Welcome to my bi-annual prognostication: The Winter 2017/2018 Toronto Real Estate Forecast. Toronto real estate has been newsworthy over the last several years, to say the least, but it is most definitely an interesting time to be a market participant, no matter in what capacity.
In Part One of the Forecast, I’m going to look at what some of the pundits are saying and discuss the probabilities of market direction for 2018. I’m also going to talk about the impact that shifting wealth, foreign ownership and globalization have on the market right now and the possible outcomes. Stay tuned for Part Two, where I’ll touch on the role of Government in the housing market, buyer motivation and demographics and the ever-present role of the condominium market.
2017 was dramatic, in that the earlier part of the year saw Toronto real estate prices soar upwards of 33% more than the year prior, before the Ontario Provincial Government intervened by introducting of the Fair Housing Plan. With the rollout of those initiatives, alongside the major move of the Bank of Canada to raise interest rates not once but twice over the summer and fall, some temperance returned to the market. In fact, I documented some pretty significant price drops over the summer in both the freehold and condo markets, in this post called The Wackadoodle Toronto Real Estate Market. This transitioning market begs the question: where is the market heading in 2018? Well, as always, that depends on who you ask.
Some believe that higher interest rates and the new OFSI mortgage stress test will bring prices down. The Bank of Canada suggests that the mortgage stress test could remove 10 per cent of hopeful buyers from the pool; in their 2018 Housing Outlook, Re/Max believes that these measures will keep home prices flat in the GTA. Risk analysis firm Moody’s says that Canadian housing prices in general will decline over the next five years, but feels that Toronto will see a slight price increase. Royal LePage concurs that these mortgage rules will impact the market but is more optimistic, expecting Toronto to still register a 6.8 per cent price increase through 2018.
However, there are many who feel that any cooling of the white hot Toronto market is a temporary measure and that once the market gains its footing again it will be off and running.
This is due in large part to the fact that the mismatch between supply and demand continues in a big way in Toronto, which is always a major driver for price appreciation. Although as the Fair Housing Plan measures took root in the market, pressure lifted slightly and Buyers took a pause from the frenetic market to catch their collective breath in the midst of all the drama, there are a number of indications that demand is simmering but will return to robust. Additionally, the indications are that demand will continue to outpace supply, which will continue to buoy the market, although not at the breakneck speed that was seen in early 2017. After all, if you can't increase the supply to meet the demand then you have to squeeze the demand by making it more difficult to buy. In an effort to serve our local market - and curb run-away prices - all three levels of government have been intervening.
In fact, pundits like CIBC Economist Benjamin Tal suspects that demand is “stronger than perceived”. And while higher interest rates, measures from the Fair Housing Plan and the now implemented Mortgage Stress Test for all Buyers (here's What You Need To Know About Canada’s Recent Mortgage Rule Changes) will give the market pause, it is widely believed that this cooling effect will be short-lived. Why? Because of the strength of the fundamentals that are still in place in the market override other influences like interest rates and removal of speculative investors; while the government measures do strip away some of the market momentum by removing some of the players and re-introducing some housing stock to the market, it probably isn’t enough to truly cool the market.
Tal says astutely, acknowledging that housing policy can have an impact and that the market has the capacity to react strongly to abnormal market conditions, but that “if those policies are not directed at the core issues facing the market, their impact will be temporary at best.”
With strong employment, immigration and accumulation of wealth from various sources, the stage is set for continued upwards activity in the market. What’s more is that home ownership continues to be a major goal amongst Millennials, undeterred by the intense pressures, debt and emotional roller coaster ride of being a homeowner in a market like that in Toronto. Tal goes on to discuss in detail that issues around supply that cannot keep up with demand because of scarcity of land and various challenges around development, which will ultimately continue to direct the market strongly upwards.
Click here to read Tal’s research note entitled “The Housing Market: When The Fog Clears”.
I don't disagree that the fundamentals are there for the market to remain solid in Toronto - particularly with respect to employment and the general optimism of a city in growth. Here are some other stories that reflect this sentiment: “Toronto, Vancouver Housing Shortages Will Keep Prices Soaring: CIBC”; “2018 Expected To Be A Big Year In GTA”,” 10 Stats You Should Know About Toronto’s New Home Market Heading Into 2018” and “Will 2018 Bring Another Housing Boom In Toronto And Vancouver?”.
