Sustainable House Prices?

August 11th, 2014 by Potato

While there may be great disagreement over whether a crash is coming, most people can agree that

    1) this past decade has seen an incredible increase in real estate prices
    2) that this rate of growth cannot continue forever

The issue is that the ultimate barrier and outcome is not so clear. Some think prices could continue at high-single-digits growth until Toronto is approximately as expensive as London or Tokyo (or Vancouver!). Others (such as myself) don’t think Toronto incomes can support that level — indeed, there is a question as to whether the current level can be sustained.

The Toronto market has started to segment in the past few years: condo price appreciation has moderated, while detached houses have gone on a tear (especially those under the new $1M CMHC cap). In the last post I was trying to figure out whether there were enough rich people to support the current prices — if we had already crossed the point where a soft landing is impossible. If price increases do abate, but the levels stay this high relative to incomes and rents (a soft landing), then houses will continue to turn over year after year like this — are there enough households rich enough to keep buying for decades to come in a soft landing? I have my doubts, and tried to put some math to it.

I think it’s getting close to the breaking point if it’s not already past it. Note that there is nothing stopping the market from running well past the point of sustainability — just that once it does a soft landing is nigh impossible to pull off.

One Response to “Sustainable House Prices?”

  1. save. spend. splurge. Says:

    It is simply impossible that there are enough incomes to sustain such high prices in Toronto. Toronto is not Manhattan. Toronto is not San Francisco. There are plenty more billionaires and millionaires in the U.S. (sheer population comparison alone) versus in Canada and the ones who are buying these million dollar houses are people who are my age but don’t have my income potential. They’re people who work regular jobs, earning at most, perhaps a 6-figure income (120K combined) which is not enough to pay a million-dollar mortgage for what I basically see is a wooden shack.

    We are headed towards something quite nasty.