bangmal-ga,
The Toronto real estate boom will certainly go down in history as one
of the big ones. The question you asked, what caused the boom?, is
certainly a good one. Especially if one wants to predict the next
boom, and perhaps be on the receiving end of some the billions of
dollars that flowed during the last one.
The first thing to understand is that the 1989 real estate boom was in
fact a BUBBLE.
A bubble is an artificial increase in a market that's driven by
investor speculation. The difference between a bubble and a good
healthy market, is that investors spend money, not based on any real
value of the product, but on a perceived future value that may or may
not bear out. Prices become inflated well past any real value of the
product. Inevitably, bubbles burst and huge investments become
valueless.
"A housing bubble is an economic circumstance in which prices begin to
escalate so rapidly that the underlying economic forces that drive
prices are overwhelmed to the extent that they no longer become the
basis for buying and selling decisions. (or, more simply put,
"irrational exuberance")."
BUBBLE, BUBBLE, …TOIL AND TROUBLE
http://www.naifa.com/gram/2002jul/ellis-jul02.html
THE FABLED HOUSING BUBBLE
http://www.1sttech.com/services/education/innovatorw03_mortgagehtml.html
So, perhaps our question should be, is the current housing market in
Toronto a bubble or is it based on solid factors? And in either case,
is it projected to last or is it about to burst?
Let's take a look at the story …
======================
THE BUBBLE OF 1989
======================
The 1989 Toronto real estate bubble was caused by massive speculative
investments that exceeded the intrinsic value of the homes being
purchased and exceeded the ability of the purchasers to pay their
mortgages.
As more and more people fed into the bubble, housing became more
scarce, thus driving up prices even more. The high prices induced more
people to invest and the number of available houses decreased yet
more. Eventually, like any bubble, it burst. The end came crashing
down and house prices fell over 25%. Many people lost their shirts.
==================================
2002 - STRONG MARKET OR BUBBLE?
====================================
In 2002 there was much speculation as to whether or not Toronto was in
a housing bubble. The general consensus was no, that the market was
strong and was based on solid economic factors.
"In the Toronto resale market, some analysts say it's beginning to
remind them of 1989, another year when multiple offers and low
inventory caused a real estate frenzy. That market came to an abrupt
end and prices of some homes dropped by as much as 25 per cent. Some
of them have still not climbed back to their 1989 values.
"But Pearce says this boom is different: "Unlike the housing market of
the late 1980s, which was artificially inflated, today's conditions
are the result of genuine factors such as high employment and low
interest rates."
IS TORONTO REAL ESTATE GETTING TOO HOT TO HANDLE?
http://realtytimes.com/rtnews/printrtpages/20020314_toronto.htm
" Many consumers are asking if the housing bubble is about to burst,
as the busy market reminds them of conditions in 1989 when it all came
crashing down and prices dropped dramatically. While most economists
agree that won't happen this time, two recent reports advise caution.
…. "While current conditions have yet to reach a bursting point as
seen between 1989 and 1996, there is enough troubling data to warrant
concern and advise against an altogether relaxed and worry-free
attitude in the market."
CANADIAN MARKETS STRONG, BUT CAUTION URGED FOR TORONTO CONDOS
http://realtytimes.com/rtnews/rtcpages/20020620_camarkets.htm
"The housing and real estate boom has been fuelled by many things. We
have had the lowest interest rates in 40 years, which allowed some
buyers to get in the market for the first time and others to trade up.
As the jobs numbers released last Friday showed, we have had much
stronger job growth than in the United States, with half a million
jobs created so far this year. More jobs mean more consumer confidence
and more spending power. Incomes are growing."
NO EVIDENCE OF ANY BUBBLE IN REAL ESTATE
http://www.globeinvestor.com/servlet/ArticleNews/trusts/GAM/20021209/RGOOL
" The possibility of a housing bubble is now being discussed in the
media. The logic behind this worry is that exceptionally low interest
rates in the wake of 9/11 have pushed housing demand to artificially
high levels. The supply of new housing is admittedly running far above
underlying demographic requirements in both Canada and the United
States…."
" The possibility of a housing bubble seems to be limited though to
regional pockets in the United States."
