Welcome to my blog on housing, culture and design in Toronto - and (drum roll please!) Part One of Urbaneer’s Spring/Summer 2018 Toronto Real Estate Forecast!
While this is the season when the days become longer and we're called to embrace outdoor leisure again, the Spring market is also the busiest time in Toronto real estate. Despite the conflicting narratives of various media outlets, housing is always in demand - now, as much as it ever was. And although Toronto's market has moderated over the last year, it's important to apply context to the story in order to really grasp where the market is - and where it is going.
In Part One I’m going to review some of the recent press about Toronto real estate and consider the journey that the market has taken over the last year to help determine where it's going next. Reflection informs projection! I’m also going to look at and the ongoing role of Government in affordability and influence on purchasing power and housing prices. In Part Two, I’m going to touch on the shift in Buyer behaviour and perception of value in the Freehold and the Condominium real estate markets in the original City of Toronto.
With Government measures like the Fair Housing Plan and mortgage stress test introduced to the market over the course of the last year, all real-estate eyes were waiting and watching to see what the real impact would be on the traditionally uber-busy spring season in Toronto real estate. Now, keep in mind that in Toronto the spring market actually starts in January and runs a solid five months. It's effectively the longest selling season of the year, and it can get really frothy. Here's my blog called The Seasons To Real Estate which shares the typical dynamics of Toronto real estate. So, what's happened now that the Fair Housing Plan’s initiatives have had a year to take root in the market - so what can we expect going forward?
The Market Tumbles, But Stability In Sight
The market hit a record peak in April 2017 and then - as the measures of the Fair Housing Plan weighed their impact in the market - the year that's followed was generally characterized by a decline and, in more central locations, stabilization.
These are both worthy reads: “The GTA Housing Market Just Had Its Slowest April In 15 Years” and “Toronto Housing Sales Slump In Weakest Start Since 2009 Recession”
As we continued through Spring 2018, the market continued to reflect diminishing activity from the year prior. TREB data released in early May showed that sales were down by 32.1 per cent and the average selling price was down by 12.4 per cent year-over-year.
However, when you break TREB’s numbers down further, you can see the different directions the market is taking. The freehold market has flat lined from its furious pace a year earlier; sales of homes for $2 million or made up 5.5 per cent of total detached sales in April 2018, which is down from10 per cent in April 2017. Meanwhile, the condominium market - particularly under $1mil - has been wildly robust with prices skyrocketing upwards of 20 per cent. When TREB recently released the collective numbers for May, stats showed that sales flattened. However, what is also revealed is that due to a lack of new listings, competition between buyers has sometimes been fierce! In other words, when blending all the stats into generalizations, the market appears to be flatlining and declining. However, when assessing the stats with greater specifcity, it shows the Toronto real estate market is oscillating under radically different dynamics depending on where the property is located, the type of dwelling it is, and the price parameters it falls within.
Not to say broad generalizations aren't helpful, especially when you're trying to gauge the mood of a metropolitan area. According to this article - “Canada’s Fastest Cooling Real Estate Markets Are In Greater Toronto” - Toronto has the most rapidly falling sales-to-new listings ratio, which CREA (the Canadian Real Estate Association) uses as a measure to determine whether it is a Buyer, Seller or Balanced Market. This ratio slipped by 36 per cent since last year. Here's another CREA story: ”Home Sales Drop As Weaker Markets ‘Destabilized’ By New Stress Tests: CREA”
So conventional wisdom would suggest that all of this data shows Toronto Real estate is sliding. Is this something that should concern Buyers and Sellers? At the very least, the activity over the last year underscores the fact that real estate is cyclical. It is a sound, prudent investment for those who are prepared to hold on for the long term and weather the market peaks and valleys. For those who purchased at the peak of the market, this dip in prices is certainly disconcerting, but it also demonstrates why a hold and buy strategy is the smartest way to go in real estate. Click here to read this article from MacLeans’s Magazine: “The People Who Bought At The Peak Of Toronto’s Real Estate Bubble, And Then Lost Hundreds Of Thousands Within Months”. It's been a grim reality for some.
