Do you know the saying "The more things change, the more they stay the same"?
I mention it because this old adage can be applied (at least in part) to the mechanics driving the upward momentum of the Toronto property market, albeit with some new dimensions to old influences.
Welcome to Part One of Urbaneer’s Spring 2014 Forecast, where we offer some tales from the Toronto real estate trenches, pepper them with predictions from multiple pundits and analysts about the direction that they believe the market will go, while addressing the growing question of affordability in the City of Toronto.
In Part Two - coming soon - we explore what the recent changes in the Federal Finance department (including the appointment of a new Finance Minister in March) may mean (if anything at all) for the interest rate market, while continuing our dialogue on the persistent and important role of our growing condominium market.
Insightful Cartoon By Bryant Arnold!
Correction or Crash? So what is in store for housing in the City of Toronto?
If you're actively following the downtown real estate market, you know most of the escalation in Toronto property prices are the result of a mismatch between supply and demand. This is predominantely in the single-family housing market, where fierce competition and precedent-setting bidding wars are pushing prices high - and then higher. Like WAY UP! In some instances we've seen prices go up 5 to 10 percent in the past 120 days in hot neighbourhoods like Wallace Emerson and The Danforth. Seriously. As we enter spring - the hottest season of the real estate year - prospective purchasers of freehold houses who have been scouring the original City of Toronto for a decent house (for up to two years) - are blindly dropping every last penny (and their first unborn child) to buy the keys to their shelter-to-be in a bidding war frenzy.
And frankly we would too, if our circumstances were the same.
Right this minute we're experiencing the tightest, most scorching-hot, housing market in my 23 year career as a realtor. And if I didn't own property, I'd be panicking that I might imminently be shut out of the downtown Toronto housing market.
Sure, there are those that are fearful, like the analysts in this recent Reuters poll who say that the Canadian housing market rests on “a house of cards”. However, the bulk of media reports are a little more tempered. Why? Because there's no sign the downtown Toronto housing market is going to stabilize - let alone crash - in 2014. When there are 32 offers on a house at Bloor and Symington, it means the next day there are 31 Buyers licking their wounds who remain desperate to buy.
That's not to deny I'm a little freaked out by the speed at which prices are escalating. After all, I'm a realtor who started his career at the start of the 1989 market crash - when Buyers suddenly stopped buying because prices surpassed their means - which sent property values spiralling 35 percent down over a six year period. Kind of like what happened with the global sub-prime mortgage crisis in 2008, most everywhere else in the world.
While a number of economists, analysts and media pundits have expressed concern that housing prices are continuing to climb to unsustainable levels, many of them are leaning towards correction over crash, when it comes to characterizing the market - and what's in store for the coming months.
A report from PIMCO suggests that the market is looking at a correction, versus a doom-and-gloom style crash. In their opinion, a crash would come about as a consequence of a spike in interest rates (unlikely), unemployment would have to surge (which is contrary to current data) and mortgage credit would have to be limited or pulled back substantially (also not likely). What will result, according to these researchers, is a retreat in property prices, rather than a freefall.
This CBC report examines data recently released by the Conference Board of Canada, which suggests that those housing pundits that are predicting the burst of a property bubble are off the mark - simply because they may not be using the most accurate data for measurement.
“Mortgage costs, not just house prices, are the principal deciding factor for potential homebuyers," said Robin Wiebe, Senior Economist, Centre for Municipal Studies in a release about the report. "Mortgage rates are expected to rise this year, but not dramatically, because the Canadian economy remains in a slow-growth mode. The housing market may be undergoing a correction in some regions and market segments, but it is more likely to be a soft landing than a bubble bursting."
For Toronto proper, Wiebe cites a healthy economy and strong employment prospects as key players in keeping the market in balanced territory in the coming months.
“Price growth remains healthy and a major price correction is hard to envision, given solid employment and population growth. While the condominium market is at some risk, a soft landing appears to be the most likely scenario.”
This report is not the only one to call into question the metrics employed by which some of those predicting housing doom and gloom.
Where many experts disagree is the degree to which the market is over-inflated (which is important, because the more swollen the market is, the more vulnerable it is to burst and crash). Here is a recent story from the Globe and Mail that shows the width of the spectrum and the difference in opinion as to how vast the overvaluation is. The story says that some analysts believe that the Canadian Housing market is overvalued from anywhere to a shocking 60 percent to a modest 10 percent drop.
To put this in context (and to measure the degree of accuracy) here is a report from TD Bank, published earlier this winter, which examines how economists come to these conclusions. Even this data-based sense of valuation appears to not be absolute, which is in keeping with some of the findings from the Conference Board report mentioned above.
“The ongoing resilience of home prices in Canada continues to fuel considerable debate about the extent of an overvaluation in the marketplace,” TD economist Diana Petramala said “The challenge is that the estimation of overvaluation depends on what ratio you look at.”