A Historical Observation
For a long time the strength or weakness of a real estate market was dependent on the local industrial economy. Basically, the ability for residents to afford housing was based on the income and wages of a contained population who were swayed by the general prosperity of their geography. This determined whether it was healthy or in decline, with limited impact by external forces. I know I'm over-simplifying this, but I'm proposing that we've reached a tipping point where there are significantly more micro-markets competing for real estate today such that the original City of Toronto is less adverse to downturns in our property market. It's reached a point where demand is always going to exist for the central part of the city. Why? Because Toronto has evolved from an industrial economy to one on commerce, into an exploding post-industrial economy which - in today's attention economy - has expanded its reach, both in awareness and desirability. Although Toronto has always been a major driver of Canada's economic engine (with resource economies driving other regions of Canada), today it's boomed into the country's largest global 'post-industrial' economy. The city as place - and 'destination' is ultimately commodifying itself in global rankings. In this new millinieum we have a greater spread in affluence including the biggest transference of wealth from one generation to another, exploding global corporate economies in technology, finance, and information which includes a new 'creative class', an easy flow of international capital, married with my blog on how a hot market is influenced by the speed of the internet and its instant access to information.
Hear me out. Today, each of Toronto's multiple micro real estate markets continue to oscillate in their own push/pull dynamic, at times losing ground by competing buyers who can afford more than another segment of buyers. For example, a down-scaling couple nearing retirement may outbid a young family by offering a higher sum for the same downtown 2bed condo, or an end-user may pay more to secure a multi-unit dwelling for their multi-generational family than an investor seeking a certain cap rate. Sadly it's not unusual to see a male first time buyer snap up a brick and beam loft because his income qualifies him for a higher purchase price than a single woman in the same profession whose income for the same position is less than her male counterpart. A young trust fund kid can outbid the professional tech import simply because the Bank Of Mom And Dad are gifting a pre-inheritance. And the foreign investment capital - who have helped fuel Toronto's condo boom over the past decade - may get first choice to buy suites prior to release for purchase to the Toronto public. Here's one of my posts that outlines 7 Reasons Why Toronto Real Estate Prices Have Skyrocketed Over The Past Decade.
Each market may find its own push/pull dynamic, and at times lose ground by competing segments that absorb the housing stock for its own. As Toronto has immerged as a major player is the global phenomenon of foreign investment, and that with more capital flowing into our 'local' housing market, the capacity for the local market to compete is being compromised.
The Shift Of Wealth And Foreign Ownership
Old Money for New Money
With scarcity of land, tight supply of housing stock and vast appreciation in property values over the last several years, we are seeing the middle class being more and more challenged to get into the Toronto property market.
Consider this: according to this Globe And Mail article by Rob Carrick, the median household income in the of Toronto in 2017 was $78,667; at the time of the writing of this forecast, the average home price in Toronto was $761,757 with the average price of a detached home resting at $996,527. To put this in context, the average home in Toronto is over 11 times average income. The standard measure of affordability? There are differing schools of thought on how to measure. One approach was that you shouldn’t take on more than 3 times your income to buy a home; it is also important to look closely at the role of interest rates in affordability. You only have to look back a few decades to the 1980s, with its high interest rates, which ultimately dictate how much debt a borrower can take on. This also lands direct impact on housing prices, especially in a market where maxing out your mortgage loan in relation to your income is the norm, just to make that purchase. Buyers see this debt as a means to an end; in short, when people are willing (and able) in the interest rate environment to buy, prices will continue to be high and erode affordability. I talked about this in this post: "Dear Urbaneer: Interest Rates In The 1980s And Now. which demonstrates how declining interest rates from double-digits to the lowest ever translates into similar monthly payments from three decades ago. It's no coincidence that the past years of low interest rates and huge consumer debt exist together. Either way, with low or high interest rates, there are consequences about the precariousness of taking on such debt in relation to your income as a matter of lifestyle and desensitizing yourself to that debt but I’ll get into that in more detail in the second half of the forecast.
Let’s look at how these kinds of housing prices can shape a city’s geography as well as socio-economic “norms”. As real estate prices continue to rise (and indications are that they will), the middle class will eventually be shut out. We will see the central core of the city's freehold housing stock being purchased only by the affluent.
