It’s simple, really - the economic relationship between supply and demand. But what begins as a simple premise has created widespread impact, with financial, social and demographic implications in the City of Toronto.
Welcome to Urbaneer’s hotly anticipated dose of seasonal prognostication - our Toronto Real Estate Fall 2014 Forecast.
Many of the same market influences continue to linger - a potential oversupply with condominiums, a red-hot market that continues to test the limits of affordability, the continued roles of foreign investment and a low interest rate environment. However, due in part to the intensity and duration of the current market conditions, there are new issues that are making themselves more apparent. There is specific, significant price appreciation with freehold housing types in pockets around the city and buyer experiences that are evolving into phenomenon. These are beginning to raise the possibility of shaping a demographic shift with significant social and geo-physical impact.
Add to that the emotional intensity that being a buyer in a market that simultaneously holds opportunity and intense pressure and competition. This has resulted in major highs and lows which contribute to cycles of buyer fatigue, buyer euphoria and buyer despair - all in a rotation unique to each buyer.
The Usual Suspects
The headlines have been repeating themselves for a couple of years now - just with different words, but the meaning still remains the same. The gist of it is, ‘beware the red hot market- and the pitfalls that can ensue’. While homebuyers may feel that there is a bit of a “the sky is falling” thematic thread from analysts, their message is still valid - and should still be heeded. Bottom line - caution and knowledge are your best allies when negotiating a market that has speed and momentum on its side.
The inherent problem with repeating yourself is that some of the urgency of the message gets lost. However, what is absolutely urgent to note is that the fundamentals upon which these analysts, economists and pundits alike collectively sound their alarm bells still persist. And it is their very existence that should cause you to stop and take pause.
In his soon-to-be-released book, “When the Bubble Bursts: Surviving the Canadian Real Estate Crash", Hilliard MacBeth, an Edmonton Investment Manager, warns that the value of Canadian real estate is at risk of declining rapidly in value (by about half, in some centres).
He makes some interesting, if not controversial points, including urging Canadians to view their homes as shelter and not as investments. He fears that Canadians are employing their homes as speculative investments, and urges them to invest in other, less vulnerable assets that are not tied to debt. Click here to view his recent interview and read the article on CBC.ca.
In the article, MacBeth observes that the “Canadian real estate market shows all the classic signs of an asset bubble: a rapid rise in prices, feelings of regret expressed by those who feel they missed out on a buying opportunity, intense media coverage, and a broad fixation on the asset in question.”
MacBeth’s stance has evoked comment from a number of people, including Stephen Harper, in this CBC article “Harper dismisses reports of a Canadian housing bubble”. Harper refutes these bubble bursting claims, suggesting that the fundamentals that caused the US housing collapse do not exist in the far more stringent lending system that Canada is famous for.
Furthermore, although there is no arguing that the scenarios that could potentially still spell disaster for the real estate market are still present (i.e. interest rate hike, overloaded debt holders, housing prices rising quicker than incomes, foreign investment and a booming condo supply), the counterbalances (good employment, positive economic fundamentals, demographic support) are still there too. This point is discussed in more detail in this Toronto Star article, “Weisleder: Real estate to crash? Not by these yardsticks.”
The continuation of low interest rates, while presenting a vulnerability from a leveraging point of view, are still an important tool in terms of keeping the market moving, and all signs indicate that this will continue. Here is a recent article from the Globe and Mail, “Low mortgage rates will continue to fuel Toronto home sales.”
Supply, Demand and Dollar Signs
As many analysts indicate, the real yardstick for health in any particular market is the measure of affordability. Read our musings on the role of interest rates and affordability in our blog post “Interest Rates, Affordability and the Toronto Housing Boom.”
We know that prices continue to climb, but why is that, beyond the basic mechanics of a wide gap between supply and demand? Namely, what makes that gap so distended?
What is becoming more commonplace in the red hot Toronto property market, is that home buyers (particularly those looking to get in or move up the property ladder) are facing a bit of a conundrum. Housing stock is limited, which is pushing prices skyward. What is happening more often is that first timers are limited in what and (where) they can buy - and are re-thinking their approach to homeownership (which we will address in greater detail in part two of our forecast - stay tuned!).