So did the so-called “bubble” burst after peaking last April?. Kinda. Sort of. Perhaps. Basically what's happened - and is still underway the further you get from the central geographic core of Toronto - has been a collective withdrawal as most Buyers took a pause to assess the market as it pertained to their own particular needs and see if prices were going to slide significantly. And, by all accounts, values did adjust. Here's my own exploration of city prices for both houses and condos in the central core from August 2017 called The Wackadoodle Toronto Real Estate Market which documented real-time an adjustment in values, in particular for the freehold housing market. However, depending on where you're looking to buy, the current trajectory of values is, in most instances, stable or down but I'm finding the more central you're looking the more likely you're seeing values return to the sums attained in the peak of April 2017.
There are a few points to note here: firstly, most of the media coverage that has characterized Toronto real estate as being in a downward slide is really looking at the Greater Toronto Area (GTA), and not the City of Toronto proper. There are another set of supply and demand criteria that pertain more uniquely to the City of Toronto, which I will get to in a minute. Secondly, these headlines and stats don’t tell all of the story. Yes, huge prices gains in a short period of time have disappeared, but as freehold homes fell rapidly over the past year, condominium sales and prices have ramped up. In fact, condo sales accounted for a record-high 80 per cent of all new home sales in the GTA in 2017, with impressive price gains - as I mentioned before - of 20 per cent to match.
One of the unintended byproducts of the government interventions I believe was unanticipated and unexpected by most is how dramatic condominium values have increased. The withdrawal, pause and assessment that occurred fueled a decrease in the freehold housing market - where prices are typically over $1mil and require 20 per cent down or more - didn't impact the condominium market where prices tend to be under $1mil. In fact, this under $1mil market whose buyers tend to financially limited, whether by down payment or income, and who were already having to qualify for mortgages under a more rigorous qualification criteria has continued strong and unabated has set new price precedents where the price per square foot in the central core now surpasses in many instances $1000 per square foot. Furthermore, the mortgage stress tests also pushed buyers who once qualified to purchase over $1mil down into less expensive (read: condominium) property purchases.
This compression of buyers keen to purchase property resulted in a vertical trajectory in values for condominiums this past year. And it's been astonishing. What the interventions have done is create significant equity growth for those condo owners who purchased three to five years ago. In that short window of time condos - which were purchased in the $500,000s - are now selling in the $800,000s+! Young professional couples who may have used their RRSP savings to put $40,000 down on a $500,000 condo a few years ago can now sell their first property purchase and clear $300,000+ in capital for their next buy. And given freehold houses have not surpassed April 2017 values (in the year prior house prices went up 30%), what would have been prohibitively expensive at one time is now 'affordable' for this target market. In fact, had the government not intervened, the low rise / high rise price gap may have continued broadening, leaving two distinct market oscillating under their own accord. Instead, this massive financial gain for condo owners is enabling the filtering of condo buyers into the freehold housing market. In fact, it's been a significant part of my business this year.
So Far This Year...
Although the market is moderating, all the fundamentals that support strong demand continue to be in place in the Toronto (i.e. immigration, migration-generated population growth, the aging of millennials keen to own property and robust job creation). There is a sense that the GTA market has already begun to rebound (while the original City of Toronto has definitely moved into recovery) and, barring interest rate increases, should continue to. Click here to read 7 Charts That Show How Canada’s Housing Market Is Getting Back On Its Feet After A Serious Drop”, "Toronto Home Prices Tumble, But Market Shows Signs Of Stability" and “Is The Canadian Housing Market Finally Bottoming Out? This Economist Says Yes”
So what's happened since January? To give you a real-time snapshot on how real estate has been playing out in the original City of Toronto so far this year, here's some of my Tales From The Real Estate Trenches posts:
On January 24th I shared the tale of 35 Offers On 3 Downtown Properties Signals Rocketing Demand.
On February 14th I wrote how Four Toronto Properties Went Into Bidding Wars In The Past 48 Hours.
and on March 7th I followed up with On Toronto’s East Side 42 Buyers Bid On 3 Properties Tuesday Night!
Yup, it's been an astonishing Spring as Buyers flooded back into the original City of Toronto market after 8 months of withdrawal, pause & assessment and, in many instances witnessing the value of their condos skyrocket.
