Welcome to Urbaneer.com’s most recent shelter prognostication - my Toronto Real Estate Forecast for the latter half of 2019! I'm going to take a little bit of a different approach in this edition. In this first part, I'll explore the Provincial and Federal governments' efforts since Spring 2017 to dampen demand and diffuse the potentiality of a housing bubble with the introduction of housing policies has reshaped the Toronto real estate market, including my belief it funnelled a disproportionate number of buyers into lower price points, forcing them to compete for an already constrained supply of property which has exacerbated our housing affordability crisis.
In the second part, whereas I typically look at the oscillating dynamics of condominiums versus freehold housing and how these markets diverge, in this edition I'm going to assess the mitigating factors shaping different market segments, along with their purchasing behaviour. I’ll also explore how the urban property landscape is changing, impacted both by the local market needs for shelter as a right and the on-going global appetite for a property as a commodity, as they collectively compete for Toronto real estate.
The State Of The Toronto Real Estate Market
Summer has been sizzling in Toronto, and so has the real estate market, albeit at a less scorching pace than we experienced a few years back when the market was overheating from speculation by both Canadian and foreign buyers. In May, which is typically a very busy real estate month, sales soared up 19 per cent year-over-year. That’s the biggest month that the market has seen since December 2017, which was just prior to the Federal Government implementing the mortgage stress tests came into effect.
What's interesting, is that the price and sales increases were mostly attributed to the more affordable condominium and townhome markets, which in the original City of Toronto means pretty much the only properties with an acquisition price under $1,000,000 that are habitable without significant capital investment. Meanwhile, detached house prices remain below the sums they were garnering two years ago. Even though sales spiked in the detached market, they remain below the 10-year median. Click here to read Better Dwelling's ”Toronto Detached Real Estate Prices Still Down Over 10% After Two Years”.
The momentum continued through June, with the supply of listings shrinking and sales volume increasing, but despite this detached housing was the only housing type to drop in prices. Condos, meanwhile, continue to increase in price. Click here to read, “Toronto Home Sales Surge 10% While Condo Prices Climb 7.5%”.
The movement in July was even more substantial, with sales increasing sharply 24.3 per cent, mostly due once again - to a tight and ever-tightening supply. The average home price inched up modestly by 3 per cent to $806,755, which is still a tall order on the affordability scale. TREB attributes this in large part to an increase in buyer competition in specific segments (i.e. townhouses, semis and condos), as the affordability gap grows between detached housing and other housing types. Click here to read "Toronto Area Housing Sales Up 24.3% In July, Prices Rise Due To Tighter Supply"
What is perhaps of concern with this trendline is the continued tightening of the market, which continues to erode affordability. The lack of supply and the still out-of-reach prices for freehold housing may be contributing to the more rapid price appreciation in the condo and townhome market, as buyers are forced to purchasing that housing market type.
Stats also show that the market is tightening, particularly in the freehold segment, which suggests that more rapid price appreciation could be returning as supply gets constrained, as was evidenced in June’s stats. Click here to read, “Toronto Realtors Warn Of Housing Supply Crunch As Market Bounces Back”.
Creating more constraints on supply and demand is the breakneck pace at which the population is increasing in Toronto. A new study from Ryerson shows that Toronto is the second-fastest-growing metropolitan area in the United States and Canada by a substantial margin. While this may be viewed as a boon to the local economy (click here to read my post, Toronto’s Booming Technology Economy And Our Real Estate Market), this influx of people is coming in far more rapidly than new housing is being developed. In a city where supply is already super-tight and has contributed to affordability problems, the rate of the population growth portends to exacerbate the mismatch between supply and demand.
Even though prices in the freehold market have moderated, post-fair housing plan and mortgage stress test, they are still increasing in context to other global centres and, more importantly, relative to local wages. For example, housing prices in Toronto during the first two decades of this millennium outpaced super-expensive New York City by 133.39%. Prices rose more than Los Angeles by 33.67 % and just over 45% faster than San Francisco. Click here to read “Canadian Real Estate Price Growth Looks Absurd When Compared To Bubbly US Cities”.
