Prices for detached homes rose over 20 percent in every Toronto suburb in January. In some suburban towns, price appreciation measured as high as 58 percent.
For the suburban 905 region as a whole, detached home prices soared over 36 percent annually to an average price of $1,308,393. Soon the region’s real estate board will release February sales and pricing figures and most market analysts expect it will be more of the same.
In the Toronto Regional Real Estate Board’s (TRREB) 2021 forecast, released earlier this month, the outlook for the market was described as “healthy” with home sales projected to reach a near-record breaking total for the year while home prices would continue to climb.
But in a report published recently by Toronto brokerage Realosophy, President John Pasalis wrote that the region’s suburban homes are in a bubble and that the ideal outcome would be a “gradual cooling down [of the housing market] over the next three to six months.”
Absent an eventual cooling, Pasalis writes that an increase in speculative home buying activity could keep prices climbing rapidly for a longer period of time, creating what’s likely to be a bumpy path out of this cycle for the housing market.
In his firm’s Move Smartly Report for February, Pasalis includes a number of important caveats with respect to his views on the future of the Toronto suburban housing market. First, he acknowledges that nobody really knows how this hot period for housing will end. That said, he believes it’s unlikely that prices will actually decline in 2021.
“The suburban housing market is so far into seller’s market territory that even if the number of homes for sale doubled overnight, this would not be enough to cause prices to fall — it would just slow down the rate of house price appreciation,” he wrote.
“For prices to fall, something dramatic would have to happen that would significantly cool the demand for houses and also lead to an increase in supply,” he added.
The last time the region’s housing market was confronted with what some viewed as runaway price appreciation, the Liberal provincial government stepped in with its Fair Housing Plan to cool the market. This was followed soon after by the introduction of tighter mortgage rules by the federal government.
Pasalis thinks government intervention is unlikely this time around, so an ideal outcome would simply be an increase in supply combined with a slowdown in buyer demand to achieve the gradual cooling that would keep the market stable.
For market observers, there are two key trends to watch in 2021 to understand if the market is headed for a gradual cooling or for what Pasalis describes as “irrational exuberance” that’s characteristic of a worsening bubble.
The first is how home prices are changing on a monthly basis, rather than an annual basis. By doing this, Pasalis says observers can determine if price growth is continuing to accelerate or if appreciation is beginning to ease.
The second trend is the number of houses being flipped over a short period of time. “[I]f speculators start rushing into the market to make a quick profit then rapid price gains could end up being a self-fulfilling prophecy in the short-term,” Pasalis wrote.
There are some signs that the gradual cooling Pasalis references could come to fruition this year.
Capital Economics said last week that mortgage rates will likely begin rising before the end of 2021, which could lead to a slowdown in buyer demand. On the supply side, CREA Senior Economist Shaun Cathcart said that “gun-shy” sellers who didn’t engage in the market in 2020 could be ready to make a move this year, especially when the weather begins improving in the spring.
Earlier this week, Bank of Canada Governor Tiff Macklem said some signs of overheating have already appeared in the country’s housing market and his team is monitoring the situation very closely.
