‘By all objective standards, it’s a bubble’

Even realtors say accelerated prices and sales of Toronto-area homes are a cause for concern

The average selling price of a Torontoarea house has seen a double-digit rise in all but two months of the last year. It’s a counterintuitive climb amidst a pandemic that has pushed the cost of a resale home past the million-dollar mark for the first time in history.

Detached houses in the 905 suburbs have seen the greatest growth with a near 30 per cent annual gain in February.

In Durham Region, the average price last February was $685,000. This year, it’s $942,000, said John Pasalis of Toronto’s Realosophy brokerage.

“When you see house prices rising by 30 per cent per year, it’s not normal,” he said. “By all objective standards, it’s a bubble.”

Is there a risk if the market stumbles? That is unlikely this year, say authorities like Canada Mortgage and Housing Corp. and the Toronto Regional Real Estate Board.

Even so, real estate board chief analyst Jason Mercer said the mortgage stress test, introduced to cool a frothy 2017 housing market, should protect consumers if interest rates rise. It requires that borrowers with insured loans can qualify at two per cent above the rate banks are offering.

The board expects already tight market conditions to become more competitive once vaccines are widely available and immigration resumes, further boosting demand that saw a 52 per cent increase in home sales last month.

“Looking forward, the intervention I’d like to see would be on the supply side so that we can start to see more balanced market conditions and a moderate pace of price growth over the long term,” said Mercer.

Regardless of low rates and policymakers’ suggestions that prices will continue to rise, Pasalis said consumer emotion is playing a big role in driving the frenzy.

“When the market rebounded quickly (after the initial pandemic lockdown) and rates started falling, it accelerated a lot of people’s home-buying plans.

“If you’re looking at buying a home in 2022 and it’s the end of 2020 and you’re seeing house prices go up by 20 per cent per year, you feel like, ‘I can’t wait another year. I’m not going to be able to afford anything,’ ” he said. “That’s why we’re seeing the demand up 50 per cent over last year. That’s a ridiculous number.”

But even if more listings come up in the spring and buyers, fed up with losing bidding wars, step out of the market, Pasalis doesn’t think real estate will tank.

Unlike 2016 and 2017, this frenzy isn’t being driven by investors, although that could be a factor in the rebound of downtown condo sales, he said.

One cooling option for government would be to raise the requirements for income property investors — a market that Pasalis says has surged as buyers use home equity and savings to purchase rentals. Increasing the down payment for those purchases could take some of the pressure off the market, he said.

Right at Home Realty president John Lusink called the accelerating price and sales growth “worrying.” He isn’t even sure there will be a spring market this year.

“One of the things we certainly saw is that our entire market last year got shifted by at least three or four months. The surge we’ve seen in January and February is still part of that shifting of that entire year (2020),” he said.

“Traditional spring? I think we were in it in December and January.”

Queen’s University real estate professor John Andrew notes that potential sellers don’t want strangers traipsing through their homes in a pandemic and that is causing people to hold off listing. At the same time demand is shifting, he said.

“People don’t mind being further away (from work) and it’s a great tradeoff to get a bigger house with more space.”

Andrew said the government has few policy tools left to cool the market. The mortgage stress test hit first-time buyers hard and politicians will be reluctant to reduce their buying power again.

The average Toronto home price doesn’t get you much either. “It is scary because income levels just aren’t keeping pace,” said Andrew.

Lusink said it may be the next generation of buyers who are most at risk from the current acceleration in home prices.

“I’m not sure how, if ever, they’re going to own a home,” he said.