Real Estate Values in the Greater Toronto Area are Unrealistic

(Last Updated On: March 19, 2017)

I was just reading an article in The Globe Real Estate section of the December 16, 2016 edition of The Globe and Mail. It highlights how real estate values in the Greater Toronto Area are unrealistic. The article, entitled “Shock Market”, references the real estate market in a municipality located just a short drive from where I live.

In early 2016, properties were selling for $200,000 more than asking. By May 2016, properties listed in the $1.4 Million range were selling for $500,000 above asking. In some exceptional instances, properties in this price range were selling for $1 Million more than the asking price.

Recently, a house built in the 1970s was listed for sale. The 1 acre property is in a more traditional neighborhood. It has a swooping driveway and a stream running along the property.

It was listed for $1.489 Million, drew 11 offers, and sold for $1.92 Million.

There were:

  • 2 “bully” offers within 6 hours of the house going on the market;
  • 4 after 24 hours;
  • 11 by the deadline the owners had set for the third day subsequent to listing.

According to local real estate professionals, properties are being snapped up at a torrid pace because prospective buyers want to get into the market before prices shoot up further. This coincides with people who want to move up or downsize but are reluctant to sell for fear of being unable to find a new property.

In addition, many people are reluctant to pick up and move when they start to analyze the high cost of moving (land transfer taxes, real estate commissions, moving costs, legal fees, and in some cases the cost of fixing up the new property to their personal tastes). This puts a damper on the supply side of the market.

After reading this article, I happened to read The Bank of Canada’s Financial System Review – December 2016. Look at 10 second videos for each city on this website which reflects changes in the mortgage loan-to-income ratios from Q4 2013 – Q3 2016. You will see just how dramatically households have become indebted in the cities of Vancouver, Toronto, and Calgary. The data includes all newly originated high-ratio residential mortgages where the amount of the loan exceeds 80% of the value of the home. The changes are alarming!

In Toronto, for example, in the 3rd quarter of 2016, almost half of the high-ratio mortgages originated had loan-to-income ratios that exceeded 450% which represents a 41% increase from a year earlier.

These high loan-to-income mortgages are not confined solely to Toronto. Nearby cities such as Oshawa and Hamilton saw the proportion of high-ratio mortgages with loan-to-income ratios exceeding 450% more than double over the past three years to 25%.

People are stretching themselves when mortgage rates are 2.14% for 2 year terms and 2.49% for 5 year terms. What will happen if rates are a few percentage points higher come renewal time? What if lenders will not renew mortgages unless homeowners infuse additional equity?

I don’t mean to be pessimistic but this doesn’t sound good. In Canada, we went through a period in the early 1980s and early 1990s when real estate values plummeted.

The US started to experience market weakness in 2005 – 2006 and then the real estate market crumbled in 2007. This happened even though economist Robert Shiller had warned about the housing bubble in the second edition of his book Irrational Exuberance.

Just because the US went through a real estate meltdown and Canada did not does not mean we are immune from one. In fact, Canadian households currently owe the most out of all the G7 countries!


Canadian Households Owe the Most in G7
Canadian Households Owe the Most in G7

It looks as if people just do not learn from past mistakes. Here’s hoping we do not experience a real estate market meltdown!