Toronto Housing Bubble

Saturday Aug 17th, 2019

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Why Real Estate Bubbles Happen

A real estate bubble occurs in local or global real estate markets, and typically follow a land boom. This is a rapid increase in real property market price (i.e. housing) until they reach unsustainable levels that eventually lead to a gradual or rapid decline. Can real estate bubbles be identified and prevented? Housing market bubbles are more critical than stock market bubbles. Equity price busts occur on average every 13 years, last for 2.5 years, and result in about 4 percent loss in GDP. Housing price busts are less frequent, but last nearly twice as long and lead to output losses that have historically been twice as large. Compared to financial markets, real estate markets involve longer boom and bust periods. Prices decline slower because the real estate market is less liquid. The financial crisis of 2007–2008 was related to the bursting of real estate bubbles that had begun in various countries during the 2000s.

Vacancy and Demand

In a city where there is virtually no vacancy, real estate investors and prospective buyers should not worry as much as we inately do. Speculative home buying occurs when buyers enter the market, causing an increase in home construction. The investor and pre-construction market is a perfect example of this. I would be worried if we had a high vacancy rate. But because we do not, things like rececessions will ride out (over time, of course) and prices will once again be back up to where buyers don't want to see them. This is another reason why the Toronto rental market is so hot right now. 

Toronto's real estate market is in low supply and high demand. This keeps the city (mostly) clear when it comes to real estate bubbles. Toronto has the lowest vacancy rates in North America, and we are in the fastest growing city in North America. Land is scarce.


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