SHOULD WE WORRY ABOUT THE TORONTO HOUSING MARKET?
The Toronto housing market is the centre of our real estate universe. Everything gravitates from there. When it overheats we suffer. When it cools, we suffer more. So if you are worried about a potential housing ‘Bubble’ consider this.
The average Toronto house price 25 years ago was $230,000. Today it is $530,000. When we sell our homes we look at this number and say “We Made a gain of $300,000” but did we really? While we might receive a lawyer’s trust cheque for close to $230,000 we must also factor in the ‘costs’. Nevertheless, this represents an average appreciation of 3.4% per year which is well below the average annual rate of inflation.
Twenty five years ago the minimum down payment was 25% or $57,500 leaving a mortgage of $172,500. Mortgage rates were considerably higher way back then, so to estimate the typical interest paid, let’s assume an average rate of 5% and a 25 year amortization. The total interest cost is $128,500 which added to the purchase price yields a total cost of $358,500. The average “Net’ gain drops to 1.6% per year.
Compared to the stock market 1.6% a year is clearly a paltry return. But hold on, there’s more. We must also upgrade kitchens and bathrooms, replace windows and doors and paint every 7 to 8 years, oh and course the roof was probably replaced twice as well. And on and on it goes. So our real return ends up being quite negligible. So does it make any sense that house prices are out of control?
Housing (values) prices today are actually more affordable than 25 years ago. The affordability factor is all important for real estate markets to be balanced and healthy. Historically when they are, there is little pressure in the market and housing bubbles just don’t happen.
Look at the following example. The best 5 year fixed mortgage rate today is 3.39% meaning a mortgage payment of $1,961 per month. Mortgage rates in 1988 were around 12 per cent and the mortgage payment on the above example was $1,780 or just $181.00 more for a $530,000 purchase today. And of course incomes back then were significantly lower than they are today. So at today’s prices, housing is almost as affordable as it was 25 years ago.
Is there any logical reason why there could be another housing bubble in the next five years? The media thinks so. But don’t be fooled. The negative hype is as misleading as it can be.
The big difference today is that households carry considerably more high interest consumer debt than ever and herein lies ‘The Problem’.
It is most unfortunate that the federal government somehow blames house prices as ‘The Problem’ and continues to tighten up the mortgage market (to cool prices) while ignoring the fact that sinister credit card debt is the culprit. The housing numbers by themselves do not lie. Forget the media hype breathe easier knowing that current house prices are entirely sustainable.