold onto their units instead of dumping them onto an oversupplied condo market.
Beyond 2014, however, the crystal ball gets very murky.