It seems that just about everyone in the country has concerns over Toronto’s housing market and Toronto mortgages. Home prices are rising far too rapidly and new condos are being built with every breath. Yes, there is concern, and there’s even good reason for it. But while we so often compare ourselves to the United States in their time of crisis, it’s Spain we should really be looking at. Because it’s this country that proves just how bad things can be – and shows us why it’s no so bad in Toronto.
It was in 1999 that Spain started seeing the same kind of boom that we’re seeing here in Canada, and that they saw across our Southern border. During this time Spaniards were gobbling up as many properties as they could – and foreign investors were in on the action too. People were flooding to this area to scoop up vacation homes and investment properties while in Spain, real estate was the investment to get a good return on – none other really could even compare. In fact, real estate was such a huge profit-making investment tool that many, many residents were buying second and third properties – simply because they were the best possible assets you could hold. During the height of the Spain housing market frenzy, a whopping 80% of Spanish household assets were held in real estate.
Then the other shoe dropped.
At the beginning of the global financial crisis in 2008, housing prices in Spain fell by an astonishing 21%, and it’s thought that they’re going to drop even further. By the time they bottom out, the average home price in Spain could be down 55% from its original purchase value. Add to this the fact that along with the crisis, Spain also felt other major economic repercussions such as their unemployment rate rising to a drastic 25%, and their youth unemployment rate at a huge 50%. This is due to the fact that Spain couldn’t lower the value of their currency anymore due to the Euro.
So what does this mean for us at home trying to get Toronto, Vancouver, and Edmonton mortgages? Well, it means that while our situation might currently be fragile, we’re probably not going to implode on ourselves like so many think. Compare the numbers, and you’ll see.
Our current assets that are held in real estate only equal 39%, less than half of what Spain’s was. Yes, that’s higher than it’s been in over two decades; but still not nearly as bad as we might think. And while all Canadians are worried about the current 10% overvaluation happening in most Canadian markets, it’s nowhere near the overvaluation that occurred in Spain or in the States, and so while our prices will drop, they’re likely to not be nearly as drastic.
Does this mean that we should wash our hands of responsibility and continue to ignore our housing market? Of course not. Canada has never done that, and there’s no doubt that our federal government is keeping a closer eye on our housing market than ever before. But it does show that while we may be in a bubble, and while there may be no denying that the bubble is going to pop, it’s still very likely true that what we’ll feel will be the “deflating” effect that so many have predicted. And not a burst that makes our entire economy collapse.
