What is a good way to spot a “Housing Bubble”?

One simple and effective way of spotting a housing bubble is to compare the % change in house prices to the % change in incomes. The chart below shows Year-over-Year (YoY) change (in %) between house prices and incomes in the Toronto area since 1973.


So for example – if the red line (which represents average house price change in %) vastly exceeds the blue line (which represents median total income change in %) then house price growth is outpacing income growth, which can be considered an indication of bubbly formations. We can see in the chart above one big bubble that formed in the mid 1980s, and popped in 1989/1990. Why is it considered a bubble? Because there are very few things in this world that can justify a rise of 30% in house prices in one year. For example, incomes during that same period grew by 2%.

As well, we had a bit of a bubble that formed in 2016/2017 and clearly deviated from the norm. But that bubbly 2017 period ended abruptly with the introduction of the Fair Housing Plan by the Ontario government (among a number of other house calming measures introduced at the Federal and Municipal level; for eg – the stress test).


It is also important to recognize that incomes are only one element (albeit a very important one) that influence house prices. Other important factors include interest/mortgage rates, length of amortization periods, inflation, demographics, housing supply-demand, development and housing regulations, general economic/job outlook, foreign investment, speculation, etc. These other factors likely account for the left over discrepancy between house price and income growth.


House Prices – http://www.trebhome.com/market_news/market_watch/

Median Total Income (1976 – 2011) – https://open.canada.ca/data/en/dataset/ed248f3a-65ef-4a8d-860c-deef144bb7a2 (Table 202-0411)

Median Total Income (2000 – 2015) – http://www5.statcan.gc.ca/cansim/a26?lang=eng&id=1110009&p2=33


What will your monthly mortgage payments be like in the future?

I like to think of the price of housing, not from the perspective of the purchase price, but from the perspective of monthly carrying costs – i.e., what you actually end up paying for a house. And I’m especially interested in how monthly carrying costs have changed over time.

RBC for example produces great reports on housing affordability, which chart the proportion of income required to service mortgage payments, property taxes, and utilities since the 1980s.

I decided to replicate RBCs analysis in this post to determine what monthly carrying costs could be like in the future. I used data from TREB, the BoC and Stats Canada (sources shown at the end of post).

So if we take a quick look at the data used for this analysis, we notice some key trends. Notably, house price have risen in the GTA since 1973 (in 2017 $), to about $823,000 as of 2017.

House $s

5 year mortgage rates have fallen over the same period, and are currently at historic lows.


And median total income for all families has barely done anything since 1973 (in 2017 $).


When you combine the three variables above together, you get the chart below (RBC produces similar charts, but by quarter, and also takes into account the cost of property taxes and utilities) –

mortgage %

So about half of your income is servicing just the mortgage today. And if you want to look at what you’re actually paying per month, see the chart below (keep in mind the historic data from the late 1980s might seem a bit crazy given it captures a particular period in time with peak house prices and mortgage rates) –

mortgage $

So expect to pay about $3,700 per month today for just your mortgage. This is based on an average GTA house price of $823,000 with a 20% down payment, and at a 4.78% mortgage rate with a 25 year ammortization period.

As I noted at the beginning of this post, I am most interested in the monthly costs in the future. So I decided to set up three different future scenarios to 2030 –

  1. House prices and incomes rise at 4% and 3% respectively per annum; 5 year mortgage rates fall gradually to 3.2% by 2030 – I call this Rise and assume we see continued economic growth globally and in the Toronto Region.
  2. House prices fall at 2% per annum and incomes grow at 1% per annum; 5 year mortgage rates rise to 9% by 2030 – I call this Drop and assume we see stagnation and a recession globally and in the Toronto Region.
  3. House prices and incomes grow at 1.87% per annum (rate of inflation 2016 to 2017); 5 year mortgage rates gradually rise to 5.4% by 2030 – I call this Stable and assume status quo.

The charts below show what those trends look like for house prices, interest rates and incomes (dashed coloured lines represent the three future scenarios identified above).

By 2030, house prices could be between $497,000 and $1,077,000 in 2017 $s (between $633,000 and $1,370,000 in 2030 $s) ; or they could stay at 2017 levels – $823,000 ($1.04M in 2030 $s).

F house

Here we see how the three future scenarios play out with 5 year mortgage rates.

F mortgage.JPG

And in the chart below, we see the impact of the future scenarios on median total income. By 2030, incomes could be between $76,000 and $97,000 in 2017 $s ($96,000 to $124,000 in 2030 $s).