For those who are purchasing and selling outside of the original City of Toronto - where prices have dropped or flatlined - I'm truly albeit cautiously confident this market adjustment is short-lived. First, as the values of houses drop, their new list prices are aligning with the purchasing capabilities of buyers who have been impacted by the Mortgage Stress Test (here's "How Much Can You Spend On A Home? It May Have Changed Drastically"). Although Buyers are qualifying to borrow less funds than a year ago, property prices have dropped such that they can effectively purchase the same property as they qualified to buy last year. They're actually in a position to buy the same house for less money and have a smaller mortgage. As long as the Seller can reconcile the lower selling price (and if they owned long enough still make a significant equity gain), then I'd call this a win-win 'share the wealth' paradigm.
Housing, The Economy And The Struggles Of First Time Homebuyers
For Toronto homebuyers, although there has been some relief in some segments of the market, affordability continues to be a pressing issue.
While the measures did introduce some balance into the market, average prices for the most part are still very high and difficult for many first timers homebuyers to afford. It’s a bit of a perfect storm for unaffordability: high housing prices combined with government interventions and climbing mortgage rates simultaneously taking a big bite out of first timers purchasing power. Click here to read “Hike To Mortgage Qualifying Rate Fresh Blow To Home Hunters’ Buying Power” and “Canada’s Mortgage Test Just Got Tougher”. On the one hand, limiting the ability for homebuyers to take on more mortgage is positive, because this strategy helps to reduce the overall household debt load, which is astronomically high. Debt accumulation in Toronto vastly outpaces income growth, which creates a financial house of cards.
Sure real estate investment can be a prudent and lucrative investment over the long term, but there are consequences when you over-leverage yourself in debt in the short term. You really need to be careful, in particular because Toronto has long experienced an escalating market. For the risk averse the issue is whether now signals the beginning of a bumpy ride, or if it's just a hiccup or two. While your perspective will depend on your own situation, be cognizant whether you are making yourself extremely vulnerable financially (what would happen in the face of market correction, higher increase in interest rates or an interruption to income through disability, illness or other life event?). And two, if you take out too much debt to buy a home you are inevitably deferring other financial milestones, like saving for retirement as you service that debt. And for those Millennials and Gen Xers who hope to make their home their retirement nest egg and make significant cash like their parents did in Toronto, the marketplace is completely different so that may not be a reasonable expectation. While interest rates are lower than they were in generations past, debt is higher and house prices in relation to income are higher too. Click here to read “Canadians Have $201 Billion In HELOC Debt, And Over 30% Is In Toronto And Vancouver” and “Generation X Is 'Stretched Beyond Their Financial Limits' And Struggling To Save For Retirement”.
There is also the impact that the introduction of the new stress test and rising mortgage rates has had on the condo market (I will discuss the developments and current dynamic of the condo market more in Part Two of the forecast). Right now the condo market (i.e. homes under $1mil) have seen a surge in prices, whereas the freehold market over $1mil faltered but stabilized. While there has been steps taken to keep prices down by pulling back on purchasing power, the issue is that demand continues to outstrip supply, which is creating affordability issues in the condominium market in what had always been seen as a viable entry-level point for first timers. I have to admit, I'm a bit concerned at the pace condominiums have spiked in value, and question if it's possible to sustain. Yes, there's loads of demand for turn-key housing, and living as close to the centre of the city will always command a premium, but square footage is space and even though we're reconciling living well in less now, how small can 2 people truly occupy a home together without going cray cray?
There's no question as the entry point on the property ladder for first-timer Buyers becomes even more restricted, is homeownership still a viable dream in a market like Toronto? Although we are seeing a marked shift in Toronto towards the rental landscape as affordability consistently erodes and purpose-built housing development increases, the dream of home ownership continues to burn brightly - but not without a view through the lens of reality check. Millennials are having to reshape the idea of home ownership, in the current marketplace.
This story “From Broom Closet To Detached Home: What Millennials Can Afford Across Canada” examines exactly how much Millennials’ purchasing power has shrunk in the last year, relative to the market that they hope to buy in. In a city like Toronto, that pullback in purchasing power has caused Millennials to rethink buying strategies, which has had an interesting result, according to this study from Royal Lepage referred to in the story. While their dollars technically get them “less house” as home prices continue to far outpace incomes, the average square footage that millennial Toronto homebuyers get with their purchase has actually gone up.
