Is Toronto housing overvalued?

Another year, another “Toronto Housing is Overvalued” newspaper article. This time the headline was due to Toronto being highlighted in UBS Global Real Estate Bubble Risk Index 2019. If you don’t know who UBS is, join the club. They are a Swiss bank (it is not lost on me that they have ‘BS’ in their name). Typically these international studies look at simplified measures like price-to-rent and price-to-income, but the results are only as good as the data they have, and their fundamental understanding of the market. I spend at least 10 hours a day looking at Toronto housing data, and I couldn’t tell you if Toronto is overvalued or not, so I’m pretty sure a Swiss banker has no idea either.

Resale single-family house prices dropped pretty significantly in the second half of 2017, and there will be another price decline in the future, but be wary of the folks who claim to have predicted it.

There will be people that say, “I told you so, prices don’t go up forever.” They are correct ­— pricing doesn’t always go up. However, in my search for the other side of the story, I came across an opinion piece in a major newspaper from early 2013. The author of the piece suggests renting for a while because prices are overvalued, and you might be able to buy in at a lower price in the near future. The average price of a resale home in the Greater Toronto Area (GTA) at the time that article was written was $540,000 and despite the 2017/2018 decline, the average GTA price in August 2019 was approximately $793,000. I wonder if that author is still waiting?

Toronto is a major global market that attracts new immigrants on a daily basis. There is no glut of supply, in fact, we’re severely undersupplying the market (see the uproar over Airbnb reducing rental supply). Because of those two factors, we can suffer through periods of speculative purchasing behaviour by investors looking to make a quick buck ­— scarcity leads to speculation, regardless of the asset. These factors can lead to house price volatility, which is extremely scary for first-time buyers. Unfortunately, it is impossible to time the market, and if you desperately want to own your own home, you’ll have to take some risks. Keep in mind, the higher the year-over-year price growth, the higher the risk (and higher the potential reward).

All this being said, it doesn’t mean we ignore all of the warning signs and negative reports. We just need to understand why the data is moving in a certain direction before we ring the alarm bells on overvaluation. It is important to remember that the amount of land in Toronto is fixed, and the population continues to grow. Therefore, the only way to accommodate more people is to build tall towers. Tall concrete towers are expensive to build, and the price (or rent) per-square-foot for these suites are much higher than suburban wood-frame housing construction. As Millennials decide they want urban living and reject the back-breaking commuter lifestyle (despite the higher prices per-foot in central, transit-friendly areas), this impacts the historical valuation metrics used in these ubiquitous international housing reports.

My advice to anyone looking to buy is make sure the home is somewhere you can see yourself living for five years or more, ensure that the price is well within your budget, and prepare yourself financially (and mentally) for changes in borrowing costs and house prices. If you can confidently check off all those boxes, you’ll be fine. Do your own research, and ask a lot of questions. Good luck.