An economist from Capital Economics is predicting that property prices in Vancouver and Toronto could fall by as much as 30%. However this is the same economist who predicted prices would drop by 25% in these same cities in 2011.
That price drop has yet to materialize but it hasn’t stopped David Madani from making this new prediction. He notes that even though real estate markets in Vancouver and Toronto are still thriving, labor market conditions are predicted to deteriorate this year and that real estate prices in the cities cannot continue climbing upwards for much longer.
According to the article in the Business Financial Post.com, prices in Toronto were up by 12.3% compared to a year earlier, reaching $639,184 in June. The average price of a detached home in the city reached $1,051,912 having breached the million-dollar mark earlier this year. It’s a similar story in Vancouver, as figures from the Real Estate Board of Greater Vancouver showed the index price for all properties in the area increased by 10.3% from a year ago to reach $694,000 in June. The average price of a detached home in the city is now $1,422,296.
Although the Canadian economy has slowed due to the fall in oil prices, meaning some markets are beginning to experience price corrections, the pace of price gains has accelerated in both Vancouver and Toronto. Madani views these property markets as being some of the most overvalued in the world, where real estate prices do not reflect household incomes and rents. When this happens there is a risk of growing greed among investors. He doesn’t see how this trend can continue much longer in Vancouver and Toronto due to jobs being lost over falling oil prices and as affordability declines. This is even while mortgage rates are below 2%. Apparently even a median priced property with mortgage rates based on the latest five year fixed-rate terms would account for 40% of household income in Toronto and 64% of household income in Vancouver.
Even though mortgage rates have been falling over the past few years and there is the possibility that the Bank of Canada could cut rates even further, this trend will eventually reverse as Canadian bond yields are pushed upwards over the next few years due to market forces. If these circumstances materialize, Madani expects property prices will fall.