Is a crash inevitable in the Toronto real estate market? As Canada’s financial capital continues to post impressive housing numbers, the talk of the town has been a real estate bubble. It is challenging to dispute the arguments that North America’s fourth-largest city is in a bubble, especially considering the latest sales activity and valuations – and the historically busy spring market has arrived, too.

According to the Toronto Regional Real Estate Board (TRREB), residential sales surged 86.3 per cent year-over-year in March, with 5,130 sales. All property types witnessed incredible sales growth in March, led by semi-detached homes with a 106.6-per-cent jump, followed by townhouses with a 90.7-per-cent increase in sales. Condominiums reported an 87.9-per-cent boost, while detached homes saw a 75.1-per-cent advance.

Strengthening demand, consumer confidence, and ultra-low interest rates have supported the noteworthy boost in prices. The average selling price surged by an annualized pace of 21.6 per cent to $1,097,565. Detached homes topped $1.7 million, and semi-detached properties $1.3 million. Townhomes are on the cusp of surpassing the $1 million mark. Condos saw a slight drop of -0.7 per cent, falling below $708,000.

But the question remains, can Toronto sustain this momentum? Not surprisingly, many Canadian homebuyers are keen for the party to end. A recent Angus Reid Institute survey suggests that one-fifth of Canadians are hoping for a home-price crash, with 22 per cent desiring a 30 per cent decline in valuations. Will they get their wish in 2021?

The answer to the question might depend on your perspective on if this is a market bubble or an example of basic supply and demand fundamentals. What do some of the industry experts say?

Will the Toronto Real Estate Market Crash Soon?

In February, Bank of Canada Governor Tiff Macklem told the Calgary and Edmonton chambers of commerce that there are “early signs” of overheating in the Canadian real estate market. Although he has dismissed suggestions that the institution would pull the trigger on a rate hike soon, many are sounding the alarm that the housing industry is soaring at an unsustainable pace that could deliver a significant bust once monetary policy normalizes.

But while low rates are certainly an important factor heating many housing markets across the Great White North, a lack of inventory is also driving these conditions.

Jason Mercer, the Toronto Regional Real Estate Board’s chief market analyst, stated in a recent news release that additional growth could occur due to the fundamentals: rising demand and limited supply.

“The potential for double-digit price growth could continue without a meaningful increase in the supply of homes available for sale,” Mercer said. “This will become more apparent as population growth resumes over the next year.”

According to data from the Canada Mortgage and Housing Corporation (CMHC), year-to-date housing starts were down in February 2021 compared to the same time a year ago: 4,516 compared to 4,924. Housing completions are also down year-over-year: 4,986 versus 5,165.

Bay Street veteran David Rosenberg warned that he thinks Canada’s housing bubble today is comparable to the subprime mortgage meltdown in the U.S. close to 20 years ago. He told Bloomberg TV that all the critical metrics are pointing to deteriorating conditions and that governments should be worried.

“I’m taking a look at all the metrics I had in my hands when I called the housing bubble in 2005 and 2006 in the United States. I was looking at home price-to-rent ratios, I was looking at home price-to-income ratios, I was looking at the extent to which the household sector was overexposed to residential real estate on their balance sheet,” he said.

“I’ve got news for you: the numbers in Canada, on all the metrics, are higher now than they were at the peak of the U.S. housing bubble 13 years ago.”

Economists at Royal Bank of Canada and Bank of Montreal think it might be necessary for policymakers to intervene and prevent real estate prices from becoming even more unaffordable for first-time homebuyers. However, Chief Economist at Bank of Nova Jean-Francois Perrault, Toronto-Dominion Bank’s Chief Executive Bharat Masrani, as well as RE/MAX executives have urged governments to refrain from taking policy action to rein in soaring housing prices.

So far, lawmakers from any of the major parties have not expressed a desire to pass sector-altering legislation to cool down the market. Canada’s banking regulator did slightly tighten qualifications rules for uninsured mortgages that would cut approximately four per cent the size of mortgages households would be eligible to take. The consensus is that this will not do much to impact the broader housing market. Robert Kavcic of Bank of Montreal said in a note to investors that the “tone and the psychology of the market might not change all that much.”

What Would Cure the Overheated Market

The go-to solution for any proposal is taxation, but there are three other ideas that would have more of a long-term positive effect, according to Christopher Alexander, Chief Strategy Officer and Executive Vice President at RE/MAX of Ontario-Atlantic Canada, and Elton Ash, Regional Executive Vice President at RE/MAX of Western Canada:

• Add a mandatory condition to every offer, making the purchase conditional on financing.
• Implement an industry “watchdog” to review transactions where homes are sold well over asking price.
• Introduce more housing supply.

Aside from that, the only thing institutions can do is publish reports that allude to the growing number of markets, including the Toronto real estate market, that are vulnerable to a sudden collapse in prices.

What’s Next for the Toronto Housing Market?

Do you think Toronto real estate can get any more expensive? Benjamin Tal, the deputy chief economist at CIBC, had this message: “If you think Toronto is unaffordable now, you wait.” While this might not be words first-time homebuyers want to see or hear, this is great news for current homeowners who are thinking of selling their three-bedroom house in The Beaches or Leaside.

Whether the Toronto real estate market experiences a crash or not remains to be seen. But Patricia Lovett-Reid, the Chief Financial Commentator at CTV News, has these recommendations if you are waiting to purchase a home: get pre-approved, gather your documentation, and read the fine print of your pre-approval. These are important steps to take, so when you do see an opportunity to achieve the Canadian dream, you have the legwork already done.