Unless you’re a little too young to remember, you probably witnessed 2 extravagant market bubbles in both 2000 and 2008. If you are too young, and are at least somewhat interested in economics, you’ve at least probably heard of them.
These bubbles are often what happens when the price of something becomes so exorbitantly high that eventually it will burst. There was a lot more behind the 2008 financial crisis than this, but that is a story for another time.
Real estate prices are sky high all over Canada right now, so much so that new regulations and rules (like OSFI’s stress test) have come into play to try and cool it down. But two areas in particular, Toronto and Vancouver, seem to be the worst of them all.
The average price of a detached home in Toronto is $1.35 million. I mean, it is absolutely insane. Here in Edmonton, I live in a 2000 square foot home with all the bells and whistles. Upgraded hardwood, air conditioning, heated triple car garage. The cost? $460 000.
Buying in Toronto in 2019 could be a grave mistake
In an age of rising interest rates and generally poor economic conditions, we’ve got to be very, very careful purchasing real estate, especially grossly overpriced real estate. If the Bank of Canada keeps raising interest rates, it will eventually price most buyers out of these homes. And, as you probably know, the only thing driving the real estate market is supply and demand. If the buyers drop, inevitably the prices will as well.
Buying a home in Toronto in 2019 may come with some pretty devastating side effects. Real estate is supposed to be one those “guaranteed” investments. A highly leveraged investment that gives you the ability to parlay 5% down into 20 times the purchasing power. The house generally increases in value enough to outperform inflation and then some, and in the case of houses in the early 2000’s, you can literally hit the jackpot.
But what happens when houses go down? Well, you’ve now gone from an asset to a liability. Paying a ton of interest on a highly leveraged investment when that investment is going to make you money in the end isn’t necessarily a bad thing. But if housing prices drop 10% because of any one of the things that are bound to hit the Canadian housing market, you’re now paying interest on an investment that isn’t even worth what you paid for.
In the natural cycle of a housing market, this is sometimes o.k to do
Houses go up and down all the time. There may be 2-3 year lulls where the economy slumps, prices go down and homeowners generally have to wait it out to get what they want for their home. But, if you can look at today’s prices and think they have anywhere else to go but down, I’ve got a bridge to sell you.
The problem many prospective Toronto buyers are facing now is the fact that detached houses are selling for so much, those who have turned to buying a condo and have waited for too long are seeing condominium prices skyrocket in recent times. So, now those who spend the money to buy a detached dwelling may see prices start to fade away or stall at the very least, and those who are looking to get into a “cheaper” condominium are being forced to pay more.
It’s an endless cycle of supply and demand. But for the large majority of Canadians, the prices of these houses are going up substantially faster than their wages.
And at some point, something’s got to give
Consider renting, or moving to a lower demand area
I know it’s hard to just pack up and leave. Some people love the area they live in and really don’t want to change that. But if you’re goal is to truly become a homeowner one day, you may have to look elsewhere.
Or, there is the option of renting. But even then, rental prices in places like Toronto and Vancouver are simply ridiculous. This post is a little out dated, and it may have gotten worse, but check out the average cost to rent in a Canadian city. Toronto is by far the most expensive, coming in at double the price of a place like Calgary, which in my honest opinion is one of the most beautiful cities to live in in the country.
The reasoning for these high rental prices? Well, it’s simply because of the cost of the home. If you’re paying a million dollars for a home in Toronto, you’re probably paying over $3000 just for your mortgage. And that’s with 20% down! Renting makes no sense unless you are at least covering the mortgage payment.
Overall, I’d avoid buying in these cities like the plague
It’s been coined “the first investment every person should make.” That being buying a home. But, that doesn’t mean you should be rushing to the bank to overpay for a home just to say you did. Rent until this market inevitably cools down, more to to an area where you aren’t going to pay an arm and a leg for a 700 square foot condo.
The same methodology must be put into place when buying a home as you would buying a stock. If the price isn’t right, you simply don’t purchase. Purchasing a home in Toronto or Vancouver right now coupled with an inevitable bubble burst of the real estate markets in these areas could leave homeowners having to hold on to their properties for years just to recover to their initial purchase price.
You’re supposed to make money on your home, not hang on for dear life just to break even.