Canada's Housing Bubble

Jan 22, 2010 Tony Wong Toronto Star

Prices of existing homes in the Toronto area are likely to come down a bit in 2010, a forecast says.

The average price of a home at the end of 2009 was $396,200, but housing analyst Will Dunning says he expects that to fall by about 1.6 per cent, to $389,000, by the end of this year.

The big reason is that job creation is still slow relative to the demand experienced in the market, the economist says.

"Housing demand is hugely ahead of the key economic fundamental of job creation. The recent surge of sales and prices is due to low interest rates and fears that rates will rise," says the report, released Thursday.

"This wave has to dissipate eventually and the next nine months will be disappointing compared to the past nine."

So far, the year started off with a bang for realtors, with sales in the first two weeks of January almost double the number from the same time in 2009. Last year was the second-best year on record in the Toronto market.

This week the Bank of Canada also reiterated it would keep interest rates unchanged till at least the second half of the year. Those low rates should keep stoking the market for at least the first quarter of this year, say analysts.

But while housing sales are robust, the job market still seems stuck in first gear. The unemployment rate in Toronto remains at 9.5 per cent in December, the same as it was in November.

Jobs rates are the single biggest indicator of the fortune of the housing market, since you likely need a job to afford mortgage payments.

Buyers worried they will miss out on cheap mortgage rates have been driving the market, but that won't go on forever, the report says.

"These are temporary factors and sales will have to slow due to the weakened economy."

Others have said the Toronto market is overvalued, based on historical trends. CIBC World Markets economist Benjamin Tal says prices will likely remain flat this year and possibly for several more years with little, if any, appreciation.