One of the critical factors I'm seeing in the market today as it pertains to first and second time Buyers, is whether the Bank of Mom and Dad are involved in any way in the purchase, which I'm going to talk about in more detail in Part Two of the Forecast (stay tuned). In the meantime, check out these past posts about a growing Reliance On The Bank Of Mom And Dad - and Are Strings Attached When Parents Help You Buy?.
Alternatively, a lot of millennials are choosing to move further out of the core, where dwellings are more spacious, but require a longer commute. And there are many instances where they're electing to change their lifestyle and move to smaller communities and forgo big city living in its entirely. Sure they'll earn less money (unless they're telecommuting), but they'll bypass the stress of what is becoming a prohibitively expensive city. What this shows is how compromise is a necessity in today’s market, when home ownership is the goal.
Housing And The Election
We’ve seen the impact that the Government has had on housing in Toronto. It will be interesting to see what impact housing has on the Government in the upcoming Provincial Election. Housing is inextricably linked to economy and affordable housing is linked in to election issues, particularly for millennials and for first time homebuyers. Click here to read “Millennials Rank Affordable Housing Among Top Concerns For Upcoming Provincial Election, Real Estate Study Says”
According to a recent study released by OREA, the vast majority of first time homebuyers (aka Millennials) still value home ownership as a sound and desirable investment (91 per cent). However, that same group admits that buying a home in their parent’s neighbourhood (or in their desired neighbourhood) is nearly impossible, as housing prices are still out of reach.
It’s no surprise then that this cohort has identified affordable housing as a major voting factor in the upcoming Provincial Election as affordability continues to be a red-button issue.
- 70 per cent felt that the Government needed to do more to step in to assist with affordable housing and offer assistance to young people in order to accomplish this goal.
- 81 per cent said that housing affordability was their number one concern
- 70 per cent of Toronto respondents are opposed to the double land transfer tax, which adds even more cost when things are already prohibitively expensive.
- How can the government help? Millennials are clear on what they’d like their Government to do to help their housing affordability plight, and have indicated that platforms including the addressing the following issues would sway their vote.
- 62 per cent would welcome help from the government to make their homes more energy efficient
- 53 per cent are looking for a first time buyer exemption to land transfer tax
- 50 per cent said that a pledge to build, maintain or improve public transit in their neighbourhoods would grab their vote.
Similarly, TREB conducted a poll that showed that Toronto voters are looking to their leaders to assist with housing affordability and admit it is a major influence on which candidate that they will vote for (69 per cent of respondents said that the parties’ platforms on housing affordability drive their voting decision). Toronto voters are also looking to their Government to assist with increasing supply, making housing more affordable and are overwhelmingly in favour or reducing or repealing the provincial land transfer tax, which adds substantial cost. Click here to read "GTA Residents Want Next Ontario Government To Cut Land Transfer Tax As Home Sales Fall 22%".
Depending on the outcome of the election, housing may become more affordable (let's get the supply side of the issue resolved, ok - though I'm personally loathe to see the greenbelt rezoned for single family dwellings which I consider an antiquated aspirational status marker). Support for development may happen to ease supply concerns, or perhaps taxation for Toronto home buyers will be addressed. It remains to be seen, but does remind us of the critical role that housing plays in our social and financial well-being, hence the value that these young voters are placing on the issue.
(Post-Election update: With a PC win, what is in store for housing in Toronto? We will keep watch on how these election promises unfold: Here is an interesting article about Doug Ford's stance on housing and other issues: "The Big Economic Challenges Awaiting Doug Ford".).
Stay tuned for Part Two, with more insight on the condominium market, how the concept of value is shifting in Toronto real estate and how Buyer behaviour has adapted! I'll also talk about how a balanced market needs attention to supply and demand.
In the interim, consider reading these other popular Toronto real estate blogs of mine which explore housing as a right and/or a privilege:
Are you considering buying or selling your property? In order to navigate Toronto's complex real estate market, you need to not only accurately chart a path, you need to have a comprehensive view of market influences. With decades of in-the-trenches experience and a multi-disciplinary education in housing, my team and I can offer relevant support to understand the dynamics of our housing industry.
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Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
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