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Toronto Real Estate ON FIRE
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Toronto home sales caught fire in the first half of May, but at this frenzied pace, homeowners better hope that fire doesn’t burn everything down.

The latest numbers from the Toronto Real Estate Board suggest a market so strong that it might just be overheating: Sales volumes jumped 19.6 per cent compared to the first half of May in 2013, and prices followed.

The average cost to buy a house in Toronto, including condos, soared to $663,787, up 11.5 per cent in the space of a year. In the Greater Toronto Area, prices were up 8.9 per cent, to $542,047 on average.

Condo prices in Toronto were up 12.2 per cent, to just under $400,000 on average, while single-family homes jumped 13 per cent to $966,867. (By Teranet’s measure, single-family houses have already surpassed the $1 million mark.)

So is this a sign of a strong, healthy market or a sign of extreme overheating?

Compare those house prices to inflation, which was running at a 1.5-per-cent clip last time StatsCan checked, and to wage growth, which is clocking in at about 2.3 per cent per year. Toronto’s house prices are far out of proportion, and affordability is inevitably deteriorating.

Toronto’s real estate board isn’t sounding the alarm just yet.

“While tight market conditions continue to prompt strong year-over-year increases in the average selling price, it is important to point out that the monthly cost of home ownership – mortgage principal and interest, property taxes and utilities – has not trended upward as strongly. Strong price growth has been mitigated to a large degree by low borrowing costs,” the board's senior market analyst, Jason Mercer, said in a statement.

Incredibly, those low borrowing costs may yet sink lower, if other lenders follows the example of Investors Group, which recently introduced a variable-rate mortgage starting at just two per cent.

All the same, the sudden acceleration in house price growth should concern housing bubble-watchers. As BMO economist recently showed in a chart, bubbles tend to be preceded by a sharp increase in prices. Here, we see sharp price growth before the housing bubble burst in Toronto in the early 1990s. The more recent run-up in prices has not been as steep — until now.

Despite the strong numbers coming out of Toronto and some other markets like Calgary and Vancouver, some economists have already declared an end to Canada's long-running housing boom. A recent report from Scotiabank predicts the housing market is about to shift from being a major driver of economic growth to being a drag on GDP.

What do you think? Are these huge house price spikes the start of a housing bubble, or just a sign of a strong housing market? Let us know in the comments below.

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