What happens if you had a recession and housing prices didn't really go down?
That's the scenario Toronto could be in by the end of 2009, as economists scramble to revise forecasts.
Toronto housing economist Will Dunning is forecasting that the average price of an existing home in the Greater Toronto Area will be $378,700 by the end of this year. His previous forecast was for prices to decline to $358,100, or about 5.6 per cent from 2008. That's in line with the estimates of about a 5 per cent decline from most major housing analysts.
"The forecast has been raised substantially," Dunning says. "For the past three months, resale activity has been much stronger than I had been anticipating."
A $378,700 price is spitting distance of the $379,347 average price recorded at the end of 2008. Dunning says this year's average price could surpass last year's.
Under that scenario, prices would have increased every year since 1996 – a total of 13 straight years.
Not bad, considering that consumers have been repeatedly told this is the biggest economic downturn in North America since the Great Depression.
"These kinds of price increases are not what we expected at all," says Sal Guatieri, senior economist with BMO Capital Markets. "Given the economic backdrop, no one expected housing to bounce back the way it has."
Those who remember the previous recession won't soon forget a housing downturn that lasted for seven years. Average prices plummeted from $273,698 in 1989 to $198,150 at the bottom in 1996.
It is almost inconceivable to think this recession may not see even one year of retreating prices. But it's possible.
"I guess if you make things affordable enough, it will generate demand.
"And all that impact on affordability has been on the backs of lower mortgage rates," says Guatieri.
According to a Desjardins Bank report released yesterday, affordability is deteriorating as average prices rise in Ontario.
Still, the provincial market remained affordable despite the increase in prices. The bank warns, however, that "if this trend holds, the market's journey into affordable territory will be short lived."
Guatieri calls the housing climate "bizarre" and worries that some consumers may be stretching themselves to get into the market.
"You have to wonder (if) in two or three years mortgage rates go back to normal levels whether they will still be able to afford the properties," says Guatieri.
The rebound's strength is even more surprising, since the year began with sales down by 50 per cent in January. The market started to show positive territory in May, with a 2 per cent increase, then posted two consecutive records, a 27 per cent increase in June and 28 per cent in July.
Data for the first two weeks of August show that this year's cumulative existing home sales have surpassed last year's sales at the same time.
Guatieri says the bubble of the 1980s was driven partly by speculators, while affordability with double-digit interest rates was "stretched to ridiculous levels."
This time housing prices are still growing faster than income levels, but affordability was not as stretched thanks to a low-interest-rate policy by the central bank.
Most economists think the party will have to slow at some point.
"Over longer periods, growth of employment is the critical factor, as it generates a need to expand the housing stock," says Dunning. "With employment having fallen since last fall, there is limited need for new housing activity."