Gentrification - which was part of my own multi-discplinary university education in the late 80s when I wrote an Urban Studies Thesis funded by The Ministry Of Municipal Affairs called "Gentrification: Yuppie Porn In South Riverdale". The thesis, which included a comprehensive review of past research exploring the movement of middle class households into this working class neighbourhood, also explored my early fascination with housing as a symbol of self. You can read more about it in A Nose For Leslieville. Today it's no longer about a neighbourhood evolving from its working class roots to become more affluent and more desirable from a real estate and amenity standpoint. It’s about a transfer of wealth, reflected in housing from the “haves” to the “have more”, as incomes for the middle class (who are major players in the normal shape of the property ladder) simply cannot keep pace with rising home prices, particularly in the freehold market. Take for example this story that I wrote for my sister site Houseporn.ca - A $15 Million Mansion In Toronto’s Tony Forest Hill - where a $4mil Forest Hill mansion became a tear-down for a $15mil new estate. It signals that gentrification isn't just about the working class being displaced as it has it the past, but about the exchange of 'old money Toronto' for 'new money Toronto'.
We’ve seen this phenomenon in global hot spots like London, New York and Paris. This “Manhattanization” of Toronto will mean a higher concentration of affluent households in the original city of Toronto. Spanning my 25-year career as a realtor and even looking back as recently as seven years ago - there were decent houses in 'marginal' neighbourhoods which my Buyers elected to avoid over perceptions of safety, or the lack of sufficient 'lifestyle' amenities like a great coffee shop with Wi-fi. And, in most instances, those Buyers could afford to choose a more desirable location (read 'village neighbourhood') without having to increase their budget significantly. Today, most Buyers would be thrilled to be able to buy a house in any part of the original City of Toronto, but the precipitous rise in values have forced them to either buy a house in the suburbs or a condominium. The trifecta of a stable economy, migration, and foreign investment, pretty much makes this a long term certainty.
Check this Globe and Mail article for context: "Can the Government Save The Middle-Class Wannabe Homeowner In Toronto And Vancouver?”.
The Ongoing Role of Foreign Ownership (and Landed Immigrants)
There are differing schools of thought on how much influence Foreign Buyers ultimately have on Toronto real estate.
New data released by CMHC shows that Foreign Buyers may not be as big a market as previously thought. They say that Foreign Buyers hold only about 3.4 per cent of residential properties in Toronto. Read: “Looks Like Foreign Buyers Aren’t The Big Problem In Canada's Housing Market After All”. There's been a fair bit of press about the accuracy and meaning of the stats. This Financial Post article called Statistics Canada Answered A Housing Question, But Not The One That Everyone Was Asking addressed that this "data breaks down home ownership (not necessarily homebuying) by residency status, irrespective of citizenship", when Canadians "want to know the share of the residential real estate being purchased by foreigners with no real connection to Canada (i.e., those who are neither Canadian citizens nor permanent residents)." This Globe and Mail Opinion article called How Much Real Estate Do Foreign Investors Really Own? Statscan Got It Wrong shares the concern that real estate owned by corporations ultimately masks a good portion of global investment because a "foreign investor can pour money into Canadian real estate through a Canadian company they set up either federally, provincially or territorially, using a Canadian as a nominee director/shareholder/beneficiary, without disclosing the true beneficial owner".
Research is beginning to show Foreign Buyers are pursuing two dwelling types. There are those purchasing pre-construction condos strictly for investment, and then there is the high end Luxury Market which may be for their own occupancy (even if it's just occasionally). This piece in Better Dwelling (who do amazing statistical analyses) called "Foreign Buyers Apply Pressure To “Affordable” Housing In Toronto And Vancouver" shows the impact on the entry-level new build condo market, while Reuters reported how "Foreign Money Drives The (Luxury) Housing Markets In Vancouver & Toronto". Even if it's the stats being reported or if the numbers are accurate, according to Better Dwelling "Foreign Buyers Own $37.37 Billion Worth of Toronto Real Estate".
Although the size of the Foreign Buying market could be larger, I don't believe when it comes to this particular market segment it truly comes down to quality versus quantity. I think it's ultimately about the massive flow of global capital into the Canadian real estate market from China regardless of the status of the Buyers. In this Globe and Mail piece called Foreign Buyers Are Paying Almost 50% More For Properties In Toronto After Tax, the government statistics on the citizenship of foreign buyers showed 70.6 per cent were from China. Trailing in second place were Americans, at 4.6%, followed by buyers from India, at 3.6%.