These economists look at things like price-to-rent ratio points and the relationship between home price- to-income ratios. While these data sets may be a reasonable barometer, they can be skewed by things like rent controls (very much an issue in Toronto) and on the definition of income.
The true barometer of the market, as Petramala states in this report, is that of affordability.
And urbaneer.com agrees. Blingo!
Affordability & the Toronto Homeowner
The property ladder is a great analogy, because it not only depicts the shape of what a healthy resale market traditionally looks like, but it also represents the climb that the young must undertake to jump in and move up as they mature and their lives evolve.
While the continued low-interest-rate environment fuels what is considered 'affordable', the escalating property values (especially when it comes to certain property types in coveted neighbourhoods) are throwing more potential obstacles on the passage to home ownership for First (and Second time) Homebuyers. While low interest rates are critical to the success of the global economy, it's also a means to enslave the proletariat through their own free will and weakness. Offering cheap money encourages individuals to accumulate dangerously high levels of debt that are mostly interest payments, which ultimately makes rich corporations richer. So while it may be said indebting buyers into a serfdom of mortgage payments ultimately serves the capitalist machine, we at urbaneer.com worry that it comes at a precarious risk.
While we can't control the buying behaviour that's occuring right now, we understand it. In a market that has sustained an upward climb for 17 years (with only a blip of wonkiness in the 2008 global economic calamity) today's rational, educated, prudent Buyers have no choice but to thrown down their gloves in the battle of the bidding wars. To win the competition, Buyers are obliged to make stupendous bids to acquire the most optimum property they can afford knowing that - even if it's 'precedent-setting' - it will still be a sum far less than what far-out future values hold. And they're ok with this, because they're not planning to sell for a decade or three.
A quick segue. At the start of my career over two decades ago, it wasn't unusual for a Buyer to enter the housing market by purchasing a small condominium, which would be the first of three or four moves into the long-term 'family-home' purchase. Today it's more common for Buyers to purchase a property at the very top of their budget, which they can decorate, upgrade, renovate and “grow into” over the next few decades. Instead of incurring another round of closing cost expenses (which include the shockingly hefty city and provincial land transfer taxes - which - for example - are $22,200 for a modest $750,000 downtown starter home) Buyers are pushing themselves to their financial limit to get their foot in a long-term hold.
There is sense to the madness of paying a premium today rather than tomorrow. If housing prices are escalating at a rate that exceeds incomes, then very soon a Buyer won't be able to afford the very properties they're considering now. As housing prices increase, the quality of dwelling a buyer can afford diminishes, and if their income doesn't grow then the gap widens. So if a three bedroom upgraded semi-detached house in Wallace Emerson was $600,000 last year and now costs $750,000, imagine what the size and condition a $600,000 house in that neighbourhood is now. And good luck if you're in a well-established family-friendly neighbourhood like Riverdale, where if you want to upgrade to a four-bedroom residence the demand is so strong it costs around $200,000 more than a three bedroom. Really! The end result (and potential problem) in this market phenomenon, is that home buyers have no choice but to take on more debt - which is for many feasible and well-managed under the current state of low interest rates and today's property values. But what if property prices pulled way back? What if interest rates leapt? And (shudder) what if both of these scenarios happened at the same time?
This is not to deter a purchase that serves your needs both now and in the foreseeable future. What this does underscore is the necessity of understanding your property purchase, not only in the context of how it meets your needs at the moment, but also how it would move alongside market adjustments and how you might address some of the variables.
Another phenomenon that is becoming more commonplace in this city is the growing reliance for First-Time Homebuyers to reach out the Bank of Mom and Dad (as Urbaneer has written about in the past) to fund down payments.
There is evidence that First-Time Homebuyers are increasing their budgets, in part to field the increase in required down payment to mirror the increase in property prices. Here is an interesting report from BMO that shows that the First Time Homebuyer in the Toronto will field a budget of $408,000 this year to buy their first home.
The report also found that a third of First-Timers are seeking help from parents with a down payment, but also that more and more prospective homeowners are delaying a home purchase, due to rising prices.
"High prices in a few major cities, and the fact that prices are outrunning incomes in Toronto, are turning off some first-time buyers, while forcing others to go deeper into debt, tap their parents for hefty down payments, and opt for a condo rather than a detached house," said Sal Guatieri, Senior Economist, BMO Capital Markets.
What all of this does indicate, is that there has been a serious shift in the dynamics, behaviours and attitudes towards the traditional march up the property ladder, and is a telling commentary of what some of the potential collateral damage could be from getting side swiped in a swiftly-moving property market.
Stay tuned for Part Two of the Forecast, where Urbaneer will continue their lively discussion on what might be in store for the Toronto housing market, in the context of the condo market and the interest rate environment.
Part of understanding the market is how to capitalize on its opportunities- whether that means finding your dream home or building up your investment portfolio. Urbaneer has several decades of keen observation of and participation in the Toronto property market. You've got all the information and data - but what does it mean for you?
At Urbaneer, we're here to help!
~ Steven and the urbaneer team
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