There are barriers presented to homebuyers on various rungs on the property ladder. It’s hard to get into the market; it is equally as difficult to move up into a larger property, should your needs change. With the lower interest rate environment, more and more buyers are buying homes at the very top end of their budget, with an eye to staying put for a number of years to come. Rather than relocate, they plan to renovate. We see this time and time again in our monthly Buy Of The Month feature which shares what Toronto buyers are purchasing using the services of urbaneer.com. For example, here's a midtown sale that shows how demographics contribute to a push on values.
It’s not just the lack of stock and high housing prices that are pushing this “buy and stay put” phenomena. As prices escalate, it becomes prohibitively expensive to move, especially when you factor in legal and realtor fees, as well as land transfer taxes.
As more of more homeowners stay put it impacts the natural filtering of our housing stock up and down the property ladder, which has a further effect on the mechanics of supply and demand, squeezing the options for Buyers which in turn pushes prices up. The freehold housing stock in the original City of Toronto is already limited to begin with. Seeking out very specific amenities right away, because of the choice to start at the top of the property ladder, like schools, parks and shopping - that can support homeowners at various stages in their lives, constricts supply even more. In-demand freehold housing, located in in-demand neighbourhoods is drawing buyers from across generations, which is increasing the buyer pool on an already scarce stock. Click here to read an Urbaneer post that addresses this: “Understanding Our Market Momentum”.
Also inadvertently placing upward pressure on prices is a CMHC policy on $1 Million properties. The gist of it is that CMHC will only insure high-ratio purchasers (a down payment of between 5 to 19.99 percent) for properties that sell below $1 Million. Once a property goes over that million dollar threshold, the down payment requirement goes up to 20 percent. This has placed even more pressure on the sub-million dollar property pool, which is constrained enough as it is in the city centre. We discuss this in greater detail in this recent 'from the real estate trenches' Urbaneer post, “Toronto Life, And Tales from the Toronto Real Estate Trenches”.
The ceiling on Toronto housing is pushing further out as well, as has been evidenced in the luxury market. In this recent article from the Financial Post, aptly titled “Toronto and Vancouver’s red-hot housing markets aren’t as ‘insane’ as they look, says CIBC’s top economist” CIBC World Markets Chief Economist Avery Shenfeld points out that most of the hefty price increases that have characterized the market of late in Toronto have come at the “upper end of the price spectrum.”
A recent survey, referred to in this article: “Home value survey finds rich Toronto enclaves get richer still,” supports the data that suggests most of the surge in prices has happened in the luxury market, with homes over a million dollars. This is mostly happening very specific sought-after urban neighbourhoods, with freehold housing at the centre of it all, creating more of a challenge for affordable supply. However, it's critical to recognize that if the high end of the market is spiking faster it, by default, puts pressure on the values of similar less-expensive housing. Lately, we've seen houses in the 700k-999k price point surge in value.
Furthermore, Shenfeld likens Toronto to Manhattan, where the price of a single family home (which are hard to find to begin with) is astronomically mismatched to income. While this is sustainable currently, it makes one wonder what the future of housing will look like in urban Toronto - and to what extent the battle for affordability will rage on.
What are some of the effects of this wonky supply and demand? How does the condominium market figure into this fray?
Stay tuned for Part Two of Urbaneer’s Toronto Real Estate Fall 2014 Forecast, where we address these points, as well as some of the more human behaviours and consequences that are characterizing the market.
Navigating the Toronto market successfully is not about fleeing the scene, as alarmist as some of these points and articles may be. It is about understanding the market in the context of these factors, doing research, having a plan and getting support from someone who can help - like urbaneer.com. Whether you're purchasing a personal residence, or you're investing in your financial future, we're here to help! Serving liberated, progressive pro-urban Torontonians for over two decades, our friendly, fashionable boutique real estate service always has your interests at heart. Building clientele for life, consider letting us help build your real estate portfolio, one property at a time.
Curious to see what kinds of properties the Urbaneer team sell? Here's our Buy Of The Month category which showcases examples - and the stories behind the scenes - of an Urbaneer purchase.
~ Steven and the Urbaneer team
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