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From The Globe and Mail, Published Monday, June 11


Toronto, Vancouver prices forecast to sink

Toronto-Dominion Bank economists expect house prices in Toronto and Vancouver to sink by at least 15 per cent over the next two to three years.


Canada's two largest real estate markets appear to have gone their separate ways recently, with a slowdown in Vancouver and continued gains in Toronto.


But average prices can be deceiving, said economists Derek Burleton and Leslie Preston.


"The real parting of the ways seems to be between the market for single-family homes, where limited supply has kept prices firm, and the condo market, where construction booms have kept increases more modest for both markets," they said in a report today.


"In the near term, we expect the divergent fortunes of these big-city markets to diminish, but longer term both markets are likely 15-per-cent overvalued. Inventory levels that are already high (Vancouver), or set to head higher (Toronto) make the condo market the bigger concern in both cities.


Mr. Burleton and Ms. Preston expect a price decline of that size over the next two to three years as neither market shows "bubble-like symptoms" akin to the U.S. market before its crash. Having said that, a "severe shock" from overseas could speed that up.


"While the supply increases of multiple units recorded currently and over the past decade will be a contributing factor, the more significant catalyst is likely to occur on the demand side," they said.


"In particular, the powerful tailwinds that have driven demand in recent years - including low interest rates and households’ desire to take on additional credit  - are expected to become decidedly less supportive. Economic growth in both regions is likely to be scant at best over the next few years.


Moreover, even if the rental market benefits from a softer home-ownership market, weaker property valuations would likely put a damper on investor returns, hence leading to a softening in investor demand."


Both markets have seen hefty run-ups since the mid-2000s given "decent" growth in their economies and populations, coupled with low borrowing costs.


"And faced with growing land restrictions and worsening affordability, both markets have experienced growing demand for - and supply of - condo units, and outsized price gains of single-detached homes. As evidenced by increasing units under construction and rising inventories of new and unoccupied dwellings, both condominium markets have been showing signs of getting ahead of themselves."


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