Last month this author wrote an article about the indications on the street that the Toronto real estate bubble had begun to burst. The article titled “Home Not Selling in Toronto Reveals Truth About Market” received much heat from industry players, primarily real estate agents despite its reference to specific examples. Yet, today the Canadian Real Estate Association said that the average price for a Canadian home sold in September 2011 was $352,600, down 5.4 percent from an average of $372,700 in June, or a loss of $20,100. This further indicates the real estate bubble has burst and we’re going to see significant impact on real estate prices in coming months.
Since the original article was written the Canadian dollar has continued to decrease further adding to investment losses of foreigners who invested in Canadian real estate. A major Canadian bank predicted that the Canadian dollar will continue to drop as discussed in “Canadian Dollar to Drop 12 percent by April 2012 Warns Major Bank”.
This morning The Globe and Mail reported that the 2 percent target the Bank of Canada has followed is “likely to be renewed this fall with some new language on ‘flexible inflation targeting’, allowing the Bank to take longer than usual to bring inflation back to the 2-per-cent target.” Other language used by the government includes describing how the mandate is to look beyond inflation. It seems that the government might be willing to embrace inflation.
Analysts have been predicting for a couple of years that inflation exists and if you examine food prices you will agree that it has already been part of the system. As far as food costs go, they are expected to outplace price increases of other consumables as discussed in “Threats to our Food Supply and Rising Prices”.
However, this also means that interest rates will rise and as interest rates rise, real estate prices will drop. It is estimated that with every 1 percent increase in mortgage rates, real estate prices will drop 10 percent. In 1981 Bank of Canada interest rates reached 21 percent. Meanwhile the cost of home ownership as a percentage of family income is already at an all time high and of concern to both national and international organizations.
In addition we have a situation in Toronto where the cost of owning a home is actually 25-40 percent higher than renting the same unit as discussed in the related articles referenced below. This translates into a potential drop in real estate prices of 25-40 percent from June 2011 levels. In order to reach equilibrium the cost of owning a home has to match the cost of renting the home, otherwise why would one buy a home and watch their hard earned money being wasted every month?
The next few months will have real estate investors and realtors carefully watching the market.