The Canadian Real Estate Association said this week that average house prices across the Greater Toronto Area hit $ 727,300 in February, a figure that has risen by more than 23 per cent in the past year.
“It’s pretty much the best time to be selling a Toronto home in at least 30 years,” BMO economist Robert Kavcic said, noting that activity in neighbouring regions such as Guelph, Barrie, London and Windsor is even more feverish, with gains pushing 30 per cent. “Supply-side fundamentals have been left in the dust.”
Much has been written on the difficulties that new buyers are having in the Toronto area, and Kavcic’s colleague Doug Porter expanded on that notion Friday morning with some hard numbers to show just how “other worldly” prices have become.
Both earn high incomes, but for the purposes of Porter’s exercise, he assumes that one will stay home without an income for a while. The other will go to work and earn $ 225,000 a year.
“This still places them on the very cusp of the legendary ‘top one per cent’ of all income earners in Canada,” Porter notes — but adds that even they can’t afford to buy once you break down the numbers.
Their sizable down payment means they can qualify for a home costing $ 500,000, but anything above that would require the additional cost of mortgage insurance under new rules announced last year. But under the same rules, “anything above $ 1 million is immediately off limits, since it wouldn’t qualify for insurance,” Porter noted.
“Surely, this will be enough to afford a reasonable place?” Porter asks rhetorically. “That depends on your definition of reasonable.”
The average detached house in the city itself now costs $ 1.57 million, CREA says, and in the neighbouring suburbs it’s $ 1.11 million.
A semi-detached in the 905 area could be had for well under their budget at $ 700,000, Porter says, but “they’re not that common in that region, and their price has shot up by 33 per cent in the past year.”
Add it all up, and the Dorights exemplify a sobering reality: even people near the top one per cent of all income earners in Canada “are at best able to afford a semi-detached home on the fringes of Toronto, or maybe a low-end detached home verging on teardown status,” Porter said.
That spending boosts the economy, but it can’t go on forever, TD warned. “Home prices across the GTA and surrounding areas appear to be detaching from fundamentals and are simply unsustainable,” the bank said Thursday in its quarterly forecast for Canada’s economy.
If the bubble pops, it won’t only be over-leveraged Torontonians who bear the brunt.
The good news is that sort of shock “typically requires a trigger,” and the bank sees nothing on the immediate horizon likely to set off a chain reaction.
And the other element fuelling high house prices — low interest rates — are unlikely to disappear any time soon. That means “in the absence of government policy intervention or a sharp movement in interest rates, momentum is likely to keep the Toronto housing party going for at least a few more quarters,” TD said.
Porter notes that when Toronto prices peaked in 1989, it took Toronto prices nearly two decades to recover, once inflation is factored in.
As TD put it: “This pace cannot last forever.”