Toronto Real Estate Prices Are Not Crazy

(They’re just misunderstood.)

Kathleen Henry knows as well as anyone what it’s like to contend with a red-hot seller’s market as a would-be homebuyer.

“If you’re not prepared to cut the [deposit] cheque as soon as you cross the threshold – even before you cross the threshold – it’s gone. We’ve had that happen,” says Henry, a 67-year-old writer who’s been searching for months for a condominium to share with her wife Kim, a lawyer.

They both still work – “Retirement isn’t looming, but it’s inevitable,” Henry says – but they’re looking to downsize into a condominium that will be easier to manage as they get older. They want the home to be located in a nice area not right downtown, but central. They’d prefer that everything to be on one level and for the parking to be inside the same building. As for bedrooms, two would be acceptable; two-plus-den is a preferable but vanishing possibility.

One might think Henry and her wife could land a place like that for a seven-figure budget, but no luck so far. “We would prefer not to go over a million dollars. But there’s one that’s on the market now that has virtually everything we want,” Henry says – except a den-slash-office. And even then, the asking price is $1.2 million – with a “US” in front of the dollar sign.

Toronto readers might have expected this to be a story of local home prices gone wild – another breathless tale of rock ’em, sock ’em bidding wars and broken dreams, of the kind that certain publications thrive on. But in fact Henry lives in Greater Boston, just one of many cities around the world that are much like Toronto in many ways, and have Toronto-like housing woes.

You can’t live in Canada’s largest city without hearing the refrain parroted everywhere from parties to preschool pickup: Toronto’s house prices are “crazy” (or at least dangerously overvalued), we must be living in a bubble, and sooner or later (probably sooner), we’re in for a crash.

If there’s any caveat to soften all of that, it’s usually: “At least it’s not as bad as Vancouver.”

Yet there’s a case to be made that the intensity of Toronto’s housing market is really quite normal by world standards. To economists who closely – rather than anecdotally – follow the situation, Toronto’s house prices are downright sensible, given the other variables at play.

If anything, the cost of homes has plenty of room to grow upwards, if we compare the real estate market to other, similar major cities.

To see what’s wrong about the water cooler tales of Toronto real estate woes get the picture so wrong, let’s pick it apart piece by piece.



Well, compared to what? Compared to what they were last year, or 10 years ago, or 30? Yes, although that’s the case pretty much anywhere in the world. Within Canada, Toronto’s home prices are growing faster than average, but depending on what time frame you’re looking at, Vancouver and other British Columbia locales are peeling away even faster (see the Canadian Real Estate Association’s chart at the bottom of this page). Toronto house prices may look absurd in light of the prices of yesteryear, but that’s fairly common in real estate.

Rather than the past, let’s look elsewhere in Canada for a city to compare Toronto with. It’s true that prices for resale homes are certainly going to look high in the Toronto area. But Toronto is, frankly, a much larger city than every other place except Montreal (where, granted, prices are lower – partially for historic reasons). That leaves Vancouver. And if prices in Toronto are “crazy,” Vancouver’s are entirely detached from reality.

Most Canadians are aware that Vancouver homes are expensive – even more so than Toronto’s. Fewer are probably aware that the gap has been rapidly widening. For anyone who hasn’t checked in a few years, the decoupling between the two cities has led to Vancouver’s houses reaching lofty sums that typically leave Toronto’s chattering classes momentarily speechless (perhaps you spotted this dumpy little number through its many sharings online?).

Around the same time as the average price of a detached home in Vancouver hit $2.2 million last September (to 416 Toronto’s paltry $1.05 million), The Canadian Mortgage and Housing Corporation released a report of comparator homes – an attempt to compare apples to apples between the two cities. As The Globe and Mail reported, the comparables were anything but: Sure, a four-bedroom in Toronto’s tony Forest Hill will set you back $1.85-million, but a similar house in Vancouver costs a cool $3.17 million. It’s not even close.


The same goes if we compare Toronto other big cities in rich countries and regions – especially English-speaking locales that share a similar cultural bias toward home ownership. According to Demographia’s annual housing affordability report for 2016, Toronto’s median home price of about $530,000 (all figures in Canadian dollars) is in the worst third of 87 cities studied in terms affordability. But it’s essentially the same as in Greater New York ($528,000), and lower than prices in a slew of major world cities, including not just Boston ($540,000), but also London ($746,000) and Hong Kong ($921,000). Toronto’s median house is also more affordable than four major cities in California: San Diego ($714,000), Los Angeles ($554,000), San Francisco ($1.04 million) and San Jose ($1.24 million). According to Demographia, the median Toronto home also costs less than in a trio of Australian locales: Perth ($567,000), Melbourne ($701,000) and Sydney ($991,000).


