Is Oakville in a Housing Bubble?

Last week an article was written in the Toronto Star reporting on the competitiveness of the Real Estate market in the Toronto suburbs.  This sparked debate among some friends about whether or not the market fundamentals are deteriorating at we are in bubble territory.  I thought I would share my response to our discussions below

Question:

Lindsay, do you think Oakville market fundamentals deteriorating to the point we are in bubble territory and if so what is the cause?  Are you seeing much property flipping in the area?

I haven’t seen flipping as much as lots and lots of buy and hold investors. Everything I see supports the much reported view that Chinese investors are looking to park money outside China so buying and holding is a better play at the moment. I believe this is having a very large impact in Oakville right now. 

It's hard to be conclusive when the real estate industry and the government does not publish who is buying and the reason for the purchase but it is blatantly obvious that forces have changed in Oakville over the past year. Our average price increases since 2008 have been in the 6-12% range annually. Last year we were at 27% and if the first month and a half of this year are any indication, I expect this year will be similar if not higher than last. The fundamental forces have not changed significantly. Immigration, diverse economy, low interest rates and limited supply/land availability have all been fairly consistent since 2008 and can in my mind justify the consistent high single digit, low double digit growth. Mortgage rules have gotten significantly more stringent so you would think that would curb buying. What then is causing the market to go crazy? The big change I can see is foreign investment coupled to a lesser degree with domestic investors. This is a good place to make money but what happens when Australia or the US or China becomes more lucrative?

I don’t closely study the Toronto market but my guess is that foreign buyer focus is shifting to the suburbs. Burlington saw an increase in prices of just over 10% last year so strong but not completely out of whack with prior years. Again without data to back it up, I can say from working there that the pressure from investors was no where near what it was in Oakville. 

I question when someone of John Tory’s influence says that market fundamentals are still strong. Because there is no published data on the influence of investors does not mean you can turn a blind eye to its impact on the market. Yes, fundamentals are strong but so is the negative outside influence of investors. 

The market rises are still more or less localized to the GTA and surrounding areas so to me the problem should be addressed at the local level. The problem is the municipalities have no incentive to impose controls. Property owners, especially baby boomers are loving the gains. Revenues are up with soaring property assessments and yet municipalities can boast no tax rate increases while they rake in more money. The voting majority is happy while future generations will be hurt.  The same goes for the provincial government who just recently reported that deficit projections have gone down significantly due in large part to land transfer tax revenues.  In Toronto the city gets the benefit of both rising property tax and land transfer tax revenues.

It's a real problem and this is the first time in my 8+ years in the industry that I am worried that their is an imbalance in the market fundamentals. That said, short term, people stand to make a killing so for many it still makes sense to buy. I realize this mentality just creates more of a bubble with people pushing into the market faster than they otherwise would but on an individual basis it makes sense for many.  If I am interested in buying and can afford a home today but am worried the market will increase to the point that I can't comfortably do it a year from now or even 6 months from now, I am incentivised to look now.  The majority of the buyers I’m meeting feel the market is still going up in the short to mid term and that they stand to be better off financially if they buy now.  If you are living in the home you buy then the process is also emotionally charged.  The emotional value of a home can believe it or not still exceed the financial obligation even at todays all time highs.  If you can afford the home and can weather mortgage rate increases, then buying now for the long haul still makes sense.

So do I think there is a bubble? Maybe but probably not yet. It depends how many investors are currently in the market. It is the one huge key piece of data we need to be capturing but are not.  I honestly cannot for the life of me figure why not.

The vast majority of principal resident home owners have made a lot of money on their home so they probably won't sell off even if prices turn flat or fall. A bubble implies that it can burst at any time and see disastrous consequences.  I'm not convinced this is the case in Oakville as despite high investment activity, there are still a whole lot of good fundamentals at play (immigration, lack of land, low interest rates, diverse economy). Plus, where would everyone all go? 

What we need to do is prevent investors from creating a market that is influenced only by market returns. As soon as an investment vehicle provides a better return, they are gone. It is imperative we need to curb this influence before it gains too much influence.

It is time for the government to act (both with tracking and publishing investment activity and imposing regulation to curb it). If investment keeps at its current pace then we will reach a point where we are in bubble territory.

For reference, attached is a link to the original Toronto Star article that sparked this conversation.  Note I am a TREB (Toronto Real Estate Board Member), was invited to partake in the voluntary IPSOS Reid Poll where the research concluded that only 5% of transactions taking place are from foreign buyers.  I won’t go into my rationale here but I believe this number to be artificially low for many reasons.