Emotion can have a big impact on a market in the short term, you see it with stocks all the time. Bad news will hit an otherwise profitable company with solid fundamentals, and the stock price will fall. Then sanity returns as the market realizes that nothing truly important happened and the PPS recovers.
The same thing happens in reverse with highly speculative money losing companies. Good news comes out and excitement takes over as buyers storm in and push the PPS up to often insane levels. And then reality sets back in and the PPS collapses as people wake up and look at the balance sheet and see nothing but red.
With housing there are 3 fundamental metrics that drive the market. The two most important are obviously supply and demand. The third factor has a big impact on the first two, and that is affordability. In housing affordability is largely driven by mortgage rates, most people would not be paying $1 million+ for a detached family dwelling in "The Six" if mortgage rates were in and around five or six percent.
But with interest rates sitting under three percent and a lot of household incomes well into six digits, GTA families can afford to assume hundreds of thousands of dollars in mortgage debt.
A note of caution though, interest rates are key. If mortgage rates go up even one full percent, then the supply/demand dynamic will change dramatically. Many current homeowners would no longer be able to afford to keep up with mortgage payments and would be forced to sell, and the number of buyers would drop as would the amount they could afford to spend.
But absent a sharp jump in lending rates, if mortgages continue to be handed out at less than 3%, then GTA housing bulls have little to fear in my view. Why? Let's face it, when it comes to Canada the greater Toronto area "IS DIFFERENT". Immigration is a big factor, probably the biggest reason that GTA real estate has been a rocket ship performer over the past 10+ years.
There are lots of people who go to work in UAE states like Dubai and Bahrain or in Saudi Arabia where they make big bucks and pay $0 in income taxes. After ten years working in the Gulf States its not unusual for a couple to emigrate to Canada with $1+ million in the bank, often in U.S. funds. They can afford a $1 million dollar home in The Big Smoke because they can buy it free and clear, with $0 needed to finance a mortgage.
There's a very popular blog called Greater Fool authored by shameless self promoter Garth Turner that has been predicting an imminent correction in the housing market for a while now. Turner is so excited by the recent pull back that I understand he's cancelled the prescription for his boner pills.
Take note however that Garth Turner has been the Chicken Little of the Canadian housing market for nearly ten years now, starting in 2008. The Über Moron was telling homeowners to "sell now if you want out at the top" when a single detached dwelling selling for $1.5 million now was going for a paltry $500 or $600K.
In fairness to Mr. Turner he's an effective communicator and very successful financial adviser. He goes on cross Canada tours offering seminars to the sheeple who follow his blog, and you have to sound brash and confident if you want the herd to free up the capital in their homes and invest it in the vehicles you're flogging.
For those who still think Garth's the man, here's what he was saying in October of 2008. Homeowners, how much has your property gone up since then?
So relax housing bulls, unless interest rates make a big jump, then this latest fear driven dip caused by the foreign buyer tax and Capital Inc's recent troubles will be just another blip like we've seen before over the past 10 years. By the fall market things will be back to what they've been, steady increases.
Capital Inc will probably survive, and even if they don't...other B class lenders will step in to fill the void. Foreign buyers might represent 5% of the market, and even that is probably being generous. When bidding wars start up again, it might mean 18 offers instead of 20.
But if you prefer doom and gloom and like drama....go read Greater Fool.
