Thursday, December 11, 2014

Will the Toronto Housing Market Bubble Burst?

As potential buyers of a home in Toronto, we carefully watch the news on the Toronto market from a distance.  Articles that say the bubble will burst cause our spirits to rise, but for the past 5 years or so, the prices keep going up.  We see the competing forces:

Bubble BurstingBubble Expanding
Prices rising faster than inflationImmigrants need housing
Affordability droppingForeign investors from China, Iran, Russia, India
Interest rates will risePhysical constraints on building (lake, roads, ..)
Commodity prices dropping, especially oilEconomy expanding

The bubble has inflated for 5 to 10 years.  But, having read about these forces for five years and competing news stories about the bubble bursting, growing, or there not even being a bubble, my conclusion is that there is only one factor that will cause the bubble to burst, deflate slowly, or stabilize prices.

That factor is interest rates.  Over the past 7 years or so the Fed has kept rates at or near zero, allowing Canada to have near zero rates as well due to the linkages between these two countries.  When the interest rate on mortgages rises, it will make housing less affordable and will drive down prices.  The big question is when will rates go up?

On the one hand, the Fed is going to raise their benchmark in the USA next year.  On the other hand, the ECB will likely implement QE bringing rates down in the EU.  What will happen in Canada?  Stay tuned, watch the Canadian rates, and I think we will see whether the Toronto housing market changes next year.

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