Bill John­ston – National Post

In August, there were 6,232 Mul­ti­ple List­ing Ser­vice® (MLS®) trans­ac­tions through the Toronto Real Estate Board, which rep­re­sented a 22% decline com­pared to August of 2009. The aver­age price for these trans­ac­tions was $411,012 – up 6% com­pared to last year. Through the first eight months of the year, sales were up by 8% and the aver­age sell­ing price was up by 11% com­pared to the Jan­u­ary to August period in 2009.

Since May, sales have been lower than last year’s results. At the same time, the aver­age sell­ing price has con­tin­ued to grow. This has led some indi­vid­u­als and orga­ni­za­tions to sug­gest that a hous­ing price bub­ble has emerged and that it is ready to pop at any time. An oft cited argu­ment goes some­thing like this:

“Aver­age sell­ing prices have been ris­ing above the rate of infla­tion for the bet­ter part of the last decade, so we should expect the aver­age sell­ing price to fall.”

I asked Jason Mer­cer, TREB’s Senior Man­ager of Mar­ket Analy­sis to com­ment on whether or not house prices are cur­rently in a bub­ble in the GTA. Here are some inter­est­ing points he put forth:

“Many recent analy­ses address­ing hous­ing mar­kets in Canada have not fully exam­ined the inter­play between home prices, bor­row­ing costs and incomes. In the past, home prices have dropped markedly when a house­hold earn­ing an aver­age income could no longer afford to carry a mort­gage on an aver­age priced home.”

“As a rule of thumb, lenders will often con­sider a mort­gage afford­able if the annual prin­ci­pal and inter­est pay­ments cou­pled with prop­erty taxes and util­i­ties are less than 32% of a household’s gross income. Aver­age home own­er­ship costs have been less than or equal to 32% of the aver­age house­hold income in the GTA for 14 of the last 15 years.* It is no coin­ci­dence that home prices have grown at a sus­tained clip over this same period,” con­tin­ued Mercer.

“The last time we expe­ri­enced a pro­longed drop in home prices was in the early 1990s when high home prices and mort­gage rates com­bined to push the aver­age cost of home own­er­ship to more than 50% of the aver­age gross house­hold income. A large increase in home prices and bor­row­ing costs cou­pled with flat or declin­ing house­hold incomes would have to take place before a pro­longed drop in home prices was once again jus­ti­fied,” con­cluded Mercer.

Real estate own­er­ship in the GTA is cer­tainly more afford­able today than in the early 1990s when we expe­ri­enced a cor­rec­tion in home prices. Dur­ing that period of time sales dropped dra­mat­i­cally, as afford­abil­ity eroded, while list­ings remained very high. With a lot of choice in the mar­ket­place, sell­ing prices were nego­ti­ated down­ward. New list­ings spiked ear­lier in the year, but have since dropped back off. This means that we con­tinue to see enough buy­ers com­pet­ing for list­ings to push home prices up year-over-year.

I will con­tinue to dis­cuss the dif­fer­ent com­po­nents of hous­ing afford­abil­ity in future arti­cles as we progress through the fall market.

*Author’s Note: The TREB afford­abil­ity indi­ca­tor assumes the pur­chase of an exist­ing home for the aver­age sell­ing price with a 20% down pay­ment, a five year fixed rate mort­gage at the aver­age rate, a 25 year amor­ti­za­tion period and the esti­mated aver­age prop­erty taxes, util­ity costs and house­hold income.

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Con­tact the Jef­frey Team for more infor­ma­tion  -  416−388−1960

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