Beware the Danger of Buying Toronto Real Estate

The big event in Toronto this weekend was the Real Estate Wealth Expo, which featured Tony Robbins, Jim Treliving, and a special performance by pop music star Pitbull.

These speakers – along with approximately a dozen more – had one simple message. The time to buy Toronto real estate is now. Prices have shot up over the last decade, with potential for similar returns over time. After all, real estate never goes down.

There’s just one problem. The last decade’s performance means Toronto real estate is overvalued. Big time.

Traditionally, real-estate investments were based on cash flow. If you purchased a property for $1 million and it returned $100,000 per year, it was an attractive 10% return. These days, investors in Toronto will happily accept cash flow of 1-2%. Many investors are subsidizing their rental properties, meaning they don’t collect enough in rent to cover expenses.

They plan to make it up in appreciation. But what happens if appreciation doesn’t come?

The average detached house in Toronto itself is now worth $1.5 million, while the median family income is well under $100,000. This makes Toronto one of the world’s most unaffordable cities.

Several of Canada’s top banks have come out on record saying Toronto is officially in a real estate bubble, and recent Canada Mortgage and Housing Corporation default insurance changes were specifically made to throw cold water on the Toronto market. Next could be a tax targeting foreign buyers, a move that already weakened Vancouver’s frothy market.

A real-estate market with regular bidding wars and huge annual gains isn’t healthy. The bubble will eventually pop.