Kiyoko Fujimura
Buzzbuzzhome Corp.
February 12, 2010

You can’t read about Canadian real estate news right now without hearing the word bubble. While we’re still unsure whether or not a bubble is truly in our midst, Finance Minister Jim Flaherty is considering policy options to curb a bubble in the housing market. With Toronto housing prices up as much 19% (by some estimates) in one year, it seems like the market needs a readjustment.

Under consideration are two policies. First, an increase in the minimum down payment. Second, a decrease in the maximum length of mortgages (amortization period). The larger down payment or the increase in monthly payments associated with a decrease in the amortization period would leave some potential buyers unable to purchase. This, in turn, should lead to an easing of demand and cooling prices.

Peter Aceto, head of ING, said:

“There are some concerns because of what’s going on with real estate, in terms of rapidly increased property values and the theory they’re being fuelled by very low interest rates, that a bubble is being created similar to what happened in the U.S.”

Interest rates have sat at record-low’s for a while now triggering what some are considering a bubble. For further analysis of this trend see my previous blog post here.


Given Flaherty’s track record (I, of course, mean the Income Trust debacle), he’s very much capable of doing something drastic.

I’ve been a nervous wreck trying to decide if it’s the time to sell our condo. Real estate agent promos tell me I should sell now!

Future potential negatives for the Canadian, and in particular Toronto, real estate are:

  • Property taxes in Toronto are set to increase soon.
  • Then we have that stupid HST this summer – instead of 5% people will be paying 13% on closing and legal fees. Not to mention a reduction in disposable income due to all these extra levies and taxes.
  • Interest rates, supposed to increase this summer.

By the way, did you notice, they’re heavily advertising government tax relief programs? I see what they’re doing though! Instead of waiting for the income tax revenue (which would probably be lower this year), they will now take their share “on the spot”. You won’t have a choice but to pay.

They end up looking ‘kind of’ good because of the temporary income tax cuts, yet they get to eat their tax pie thanks to the HST.

I know I’m over-simplifying.

Ok, let’s assume they really raise the minimum downpayment or decrease the amortization period. Wouldn’t it mean that people would buy smaller, more affordable units?

What are the signs of a real estate bubble? Everyone says it’s a bubble, and sentiment-wise, I don’t think bubbles are that obvious, right? Or have people wisened up after the US real estate crash?

I need some input. If you were patient enough to read this, please take a minute to voice your opinion. Is Canadian real estate in a bubble? Why or why not? And what would happen if there was another “Flaherty massacre”?

This is from the UK:


And this is from the US:

a bit outdated

In Canada, we will probably have the same but with a bit of a delay.

I squint just thinking about another potential “double dip” in the economy. Lots of people around me are getting that glint of hope in their eyes again, work is starting to pick up. Would hate to see these “green shoots” 🙂 destroyed by the second wave of mortgage defaults.

Toronto Real Estate Sales UP 17%

GTA Realtors report December resale housing market data.

Greater Toronto Realtors reported 87,308 MLS® transactions in 2009 – a 17 per cent increase over 2008. This result included 5,541 sales in December. The 2009 result was in line with the healthy levels of sales experienced between 2004 and 2006, but lower than the record of 93,193 set in 2007.

Royal LePage forecasts market for 2010

Canadian real estate market to continue strong gains in the first half of 2010 with demand and supply finding balance in the second half of the year.

Canada’s residential real estate market is forecast to remain unusually strong through the first half of 2010 as economic conditions across the country improve and the stimulus impact of low interest rates continues to stoke demand, according to today’s Royal LePage House Price Survey and Market Survey Forecast. As confidence in the recovery builds in early 2010, increases in average house price levels and overall market activity are expected to continue. The gradual erosion of affordability driven by higher house prices and the expected late-year modest upward movement of interest rates, together with an improvement in listings supply as confidence improves, are expected to bring the market back into balance in the second half of the year, when home price increases are expected to moderate.

Source: Real Estate Intelligence

Canadians are generally quite conservative, so when the crisis hit in the States in 2008, we (collectively) just hunkered down and refused to sell or buy. Everything came to a stand-still. In addition to the American financial problems, we’ve had about 1.5 years of increasing interest rates. So, overall demand for properties had been dropping at that time.

Come summer 2009 however, and like my friends like to say, it was “the perfect storm” – low interest rates, pent up demand and realization that things aren’t that bad (at least yet, and at least in Canada).

Agents are still saying that there’s very little on the market in the Toronto core. Property values in some areas in Ontario have increased 40% (!, Pickering) in the last year. Not my area, thankfully. I’d be selling fast if that happened here. Sounds like a bubble.

I got a letter today from an agent specializing in downtown condo sales. The letter stated that there haven’t been any units for sale in our building in over 3 months! We constantly get calls from agents saying they have buyers interested in this area.

It may speak more about desirability of this particular building (certainly, gives me a warm and fuzzy feeling) but may also be an indication of the overall state of the market. Still not much for sale, at least downtown Toronto. Yes, there’s a lot of new developments but most aren’t due until summer 2011 and later. Not to mention the registration process, those units won’t go on sale until 2012.

Canada’s resale housing market for July posted the largest year-over-year gain in two years, with Western homebuyers leading the way, according to statistics released Friday by The Canadian Real Estate Association. For the first time on record, sales of existing homes climbed to more than 50,000 units for July…

Demand is rebounding sharply in some of Canada’s priciest housing markets, skewing the national average price upward, with the average price rising 7.6 per cent from one year ago to $326,832.

Source: Toronto Real Estate Blog

Toronto real-life anecdote:
A friend of mine sold a condo this July for quite a bit more than what he paid for it 2 years ago.

Seems now is the perfect storm of low interest rates, pent up demand from winter (people got scared by the crisis/recession talk and weren’t willing to sell at firesale prices) and still, very few listings, especially downtown.

Last night I had a nightmare: the banks sent out notices for everyone to pony up the balance of the mortgage. (I swear, I’m not making it up, I even woke up an hour early from worry.)

Apparently, the banks can really do it and in fact they had done it in the 80’s, though selectively. I never read that fine print of our mortgage, but I hear that this clause is there.

Anyway, so this happens, and obviously most people can’t pay what they owe, so they start listing their properties for sale and there’s a glut of properties and prices are dropping. How many people can really pay for real estate in cash? Very few. So the prices are dropping, and it’s pretty much impossible to sell the place and pay the bank so the only thing we can do is leave.

That scared the hell out of me because recently I started thinking of our condo ‘equity’ as part of our net worth. Not for lines of credit or whatever, just it’s nice to think that should we sell the place we’ll have an X amount of money in our pocket. If the above scenario plays out, the only money we’ll realistically have is the money in the bank.

It’s probably an unlikely scenario in Canada … at the moment (knock on wood), but always keep in mind that this is a fragile system, as we’re observing the U.S. real estate market.

This would be an easy way to completely decimate the middle class, by the way.

Moral of the story – having cash is nice, the more the better.

But I have another – waking – nightmare related to hoarding cash. Will tell all about it in part 2.