Anyone who knows me and reads this is going to think I’ve lost the plot. Stay with me. I have good reason for writing this article.
Before I start, let me first get this out of the way: I (still) think Toronto real estate is outrageously priced. According to Zolo, the average warm pile of bricks in TO sold for $982,189. This is 18.6% higher than last year! The market is tight and homes are on the market for an average of 16 days.
Over the decade ending 2018, the performance of the Canadian housing market was a rarity across the world (chart below). It’s only fair to question whether buying now is a stupid idea.
The market is hot and the current pace of price increases seems unsustainable. Everyone knows how ridiculous TO housing prices are, yet they continue to buy. The market stinks like speculative frenzy. It has for years – but this is the bubble that refuses to pop.
It is quite possible that Toronto real estate experiences a serious correction. It has happened before. There was a moderate correction starting April 2017, with prices recovering since. There was also a deep housing recession in Toronto throughout the 1990s. As you can see in the chart below, Toronto real estate prices took about a decade to break even after 1989. Many people have been waiting years for a ’90s-like correction, missing out on thousands of dollars of upside. Some day, right? Right???
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Is a 1990s-style correction imminent?
According to the chart below, mortgage lending standards in Canada are strong. High quality lending standards means fewer defaults, fewer forced sales and less supply. Of course, there is some pro-cyclicality to it all, as economic strength supports incomes – the foundation underpinning lending standards. What happens to lending standards when the economy weakens?
Will there be a correction in the near future, perhaps triggered by a recession? There are smart people on either side of the argument. Let’s put the debate about a near term correction to the side for now. That’s not the point of this article.
The long view
If you’re a 30 year old buyer, maybe you shouldn’t be overly concerned with what happens in 2, 5…even 10 years. After all, a 30 year old buyer is looking to own for the next 30-50+ years. That’s plenty of time to ride out a correction. Even a correction that takes a decade to recover – like during the 1990s – is manageable with a 50 year time horizon, assuming you can keep up with the payments and aren’t forced to sell in a liquidation scenario.
Is Toronto a good place to buy if you have a long-enough time horizon?
For this article, let’s ignore the craziness for a minute and explore the long-term fundamental support for Toronto real estate.
1) Young(ish) people buy homes as they establish careers and start families. Canada’s demographic trends suggest the home-buying group should grow at a solid rate during the ’20s. This provides a tailwind for Canadian housing demand.
2) Canada remains one of the most attractive destinations for immigrants. Migration coupled with organic population growth makes Canada the fastest growing country in the OECD. New immigrants account for the vast majority of this growth.
This is very supportive to the housing market. Many immigrant populations see home ownership as essential to personal freedom and security. They work hard and do whatever it takes to buy and keep a home. Therefore, Canada’s population growth trend is bullish for real estate.
3) The immigrants coming to Canada are highly educated and ready to work. Most require little government assistance and arrive ready to spend and invest. What’s one of the first things they invest in? A place to raise their families.
4) Everyone that comes to Canada wants to live in Toronto, Montreal or Vancouver. Not all end up in these places – as they discover many opportunities outside of these cities – but the concentration is significant. Toronto in particular contributes almost 20% to Canada’s GDP, so you can see why it is a magnet for immigration. Moreover, Toronto is very ethnically diverse and has built in multi-cultural support..
5) With all this fresh, hungry talent Toronto will soon be second only to San Francisco as a North American technology hub. This trend is self reinforcing, as talent attracts employers and vice versa. Toronto is also Canada’s finance hub. The finance and technology industries will drive Toronto’s economic prospects for decades, supporting Toronto house prices.
6) Finally, although Toronto residents might not see this, the cost to live downtown is still cheaper than many other places around the world. Is Toronto equivalent to London or Hong Kong? Of course not. Not yet. But with ample economic opportunities and solid prospects, comparatively lower cost of living should continue to attract highly educated, workforce ready immigrants from around the world. This again supports Toronto’s real estate market.