To purchase the median home, how many years’ worth of the local average household income would you have to spend?

When Demographia compared these prices against the average local income to come up with a crude measure for affordability – that is, how many years of an average household’s salary would it take to buy the median home? – Toronto does poorly, but not as poorly as most of the cities mentioned above.

So, yes, Toronto’s real estate is expensive. You could even compare the prices to local incomes and make a data-based argument that Toronto is more expensive than average for a big, relatively liveable city. But you can’t argue that the prices are ridiculous.

The lesson: All over the world, cities that offer decent jobs and are desirable places to live have expensive housing. Coming to grips with this fact is just part of Toronto’s growing pains in becoming a global city. (And given that Torontonians have been making the same gripes for some three decades or more, it might be time to finally play it cool and get used to pricey homes as a fact of life.)


Does all of this international comparison give us enough evidence to say house prices in Toronto are reasonable? Not so fast, says Will Dunning, independent consultant in the housing market and the president of the Canadian Association of Accredited Mortgage Professionals.

“That kind of argument can get you into trouble. Comparing cities is not an easy thing to do, and do correctly,” Dunning says. “I’d much rather to stick to a more fundamental kind of analysis [involving] employment and affordability.” When it comes to Toronot, plenty of economists believe those fundamentals are sound.


Dunning says the actual data burst the whole idea of a bubble. He says a sober economic analysis of the situation would lead us to conclude “that the underlying conditions have caused this outcome, and the outcome makes sense given the fundamentals we have.” If we were in a bubble, speculation would be the main factor pushing house prices higher, which is what happened in the United States in the 2000s. According to Dunning’s analysis, the situation is different in Canada’s big cities today: According to his data, what’s happening is wages continue to rise while interest rates hover around record lows, which makes mortgage rates affordable even as prices rise.

“The perception out there that is generated by some of these simplistic analyses is that housing is overvalued.”

Meanwhile, BMO Nesbitt Burns chief economist Doug Porter gleefully pointed out that the bubble brigade has been holding its breath in vain for years waiting for the market to pop,  repeatedly predicting a crash every year since 2008 only to fail to see it materialize. In a recent note poking Toronto’s real estate bears, Porter teased: “Hey, forecasting is hard.”

Helmut Pastrick, chief economist for the Vancouver-based Central 1 Credit Union and a frequent media commentator on the Canadian housing market, says bearish analyses that show Toronto in a bubble are drawing conclusions from economic metrics that are conveniently easy to calculate but can give a misleading impression. The ratio between price and income is one measure that gets cited often. Another one is the ratio between prices and rent.

“Determining the fundamental value of any asset is complex, and housing is probably more complex than most assets,” Pastrick says, but that’s no excuse for not trying to capture that complexity.

The true picture of what’s going on in the resale housing market, Pastrick believes, “is far more complex than simply looking at current price-to-income or price-to-rent ratios in relation to some sort of long-term average or value.” Yet that’s just how The Economist and the OECD look at the issue, and their conclusion is that the Canadian real estate market is overheating. “The perception out there that is generated by some of these simplistic analyses … is that housing is overvalued.”


Pastrick and other housing market watchers advocate instead the “user cost model,” which attempts to take into account all the factors that real-life buyers consider when deciding whether or not to buy a home: the typical cost of servicing a mortgage, including interest rate and typical loan conditions; depreciation on buildings; typical down payment; annual cost of repairs and maintenance; property taxes. The whole host of headaches and benefits of home ownership, in other words.

The most important factor, “probably the swing variable,” says Pastrick, is buyer expectations. If would-be homeowners think home prices will rise in the future – as many rational buyers would assume in Toronto, given that they’ve pretty much always risen in the past – then they are more likely to put down a deposit and make the jump.

Advocates of the user cost model say it draws a fuller, truer picture of the real question facing the would-be homeowner: How much does it really cost to buy a home, and is it worth it?

“If we were to put ourselves in 2045 and look back at 2015, we’d probably say, ‘Boy, those prices are cheap. They’re really low.”

Dunning, who shares Pastrick’s preference for realistically complex models for forecasting the housing market, says the data “shows that affordability is not worse than it’s been over time. The level of house prices we have is consistent with the income and interest rates we’ve had. I don’t see a problem there,” Dunning says. Prices have indeed risen, but so have incomes, and interest rates have stayed low for most of this century so far.

As long enough people think buying is worth it, the market continues to swell. And that, Pastrick says, is what’s happening in Toronto – now and for the foreseeable future.

