Hubble bubble toil and trouble.  You can’t swing a cat these days without overhearing yet another conversation about a housing bubble forming in Toronto.  For anyone that has recently bought a house, the bubble threat is scary.  People always like to commend you on a “smart” decision if the price of your house rises significantly so I guess that means you’re the village idiot if the prices drop.  The unfortunate souls who buy during the height of the market become the signature cheesy scene in every popcorn comedy, the dumb guy berated by his friends for making out with that hot chick who is, duh, totally a MAN in drag.  How couldn’t you tell, sucka?

So what to do?  Buy now or wait until the theoretical bubble bursts?  I heard all the bubble hype when I bought my first house in 2006 and in three years the value increased by 32%.  Had I waited, I certainly wouldn’t have been able to afford the same house even if I had bought in the pit of the market in Winter/Spring 08-09.  So are we approaching a bubble?  Will all the haters who bought in the suburbs or chose to rent finally get their moment of victory?

Are gloomier days ahead? Photo of Jones Avenue by Rémi Carreiro

If I could actually say with certainty that we were or were not in a housing bubble, I would be doing much more important things than writing this blog…like plotting world domination or making billions on the stock market.  Before we decide on our current bubble or non-bubble status, it is important to actually define what a housing bubble is.

Contrary to popular belief, a bubble is not just a rapid appreciation in prices.  In our current market, prices are rising because of strong demand for housing due to low mortgage rates and limited inventory.  This is not by definition a bubble, even if average home selling prices rise quickly like, uh, say 19% from $343,632 in January 2009 to $409,058 in January 2010.  A housing bubble is a market where prices rise purely on speculation of future increases, where buyers pay significantly over asking in anticipation of a perceived future value that may or may not bear out.  Housing prices increase rapidly until they reach unsustainable levels relative to incomes and the pace of the economy and then SPLAT, you’re waking up next to a dude.

The largest freestanding bubble care of England's SamSam the Bubbleman. Incredible! Photo by The Sun

Is that what we’re experiencing right now?  Unfortunately we never seem to really know if we’re in a bubble until after it pops.  Why did people get so high on real estate fumes and Alberto VO5 hairspray in the 80’s?  Over a five year period from 1984 to 1989, houses appreciated by 167% and interest rates hovered at 11-14%.  On average in Canadian real estate hot spots, it cost almost 75% of pre-tax income to service mortgage payments, property taxes and utilities on a standard two-storey home, whereas that number is now hovering around 58.4% for Torontonians.  It seems totally obvious to us now that the hot mess of 1984-1989 was going to end in tears.  But, like a bad relationship, when you’re in it, the whole situation is never quite that simple.  That old bastard hindsight is always to blame.

I’m going to go out on a limb here and say that I don’t think we’re experiencing a bubble just yet.  While prices have made a massive increase from a year ago, it can be argued that we’re making up ground lost during the financial crisis.  In December 2009, prices were up just 2% over the previous high in August 2008.   Certainly the current acceleration of the market feels unsustainable but things should slow down as affordability erodes and the interest rates rise.  What happens over the next few months will really define whether or not we’re going to bubbleland.  Now that we’re basically caught up to pre-recession housing prices, how fast will growth be over the spring market and will speculative buying become a problem?  Only time will tell…

For more information on Toronto’s potential housing bubble check out:

Frantic housing market ready for calm, Globe and Mail

Housing market in bubble territory?, Toronto Star

Toronto housing market expected to cool next year, Toronto Star

Bank of Canada says sees no housing bubble yet, Reuters