Toronto Real Estate Bubble Analysis

Is Toronto in a real estate bubble? This is the question I'll aim to answer here.

So the common complaint is that Canadians are stretched and taking on too much debt. From the below chart we see that household debt-to-income is climbing.



Yes this is very bad, and I hope the trend slows down because if it continues it would handcuff our economy in the future. Does this mean we are a nation that is not credit worthy like the US. Short answer is no.

As we can see from the above chart, asset growth is high. Assets include everything from stocks, bonds, savings, and yes, your home.

I can feel the argument, well if prices fall, then a huge chunk of our assets would be wiped out. This will cause a cascade throughout the market with panicked sellers right?

I'll answer that question with another question: If prices fell 20% would you rush out to sell it and lose all your equity because you're afraid it will fall further?

Of course not. Your not stupid, and generally no one else is that stupid. You will sit and hold out until things get better.

How can we measure our ability to hold out? We have to measure our ability to service the debt we have.

From the below chart, we can see that even though debt to income is high, our ability to service the debt is within historical norms.

OK ya, I can hear the argument, our ability to service debt is easy now because rates are so low.

What if rates go up? Everyone paying debt with low interest rates would be bankrupt right?

That would make sense if everyone was servicing debt with these very low rates.

From looking at the below chart Canadians are not dependent on low rates. The interest rates people are paying is still well above the bank rate (which gives us a buffer even if rates rise).

The reason why the buffer exists is that the rates people are actually paying didn't go down as fast as the bank rate.

Another argument I hear is that prices are just too high, and what goes up must come down.

The way we should measure house prices is how much of your income goes towards housing. Like my good friend Calum Ross says, you don't buy a house, you take on a payment.

For the average priced of a home in the Toronto Real Estate board, based on current average incomes, the percentage of income going towards housing is still relatively low historically. Meaning that if either rates, property taxes, prices or utility costs go up, we are still buffered.

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Additionally, how do we measure if people are teetering on the brink of losing their home? A good way is to see how many mortgages are 3 months in arrears. That number is at 0.5% of all mortgages in Canada.





Another thing, The Toronto job market is stable, jobs are being created modestly and population growth to the GTA is high.

So the only way prices are to fall 20%+ is if rates go up massively, incomes go down drastically, if suddenly there is a mass migration out of the GTA, or there is huge calamity that causes people to lose their jobs.

If you think that's going to happen you might as well buy a bunker and stock up on canned tuna.