Back in April I wrote a piece from my Real Estate Trenches that I feel is worth sharing a snippet from it. At that time I sold a detached 4+bed executive home in North Toronto's Lytton Park Neighbourhood. Listed at $1,995,000 in February 2017, the property garnered 9 offers and spiked in competition to command $2,452,000. Of the nine offers, six of the Buyers were Chinese (and one was Russian). While I did not communicate with all of them, I did have conversations with several of these Buyers who came through the Open House. They shared that they're predominantly Landed Immigrants - who arrived in Canada over the past decade or less - who already own real estate in the suburbs of Toronto like Markham and Richmond Hill. One made the accurate observation that the prices of detached dwellings in the suburbs had increased at a higher percentage than those in the downtown core, which now presented an ideal opportunity for them to cash out and climb the property ladder to secure a more premium and prestigious dwelling in North Toronto. Why? For one, these Buyers want to secure a property in one of the very best school districts. Second, they really liked that the gracious 1935 Tudor had been thoughtfully renovated into a turn-key residence but it retained many of the original features. They said they liked the property because it was "very Canadian". One particular Buyer was attracted to the allure and status of the 'Canadian establishment', and felt it would be the right setting for his young children who would be afforded better opportunities. In my conversations with these Chinese Buyers many disclosed they were also helping friends and families who were also from overseas, but they didn't clarify if this meant they were 'foreign' versus 'landed immigrants'. What was clear by our conversations, is that it was apparent they had access to significantly more capital (including a favourable exchange rate) than other Buyers (one had just purchased weeks earlier another North Toronto residence in the $2mil range as an investment).
This well-crafted highly-informative Globe and Mail article from August 2016 called "Meet The Wealthy Immigrants At The Centre Of Vancouver's Housing Debate" outlines how China is just emerging as a untamed capitalist nation akin to the robber barons of an industrializing America. It offers a point of view critical to the Canadian real estate market. In a nutshell, new immigrants from other countries - including Russia and the Middle East - have access to huge pools of money which they want to invest in Canada. Given our real estate system - and its historically loose governance - they've been allowed to purchase multiple dwellings (one for each family member for example) which has provided a phenomenal investment opportunity. Here's a recent post in Better Dwelling called China Deployed 3 Tricks To Curb Real Estate Speculation which shares how property purchases in China require really large down payments (that increase with multiple purchases) in addition to having restrictions on how soon one can sell a property which limits speculation nationally, and inevitably fuels investment in other countries like Canada. After all, why put 80% down on one property in China if you can buy four in Canada?
** Addendum ** In Macleans (Jan 24,2018), writer David S. Lesperance shares his opinion on how Canadian policy makes it easy for unscrupulous wealthy foreigners to dodge their taxes in How To Fix Canada’s ‘Ghost Immigrant’ Fraud Problem. It's a valuable contribution to the issue. And here's a piece from Global News which documents How Over 46,000 Wealthy Immigrants Took A Back Door Into The Vancouver And Toronto’s Housing Markets via the Quebec Immigrant Investor Program (QIIP).
** Addendum 2 ** In Better Dwelling (Feb 15, 2018), it's posted that CIBC Kills Foreign Income Program, Makes Buying Canadian Real Estate Harder, such that foreign buyers will no longer be able to secure competitive conventional mortgages with down payments of 35% or more without having to verify income. This will have a significant impact on the ease of foreign real estate investment in Canada.
What's critical is no matter how small a slice of the market foreign buyers hold, they generally wield the weapon of wealth. Basically, they can cherry pick the properties of their choosing without the financial limitations of most Torontonians. If the value of all property is related to the location, size, and condition of all other property, even if foreign buyers comprise a small percentage of the market, their ability to pay top dollar (along with all other individuals who can buy without financial constraint) still impacts our prices. Every sale sets a barometer of value for the next. Given Toronto is confined within boundaries - for example the greenbelt ringing our city, proximity and ease to public transit, a diminishing supply of freehold housing in the original city of Toronto, a select number of city-centre single family neighbourhoods (with detached houses) coveted for their status - while we may have some bumps in the real estate road in the near future, I believe anyone buying property with the aim of occupying it for the next ten years will be making a prudent purchase. Why? Because the influx of people and capital from around the globe will anchor our market.