THE CANADIAN HOUSING INDUSTRY ECONOMIC UPDATE (OCTOBER 2002)
http://www.chba.ca/membersarea/news/committeecouncil/eu/sub/2002/10.pdf
===========================
2003 - CURRENT CONDITIONS
===========================
The first quarter data for 2003 upholds the opinions and projections
made in 2002 and indicates that the market is settling down but still
strong –
"..Existing home sales, while remaining strong in the first quarter,
are showing signs of moderating. A solid pick-up in new listings has
helped the market to gradually move towards more balanced conditions
after residing firmly in seller's territory during the last few years
"
"… solid household income levels the highest in the country will mean
that the expected erosion in affordability will not prove threatening
to the overall health of Toronto's housing market."
THE HOUSING AFFORDABILITY INDEX* - RBC
http://www.rbc.com/economics/market/pdf/house.pdf
* based on the costs of owning a detached bungalow, a typical target
home for first-time buyers. The higher the index, the more difficult
it is to afford a house.
-------------------------------------
"With real housing prices only a few hundred dollars shy of their 1989
bubble level, should we worry? Are we swapping an equity market bubble
with a real estate bubble? The short answer is no. While the advance
in housing prices is impressive, it is still less than half the gain
seen south of the border (Chart 4). And where mortgage rates stand
now, homeowners spend less than a third of their net income to carry a
house. This is 35% cheaper than in 1989."
"perhaps the strongest evidence of the sustainability of today’s
housing prices is the ongoing decline in inventories of Canadian
housing. The current ratio of new listings to unit sales is only
1.7—half the ratio seen in 1989…"
CIBC - ON SHAKY GROUND (APRIL 8, 2003)
http://research.cibcwm.com/economic_public/download/cw-042003.pdf
=====================
PROJECTIONS
=====================
Forecasters are predicting that the housing market in Toronto will
remain strong throughout the year but caution that investors should
not expect to see figures equal to those of 1989-90, as these numbers
were artificially high.
-----------------------
" Housing starts in 2002 and 2003 will show the highest sustained
level of activity since 1989-1990. We have made another upward
revision to our forecast. We are now forecasting annual totals of
around 186,000 starts this year and 174,000 in 2003."
THE CANADIAN HOUSING INDUSTRY ECONOMIC UPDATE (AUGUST 2002)
http://www.chba.ca/membersarea/news/committeecouncil/eu/sub/2002/08.pdf
-----------------------------------
TORONTO, May 27, 2003 - A slight increase in the overall cost of
owning a home in Ontario is not harming the province's hot housing
market, according to a report released today by RBC Economics.
"… According to the report, moderately rising borrowing costs will
further erode housing affordability later this year. However, healthy
income levels and stable population growth will guarantee continuing
demand, and the province's housing market will not be adversely
affected…."
ONTARIO'S HOUSING MARKET STEAMING AHEAD AS THE COST OF OWNERSHIP
INCREASES, SAYS RBC ECONOMICS
http://www.rbc.com/newsroom/20030527ontario.html
-----------------------------
The average monthly carrying cost of new home ownership is now 30.5
per cent of household income, well below the 60 to 70 per cent level
of the early 1990s. This is seen as a strong indicator that the real
estate market will continue to be robust for the rest of the year in
spite of recent higher interest rates and higher housing prices, says
a new report from the BMO Financial Group Economics Department."
HOUSING TO REMAIN AFFORDABLE FOR MOST CANADIANS (5/12/2003)
http://www.orea.com/news.asp?newsID=1550
---------------------------------
" Housing starts dip in January Cold weather blamed for slower start
Housing starts in Canada in January 2003 declined by 8.7 per cent from
December but remained near the highest levels in a decade, according
to Canada Mortgage and Housing Corp (CMHC)."
" “Even with mortgage rates likely to notch up slightly later in the
year, the historically low rates we’ve been seeing will continue to
put a solid floor under Canada’s housing market in 2003.” (CREA
12/02/2003)"
CREA – HOUSING STARTS
http://crea.ca/public/news/housing_starts_dip.pdf
----------------------------
FORECASTERS SEE STRONG CANADIAN HOUSING MARKET THROUGH 2003
http://realtytimes.com/rtnews/rtcpages/20020829_cahousing.htm
--------------------
So, I trust that gives you a good explanation of what caused the huge
housing market explosion in 1989 and how that compares with today's
situation.
As always, if anything I've explained is unclear, feel free to ask for
a clarification –
Thanks for your question,
-K~
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