Is the Current Slow-down a Harbinger of Toronto Real Estate Market’s Bust?

Ukrainian Credit Union.

According to Goldman Sachs (via http://business.financialpost.com), there is a 30% chance that Canada’s real estate market will experience a correction of 5% or more, after adjusting for inflation. The investment bank’s report names Canada the second most overvalued real estate market and puts it in third place among G-10 nations in terms of risk of a real estate price correction.

But is the current slow-down in the GTA market a harbinger of that magnitude of correction? According to zolo.ca, the average price for a property sold in Toronto from April 24 – May 22 was 0.1% lower than a month earlier. The housing inventory went up by 25% while the number of units sold was down 7% which suggests that the sellers are trying to cash in on the high prices but the buyers are no longer as active as before.

The market slow-down may be happening due to problems with subprime lender Home Capital and the tax on foreign buyers of real estate introduced in Ontario a month ago. The price slow-down may be temporary, as Vancouver’s case suggests, given their tax on foreign buyers slowed the market down only for a while, and price growth resumed as other fundamental factors remain unchanged.

The Bank of Canada will likely leave interest rates, a major factor for real estate values, unchanged well into 2018, despite the improving economic growth. Ian McGugan in his column in the Globe and Mail suggested that to avoid a real estate market bust, the government should take such drastic steps – implement a tax on the gains from the sale of principal residences, demand higher down payments and restrict people’s ability to use their retirement savings from RRSP accounts to buy a house. However, the author admits that any politician who would suggest anything like that would be slashed to shreds by mobs of hedge-clipper-wielding homeowners.

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