F income.JPG

Once again, when we combine the three variables above, we get the chart below –

F % Income

What this chart simply says is that the average household/family will be expected to dedicate about half of their income to just mortgage payments in the future.

And again, when we look at the actual money you are expected to pay per month –

$F Carrying Cost

So an average mortgage from now on will cost a minimum of $3,300/month (in 2017 $s), even with a significant drop in prices (of 40% by 2030) and a rise in interest rates. In 2030 $s, this would translate to a minimum monthly mortgage cost of $4,200. Below is a chart showing the monthly mortgage cost indexed to 2030 $s so you can see what you would pay in that year.

$F  Carrying Cost 2030.JPG

So although a drop in house prices would provide some financial relief with respect to monthly mortgage carrying costs, that relief does not appear to be too significant. Unfortunately, it doesn’t particularly seem like housing will get much cheaper anytime soon if you look at the monthly carrying costs.


House Prices – http://www.trebhome.com/market_news/market_watch/

Median Total Income (1976 – 2011) – https://open.canada.ca/data/en/dataset/ed248f3a-65ef-4a8d-860c-deef144bb7a2 (Table 202-0411)

Median Total Income (2000 – 2015) – http://www5.statcan.gc.ca/cansim/a26?lang=eng&id=1110009&p2=33

Mortgage Rates – http://www5.statcan.gc.ca/cansim/a26?lang=eng&id=1760043

Inflation – https://www.bankofcanada.ca/rates/price-indexes/cpi/

The State of the Resale Housing Market in the Toronto GTA

The other day, the Toronto Real Estate Board released their resale housing market data for the month of December (2017). 2017 was a crazy year for Greater Toronto Area (GTA) housing prices. Ontario’s Fair Housing Plan, which was introduced in April had quite an influence on the resale and new home sale markets.

If we were to look at resale house prices annually from 1953, this is what they look like ( shown in the chart are the average house prices for 2017, 1989 and 1974) –

Resale 1953

This is what the annual % change in house prices since 1953 looks like (shown in the chart are the annual % changes in prices between 2016 and 2017, 1991 and 1992, 1986 and 1987,  1980 and 1981, 1973 and 1974, and 1965 and 1966) –


Despite the ups and downs of the 2017 resale housing market, prices for the year are about 13% higher than resale prices in 2016.

This is what median house prices look like for every month since 1996 –

Median House Prices.JPG

We can see the big run up in prices during 2016 and the early months of 2017, followed by a fairly steep drop after Ontario’s Fair Housing Plan release.

And the following chart shows the Year over Year (YoY) changes in monthly house prices since 1997 –

Median House Prices%YoY.JPG

What I pick up from the YoY chart immediately above is that Toronto GTA’s house prices increase on average between 5 to 10% per year – which can be considered a very reasonable growth rate for a region that grew by about 2 million people and added over 1 million jobs over the last 20 years. But beginning in 2016, there was significant upward pressure on prices – in March of 2017 for example, prices were up 34% YoY! And the precipitous drop that followed was not something that was unexpected. The last time our house prices experienced these kinds of swings was during the great recession of 2008 (as clearly evidenced in the chart above).

Condos retained their value the best relative to other housing types, but even they continue to slide downward (this could be however due to a weak winter market for eg). Singles on the other hand have shed substantial value – about $200K down from their March 2017 peak.

Where will the housing market go from here? I think Spring 2018 will give us a clearer picture, as spring markets are usually very active housing markets.  We were anticipating the fall 2017 market to give us an idea of where the market was heading, but it provided little information.

Here’s what the monthly resale levels look like for the last 6 years –


It appears that the resale housing market in the Toronto GTA is not really plummeting or recovering, just merely existing…and that’s not necessarily bad.

Two years ago I wrote articles (here and here) on why I don’t believe Toronto will suffer a housing crash. I still believe that. But I had greater confidence in the market when prices were rising by about 5 to 10% per year, as opposed to 34%.

The higher they rise, the harder they fall 

I’m not sure who said the infamous quote from above, but I do know that a drop of 34% in values is much harder to swallow than a drop of 5%.

But the one thing I am very confident in is Toronto. This city is on a great trajectory and in 20 years time, it will be an even more amazing place than it is today. If you need proof, check this and this out. And the real question now is not what happens in 20 years, but what will happen in the next 5 to 10 years…

Full disclosure: I helped develop a number of the measures as part of Ontario’s Fair Housing Plan aimed at increasing housing supply, including actions related to Growth Plan implementation and monitoring the impact of the measures while with the Ministry of Municipal Affairs