Historical Look At Toronto’s Housing Market

 

We all need a place to live, so why not make where you live contribute to your financial future. Look at our parents. They were working class folks who purchased a home for say $30,000 in the early 70’s and today lets say it’s worth say $500,000+. Yes, there were market corrections in the early 90’s and 2008 but look at the benefits they reaped from decades of ownership:

  1. A comfortable home and a stable neighbourhood to raise their families.
  2. An investment in bricks and mortar which they could tangibly see increasing in value through decades of neighbourhood home sales.

Now, I live in Toronto and it think it is critical to see how our local housing market has fared over the years. Interest rates, here is a quick snapshot of what banks were charging with the highs and lows as well as the average house price:

 

Toronto Historical Interest Rates and Average House Single Family
Year Interest Rate High Interest Rate Low Yearly Average House Price
1970 10.60 10.16 $29,492
1975 12.15 10.65 $57,581 (almost double)
1980 16.94 12.92 $75,694
1981 21.46 (Peak) 15.17 $90,203
1985 13.43 11.61 $102,318
1990 14.03 12.01 $255,020 (double in 5 yrs)
1995 10.60 8.46 $203,028
2000 8.50 7.81 $243,255
2005 5.67 5.26 $335,907
2010 5.30 4.45 $431,463
2011 4.79 3.39 $466,357

Source: CMHC and Toronto Real Estate Board

INTEREST RATES:

What we can see at first glance is starting in 1995 to the present interest rates start to drop from double digits to single, and within the last 10 years interest rates are half of what they were. I put in 1981 which was year where home owners faced the highest interest charges: lets say you had a $80,000 mortgage at 21.46 your monthly payment would be $1500 if you compared that to today you could borrow $280,000 at 3.39% with the same monthly payment. Those of us with a mortgage know that we are now at historical lows, but we know that rates have nowhere else to go but up. The experts in the mortgage market have for years said go variable, but with today low rates they are advocating going 5 year.

HOUSE PRICES:

In 1970 our parents could purchase a home for $30,000. It doesn’t sound like much but then again incomes were substantially lower than what they are today. We do however share commonality in that we see that owning our own home is an opportunity to add to our personal wealth. Let roll ahead it’s 1990 and in the 5 years that have passed housing prices since 1985 have increased a wooping 150%. The good times were rolling, however a market correction was inevitable and in 1995 home prices had shed 20% or their value amortized over 5 years.

TODAYS MARKET:

Gone are the halcyon days of seeing house prices rise 150%… housing market growth is now measure in more realistic and sustainable increments. Lets say you purchase a house today in Toronto. Here is what you have:

Purchase Price $450,000

Down Payment $25,000 (5 percent plus closing costs)

Mortgage Pre-approved $425,000

Interest Rate 5 years 3.39%

You move in and a year later then we see a housing market correction of a loss of 10% of value. It seems that our bricks and mortar is now only worth $405,000. Here is where you say “If I only waited another year I could of saved $45,000″. You grumble but, hey,you still need a place to live don’t you? But today you go your mortgage provider they inform that rates are up a full point and anyone purchasing a home now are in the long term will be paying more interest. Feeling better now.

Bottom line at the end of your first year of home owner you owe $413,000 and at the end of 5 years $366,000. You lived through the market correction and funny that in 5 years you have owned your home the market has rebounded and housing values have increased 15% over entire period.

Your New House Value $516,500 (15 percent over 5 years)

Mortgage Owing $366,000

Now this is where you smile and say “What a brilliant decision I made 5 years ago to buy this house”.

Very few of us can accurately time the markets, but staying in for the long term always pays off.