“If we were to put ourselves in 2045 and look back at 2015, we’d probably say, ‘Boy, those prices are cheap. They’re really low,’ ” says Pastrick, who advises that it’s still an auspicious time for first-time buyers to enter the market, before they get priced out.

A case of you snooze, you lose? “Something like that,” Pastrick says.



No one knows the future, but Will Dunning has an idea what 2016 and 2017 will not bring. The market could be rattled if interest rates spike, making mortgage payments suddenly higher. But, he says, “I don’t think it’s very likely.” (So far in 2016 the Bank of Canada has stuck to the floor-scraping 0.5% overnight rate it established last summer.)

Meanwhile, predictions of a crash continue. In its fourth-quarter housing market report last year, the Canadian Mortgage and Housing Corporation added its official voice to the chorus of alarm, singling out Toronto as exhibiting “strong evidence of problematic conditions,” including overvaluation.

“The continued rise in house prices has not been matched by growth in economic and demographic fundamentals giving rise to strong evidence of overvaluation,” says the CMHC report, which notes that its evaluation criteria are designed to sniff out conditions “such as the house price bubble Toronto experienced in the late 1980s and early 1990s.”


A bubble happens when prices depart from the economic fundamentals, and that’s not what’s happening in Toronto, says Jason Mercer, director of market analysis for the Toronto Real Estate Board. Toronto households are still spending about the same proportion of their incomes on housing as they did 15 years ago.

“Just looking at price on its own and how much it’s grown … doesn’t really speak to how people are making that purchase. What’s more relevant is what share of the average household’s income is going toward mortgage principal and interest, property taxes and utilities,” Mercer says.

Once again, while the absolute price of a Toronto house has been rising, so have incomes, and meanwhile mortgage rates are rock-bottom – 2% for a five-year variable, or even lower for buyers who shop around at credit unions. It all kind of evens out, such that new homeowners are spending a similar portion of their income on housing as they have for years – they’ve hovered in the mid-30-percents range, Mercer says. And households are still below (if not too far below) the 39% the Canadian Mortgage and Housing Corporation identified as the danger point back in 2012.

“The housing cycle, the economic cycle, is alive and well.”

In short, home prices are rising but many people can still afford them.

Meanwhile, for anyone worrying that the income-to-price ratio will slip – prompting a slowdown in first home purchases, and thus a housing crash will pull the region or country into recession – it won’t happen, Pastrick says. He tut-tuts what he calls the “misconception” that housing crashes cause recessions. He is often vocal in the press insisting that it happens the other way around: recessions are caused by other factors, and then they pull down the housing market.

And like most economists, Pastrick speaks of economic recessions as a force of nature: unstoppable and only partially predictable. The next one will come, and house prices could temporarily fall – even Toronto house prices.

“The housing cycle, the economic cycle, is alive and well, and there will be a time when the up cycle will come to an end and we’ll be in a down phase,” Pastrick says. But in all likelihood, the circle will continue to turn, and prices will rise again … and rise … and rise.


What happens when prices keep going up in a big city, decade after decade? Nervous Torontonians can look elsewhere in the world for a forecast. Potential buyers get priced out of the market and become lifelong renters, as is common in New York, Hong Kong and Europe. Those who can mount the property ladder are forced to consider the view from a rung or two lower, as the market forces their expectations downwards.

It’s true that certain factors might cause Toronto house prices to plateau or even drop for a few years: For example, retiring baby boomers could cash in their equity and move en masse to more affordable locales. Or a government-led affordable housing strategy could actually work. Or some sort of social or technological change – one that’s impossible to see from our vantage point – causes disruption in the real estate market.

(By the same token, circumstances could push trends in the other direction: What if all those overseas investors parking their fortunes in London and Vancouver real estate swivel their attentions toward the Six?)

The point is that Toronto’s house prices may be high but they will likely keep getting higher as long as the city keeps growing in size and importance. Kathleen Henry’s Boston area house hunt, then, could be but a window into Toronto’s near future. Readers may not want to hear that at last count, she and her wife had looked at 30 properties (she has kept track) and made two failed bids. In one heartbreaking case, the couple turned down an otherwise appealing property because the building’s fine print would have barred their miniature dachshund, Cooper.

Henry wasn’t optimistic, when last she spoke with Billy, about her prospects of landing the latest target – that two-bedroom condo going for US$1.2 million that nevertheless costs a little too much and offers too little space.

“Two years ago we wouldn’t have looked at it, for a lot of reasons. But we’re going to go,” Henry says. She sighs over the phone. “It’s crazy here.”

Toronto Real Estate Prices Are Not Crazy
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