Where is our Real Estate Market Heading?

In recent weeks, there have been various reports in the media projecting the direction of our Real Estate market. Reports have varied from forecasts predicting house prices will increase by double digits to warnings that the current housing market has peaked and will weaken in the coming year.

The objective of this article is to evaluate as accurately as possible, the factors that will play a main role in defining the direction of the real estate market.

Many of us remember the real estate boom of the late 1980's. Some analysts are now of the opinion that the current real estate cycle has peaked. However, there are several fundamental differences in this real estate cycle.

Affordability
In the late 1980's, 5 year fixed interest rates were hovering between 12% - 14%. Today, an individual can secure a 5 year mortgage for approximately 5.5%. This is less than HALF of the late 1980's rate. >From a financial standpoint, the savings are enormous. For example, a $200,000 mortgage at 13% (based on a 5 year term and 25 year amortization) would cost approximately $2,206/month. By comparison a similar mortgage with today's rates of 5.5% would run $1,222 per month. This represents a savings of $984/month. This example clearly demonstrates that today a consumer is in a much superior position from an affordability standpoint.

Inflation
Over the past five years, on average real estate prices have appreciated between 5% and 10% per annum. Nowadays, in most cases, the prices have finally reached and in some cases surpassed the 1989 levels. Consequently, many consumers might feel that the market is poised for a slowdown. However, remember that inflation is effectively eroding the "purchasing power" of the consumer. Consequently, the real values are well below the peak levels of 1988 - 1989. In other words, the inflation adjusted house prices are still 10% to 15% below their 1989 peak levels. It is reasonable to assume that after 13 years, prices would be expected to at least return to their 1988-1989 levels.

Real Estate Cycles
A typical housing cycle lasts about 5 - 6 years. I believe that we have approximately another 2 years left in this current run. Of course, there are always factors that are beyond our control that could alter the direction of the market. For example, acts of war, significant hikes in interest rates and an economic slowdown to name a few, can undermine the sustained growth within the current cycle.

Another point worthy of mention is that Toronto while being a world class city, still offers very affordable housing prices. I had the opportunity to visit Europe several times this year and was quite keen on evaluating and comparing the various real estate markets. I was amazed to see how expensive most European cities were and when you factor the Euro dollar (which is currently trading at par with the US dollar), the gap was even greater. One would expect salaries in Europe to be higher to offset the very high real estate prices, but that wasn't the case.

My conclusion is that while the real estate market has been quite strong for several years there is still some growth and life left in this current cycle. I predict that real estate prices will still appreciate in the coming year at a rate of 4% to 6%. I also believe that we will have another banner year in terms of the activity levels and a significant number of houses in the G.T.A will continue to change hands in the coming year.

On another unrelated subject, changes were recently made to the down payment requirement for a potential homeowner. Previously an individual required a minimum down payment of 5% to a maximum purchase price of $250,000 and a 10% or greater down payment for a purchase price that exceeded $250,000. The price ceiling has been extended to $300,000.00 for an individual with a 5% down payment.