It’s easy to understand the impetus for the presence of these global buyers. If you were financially flush with capital to invest, and you were living in a country that had its challenges - perhaps political instability, financial corruption, environmental risk, poor health care or costly education, a lack of safety, or congestion - would you park some of your money here recognizing it offers a safe harbinger of escape, or a better life for your children?"
In addition to those compelling reasons, more and more Toronto is visibly becoming a major player on the world’s stage. Clearly, with the steady stream of accolades consistently awarded to Toronto, global awareness is on the rise. This awareness promotes desire, because it hits all the right notes for a prosperous, happy lifestyle, with Toronto ranking highly on things like safety, liveability, finance, education and more. This globalization pulls a steady stream of interest and international investment money to the City. And as I noted earlier, when you have a magnitude of wealth that exceeds the local population, it does become a driver of prices.
Here is just a sampling of those accolades I refer to: “U of T ranked No. 1 in Canada, one of World’s top 10 Public Universities”, “Toronto Ranked 4th Safest City in the World”, “Vancouver, Toronto, Calgary Named to List of World's most Livable Cities”,” Toronto Makes top 10 list of World's Most Innovative Cities,” “Toronto Ranks Consistently in the top as a Global Financial Centre”, “Toronto top 10 City for Female Entrepreneurs”, “Canada Named 2nd best Country in the World…Again, Report Finds”, “Best Countries-Quality of Life Ranking” and “Canada Ranked the most Reputable Country in the World”.
Toronto As Innovator
Toronto is today recognized as an innovator, which positions it for the future in a truly unique and alluring way. During my career - which started 25 years ago - the City of Toronto changed the zoning of downtown lands from 'Industrial' to 'Live/Work' - which allowed the massive vacant derelict swaths of lands on either side of the CN Tower to be redeveloped. These zoning changes were critical to the success of an emerging Toronto, where we transitioned from an industrial centre to a post-industrial metropolis, competing on a global scale where information, technology and finance have become significant forms of employment. Toronto was fortunate in being well-poised to tap into these new economies - along with the growth in marketing, media and communications - where a new creative class emerged along with housing for nearly 250,000 residents. It certainly fueled the growth of my 'Innovative Space' specialty which included the concept, sales and marketing of over $50 million in loft conversions. The transformation of our inner city has been substantial.
Although there is some warranted criticism on Toronto's inability to navigate the development explosion of the past 2+ decades (here's a great post in Urban Toronto called Richard Florida: Toronto Coming of Age Amidst New Urban Crisis as well as CBC's piece Richard Florida Who Coined 'Creative Class' Now Says It's Causing More Problems Than He Thought), we're still rocketing the cutting edge of mood. For example, the arrival of Google's Sidewalk Labs is an indicator of how Toronto is on the verge of a cutting edge expansion that puts it on the global stage.
This new urban development, anchored by Google, will be a “smart city” will demonstrate how the use of data and tech can help with common urban problems like congestion, commuting, noise, air quality and even trash removal. This marks the new stage of evolution in housing and urban planning and Toronto is thrust into the world’s spotlight as the host. It’s just this kind of forward-thinking vibe that not only promotes Toronto as a great place to live, but will continue to draw interest (and Buyers) to the region. Interest, of course, sparks the economy, which creates jobs, which creates wealth and so on.
Foreign ownership, supply, transfer of wealth and globalization aren’t the only factors to weigh when thinking about where Toronto real estate is going to go in 2018. Stay tuned for Part Two where I’ll round out my thoughts and observations for the coming year on Buyers are changing from a motivation and a demographic point of view, how the condo market continues to influence housing prices and supply. I’ll also determine how much housing policy is helping the market - or hurting it.
Addendum: Here's Urbaneer’s Winter 2017/2018 Toronto Real Estate Forecast - Part Two, where I discuss how buyer and seller motivation and demographics are influencing the market. I’m also going to look at how various Government interventions have directed the market, as well as one of the usual suspects - the Toronto condominium market.
Navigating the Toronto market successfully is not about fleeing the scene, as alarmist as some of pundits may contest. It's 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 Toronto's Best Houses & Condos Of 2017 By Urbaneer which showcases examples - and the stories behind the scenes - of an Urbaneer purchase.
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