Are Toronto Homes Overvalued?
It’s a question that’s been asked ever since the Bank of Canada’s interest rate was dropped to historical lows in 2008: are Toronto homes overvalued? The question comes from an influx of buyers on the market, that’s causing Toronto home sellers to realize the potential that lies in the market right now, and allow them to raise the price of their home – sometimes slightly, sometimes considerably. So, are Toronto homes overvalued?
The simple truth is, yes; although by how much really depends on who you ask. Some experts say that many of Canada’s hottest housing markets, including Toronto’s, are overvalued by as much as 25%. However, a report released by the Canadian Real Estate Association in January 2012 reported an overvaluation that was more realistic, sitting around 8.5%. At most, Toronto homes are most likely overvalued by an average slightly higher than that of the nation’s, sitting somewhere around 10%. But just because Toronto homes are overvalued, there is no bubble and there won’t be any bursting.
Toronto homes will remain overvalued as long as there are many buyers on the market as there have been the past couple of years. However, the Bank of Canada’s interest rate is going to rise, probably sometime within the next year. And when it does, buyers will slowly leave the market, causing sellers to lower their prices to normal levels. This likely isn’t going to happen overnight, as it shouldn’t. A severe correction that occurs too quickly could be like bringing a car to a screeching and sudden stop as it’s roaring down the highway. The consequences could be disastrous and in the case of the housing market, could cause a sudden loss of construction jobs and other economic ramifications.
When compared with other markets, such as Vancouver’s, Toronto’s homes aren’t overvalued by all that much. There, homes are seeing huge price increases, with little signs of a slowdown on the horizon. But with many experts still not concerned about these overheated markets, there’s little reason for worry to arise over a slight heating in Toronto’s market.
The Toronto housing market is typically one of those that drives much of the Canadian economy, and it’s definitely a large factor in the economy of Ontario. It’s also historically been known as one of the strongest markets in all of Canada, and the same is true today. While Toronto homes may be slightly overvalued, the prices will come down when the Bank of Canada’s interest rate starts to rise. When that occurs, it will be more similar to a tapping, rather than a screeching, of the brakes. With each tap, more buyers will leave the market, no longer seeing the potential of when homes came with hugely discounted interest rates, and prices will have no choice but to return to normal.
The news means that buyers who don’t want to pay even as much as 10% more for a home that’s not worth that much should get into the market now. And, sellers who want to get top dollar for their home should also seize the opportunity of low interest rates and use them to help sell their home!
Bryan J is the author of this article. For more information about mortgage broker Toronto or mortgage companies Toronto please visit canadianmortgagesinc.ca.
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