Is it smart to buy real estate just now ?

Prompted by a request to furnish information about the future of Toronto real estate…
Dear Madame,
I’m going to assume your buyer is an analytical, who knows what she knows and seeks advice in areas where she’s not expert – and then verifies that advice.
I’m attaching a chart that shows CPI-adjusted Toronto realty prices since 1969
My reason for including this as much to introduce the inflation factor as it is to show the history of property (Average annual TREB residential) prices
Looking at this you see that prices (adjusted by the Consumer Price Index -at Sept 2014) did not move in  a straight line – most significantly, prices leaped higher in 1985-1989.
Toronto CPI-Adjusted Prices
This was a Canada-wide era of high inflation, widespread investment/speculation-buying by small investors AND increasing interest rates. Central banks (world-wide) increased borrowing rates dramatically in an effort to break-the-back of inflation by making highly-leveraged, loan-dependent purchases more expensive and simultaneously adding incentives to save.
This was a wild time. A boom. Followed by a bust – as always. First-time buyers and small-time speculators competed for the entry-level properties (not so much in condos then, since the nominal (unadjusted) price of freehold properties was much lower – another chart
CPI-Adjusted vs Nominal Prices
Today’s adjusted prices reflect a) a doubling since 1996 (5.7% annual average), b)  a 24.5% gain in the adjusted average price since the previous peak in 1989 ~25 yrs and c) prices at 4-times the level of 1969 (4.7% average annual)
The reason I introduce this information is to background my opinion on i) inflation-fed, ii) demand-fed and iii) supply-fed price gains in the GTA in the short-medium future.
Investors and investment Realtors(tm) view of real estate used to be characterized as Location, Location, Location.
Today it’s Location, Demographics and Time.
Every investment has a time frame … funds will be utilized for X purposes for Y # of years.
Real Estate investments are leveraged investments ie no reason to pay 100% cash, prudent investors use 20-50% cash and let the property cover the operating expenses. Homeowners/owner-occupiers actually do the same thing – everyone has to live somewhere, and the occupier either rents their space or rents the money via a mortgage to own it.
Property investments “make money” in several ways 1) income from rent (or rent not-paid to someone else), 2) gain in equity by reduction in mortgage balance through amortization and 3) appreciation of value.
I will connect the dots by saying I believe we are going to experience another mid-high inflation cycle as central governments allow their currencies to fall, tangible assets and salaries/wages to rise (C.O.L.A clauses have already returned to labour agreements) AND make themselves ‘look good on paper’ as gov’t debt-balances (as a percentage of GDP anyway) decline.
I believe central banks will be stopped from raising interest rates because governments are the greatest borrowers and increases in rates on the already-huge interest-bearing public debts will simultaneously blow-open municipal, provincial and national budgets NB Canada has been issuing 50 yr bonds in anticipation.
The opposite scenario “deflation” has proponents too – but after the past-performance of 2008 (when the financial/monetary/fiscal world really should have blown-up) central gov’t and central banks will not allow it – they will just keep printing/borrowing/easing to expand the money-supply, thus fuelling prices and wages and we have the wage-price spiral again.
Owning tangible assets will prove wise – values appreciate, rents go up and the value of debt-principal is diminished.
People still love to own their own home, no matter whether it’s a $150K suburban back-to-back stacked townhouse or a $1.5 million deluxe condo downtown, with 2-3% interest rates and 5%-20% down payments (never mind 2% CPI inflation as a gov’t guaranteed increase) the prices will continue to rise and multiple offer/bidding wars will abound.
Over the foreseeable future, the supply of homes/properties will not increase from the low-levels we’ve had for several years – why? because seniors are staying in their homes longer. They live full lives much longer than 20 yrs ago, even if one spouse dies, the other can/wants to carry on for several years.
And why should they not try to stay home for as long as possible – home IS home, luxury condos are smaller AND often almost as expensive as the existing home (i.e. not much money gets freed up), the other choice, a retirement home is absolutely smaller, a complete change of life that is often quite-expensive monthly.
The Oak Ridges Moraine Act, Greenbelt Act and Places to Grow Act have put boundaries on GTA sprawl forcing intensification AND the new-buzzword in planning/zoning RE-intensification on the 416 and adjacent 905 communities.
Finally when rates edge up (say 1% or 1.5% over 2-3 yrs) buyers will want to “buy now” to lock in mortgage rates – pushing up prices again.
But not forever.
The key ingredient then is TIME. When to acquire and when to divest.
Time to buy can only be present.
Time to sell is when the “use” of the property is less valuable than the use of the money deployed elsewhere.
Yours truly,

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