Toronto home prices are crazy. Here’s when you need to worry about a housing bubble — and when you don’t

At least one big bank economist is willing to come out and say it: The Toronto real estate market looks like a housing bubble.

“Let’s drop the pretense. The Toronto housing market — and the many cities surrounding it — are in a housing bubble,” Bank of Montreal chief economist Douglas Porter wrote yesterday in a research note.

Home prices in Greater Toronto were up 22.6 per cent in January compared to the same month last year, according to the Toronto Real Estate Board. The average Toronto home now costs $770,745. And prices are skyrocketing pretty much in any town from which one could conceivably commute to Toronto. In Guelph, a 1.5-hour drive away when traffic is good, the average home price shot to $475,717.

That’s what BMO economists call a bubble.

READ MORE: Immigration from abroad, rest of Canada adds to Ontario’s housing crunch

“Everyone may have a slightly different definition of what a bubble is, but most can agree it’s when prices become dangerously detached from economic fundamentals and start rising strongly simply because people believe they will keep rising strongly, encouraging more buying,” reads the bank’s report.

More importantly, housing bubbles sometimes burst.

So what does a bubble mean for prospective buyers, sellers and homeowners?

READ MORE: What the housing market could look like in 2017.

Here are a few things to keep in mind.

When not to worry

• You own a house and are prepared to keep it for a very (very) long time

“My husband and I bought a house in 1988, at the top the market then, but we’re still in it and we’ve been fine,” says Marisha Robinsky, a sales representative at Bosley Real Estate in Toronto.

Despite their ups and downs, real estate prices generally trend upward over the long term. So if you’re in your house for the long haul, you should be OK, says Robinsky.

Keep in mind, however, that if housing prices crater, it might take decades for them to climb back up.

The chart below, which Robinsky compiled based on TREB data, suggests that someone who bought at the peak of the market in the late 1980s (like Robinsky herself) had to wait 20 years before home prices fully recovered:

• You really need a house now and can afford it

If you need a house to live in and can afford one, don’t try to time the market by waiting on the sidelines, says Robinsky. It rarely works.

Toronto has been abuzz with housing-bubble talk for a decade, but prices are still climbing.

WATCH: Financial expert Preet Banerjee looks at three things you could possibly expect with the 2017 housing market.

3:09 Looking ahead to the 2017 housing market

When to worry

• You bought a house with the intent to resell it

This isn’t just house flippers and speculators. If you bought a house thinking you’d be selling in five years and making a tidy profit, you should worry. Even a small price correction can upset your financial plans if you’ve bought a house as a short-term investment.

“It’s like a stock: You think you have so much money, but it’s all on paper,” says Robinsky.

• At some point in the near future you might have to sell your house, no matter what

Lots of Canadians who are counting on downsizing to help bankroll their retirement would fall into the prior category of homeowners who see dollar signs when they look at their house. But seniors are particularly at risk because they have limited ability to wait out the market if prices head south, says Robinsky.

Plenty of younger homeowners could find themselves in a similar predicament. Suppose you need to sell because you found a job elsewhere. Or because you need to take care of your aging parents. There are many circumstances that might force you to offload your house without waiting for prices to climb back up.

One of the toughest predicaments you could find yourself in is having to sell in a buyers’ market because you’ve become unemployed and there are no jobs to be found close to you. It’s a worst-case scenario but not an outlandish one, as housing bubbles sometimes burst because the economy enters a recession.

READ MORE: Why variable-rate mortgages are becoming more attractive to Canadians

So how likely is Toronto’s bubble to burst?

Not likely, according to BMO. The bank isn’t forecasting any price corrections, senior economist Robert Kavcic told Global News. Even if one were to happen, it would probably occur as moderate price decreases followed by a prolonged period of flat prices or small price increases, he added. Think Calgary or even Vancouver, rather than the epic bust of the early 1990s.

Generally speaking, there are three possible triggers of home price declines.

• A recession

A recession caused the 10 per cent housing price correction of 2008-2009.

Ontario, however, doesn’t seem to be headed for an economic downturn, at least for now, said Kavcic.

Also, economic booms and busts tend to be less extreme in Ontario than in jurisdictions like Alberta, where 75 per cent of the economy is tied to the energy industry, said Kavcic.

Ontario’s economy is nonetheless “still pretty cyclical” and generally heavily influenced by the U.S. economy, he noted.

• Interest rate increases

That’s what triggered the downturn that led to the housing meltdown of 1989. Back then, though, the benchmark Bank of Canada rate had reached 12.6 per cent. Today the overnight rate stands at 0.5 per cent.

It’s hard to see interest rates decreasing any further, said Kavcic.

In fact, some Canadian mortgage rates have been inching upward. Still, a return to the sharp increases and double-digit rates of the 1980s is widely considered unlikely.

• Government measures aimed at cooling the housing market

Something like the 15 per cent tax imposed by the B.C. government on foreign buyers in Metro Vancouver would take “a lot of the froth” out of Toronto’s real estate prices, said Kavcic. In Vancouver, the tax seems to have discouraged foreign investors with deep pockets and the capacity to bid high for houses. And it might also have popped the local bubble mentality, he added.

A similar policy move in Ontario, more so than the impact of the new federal mortgage rules, would probably cool prices in Toronto as well, Kavcic noted.

WATCH: The B.C. government also raised the threshold for those eligible for the homeowner’s grant. Many will benefit, but there are some who won’t and it has triggered another round of debate.

2:06 The winners and losers of B.C.’s housing market