In another metric where Toronto leaps and bounds ahead of the next member on the list are how many cranes dot the skyline of the city- to the tune of having twice as many as any other city in North America. This is a bit of a dubious distinction. The presence of active cranes signal high-rise projects, which is an indication of a boom in the local economy. However, with this expedited construction, and realizing how swiftly the population is growing as well, there could emerge challenges around like affordability, sustainability, health, infrastructure and transit. Click here to read "Toronto Crane Count Jumps To 120 – More Than 2x Any Other City In North America".
Meanwhile, while housing starts and housing completions in Toronto are down 24 per cent from this time last year (in part due to the restraint by developers reacting to government policies trying to slow demand and diffuse a housing bubble) this story, "Toronto Is The Fastest-Growing City In U.S. And Canada, And That’s Not Good”. If these prediction scenarios are true, then until all three layers of government create clear strategies that mandate policies which directly result in the creation of suitable housing for those most in need, then our collective commitment to resolve our housing affordability crisis will fail. We cannot rely on free-market forces to build an appropriate supply of shelter that ensures all Canadians are provided housing as a right, instead of a privilege.
---> The Mortgage Stress Test
In an effort to temper the scorching market which was being fueled by speculation and the Fear Of Missing Out, the Federal Government introduced a mortgage stress test at the beginning of 2018. Under these new Canadian mortgage rules, homebuyers who have a down payment of 20% or more were required to qualify for financing using either the 5-year benchmark rate published by the Bank of Canada or the mortgage interest rate plus 2% that the Buyer secured with their lender, whichever is the higher. This new measure did indeed pull the market back, but now that months have elapsed since its implementation, some feel like the mortgage stress test is working against first-time Buyers, rather than aiding with affordability.
CMHC believes that policies have begun to land material, lasting impact reducing market vulnerability and have lowered their risk assessment of the market nationally to “moderate,” from “high” They had rated the market vulnerability as high for the last 10 quarters, so this downgrade is significant. Although this is a national measure, it is largely driven by the country’s frothy markets, like Toronto, so that is significant. Click here to read “Risks Are Receding In Canada's Housing Market, CMHC Says”.
Evan Siddall, chief executive officer of Canada Mortgage and Housing Corp defends the mortgage stress test in this article, “'Lobby Is On The Wrong Side Of This Issue’: CMHC Head Takes On Real Estate Industry With Defence Of Mortgage Stress Tests”. Despite heavy criticism from some, Siddall insists that both consumer debt and housing prices would increase, both things that the program is designed to counter if there were changes made. Siddall believes that the market increased too rapidly over the past years and that this short term pain would eventually introduce affordability into the market.
On the other hand, there are those that feel that this stress test is “shutting the door” on some homebuyers. In this article, “The Mortgage ‘Stress Test’ Has Started Harming Canadians More Than It Helps”, the argument is that the stress test was introduced into the marketplace under different dynamics. The economy has softened since then and the rate hikes that had looked likely have been put on hold. The thinking is that the stress test should exist in tighter context to the current market.
Noted CIBC economist Benjamin Tal believes that the mortgage stress test is worthwhile, but that it needs to be modified. In his note, “Mortgage Stress Test: The Operation Was a Success, But...”. Tal agrees that at the time the stress test was introduced, it was a necessary measure to prevent home buyers from overleveraging themselves with debt. He says that the test falls short because it did not consider rising interest rates (which has happened since it was introduced) or the fact that homebuyer’s income is likely to increase during their tenure as homeowners. The other concern he raises is how, as a result of the test being too stringent, there has been a flood of borrowers into the less regulated alternative lending market, which creates another set of debt vulnerabilities. He suggests that the test needs to be “more flexible and dynamic”.
What both the mortgage stress test and the FTBI don’t do adequately, is address the real problem at the root of Toronto’s affordability crisis: a lack of supply. The fact remains though, that even with the mortgage stress test slowing the market down somewhat, demand remains much higher than supply - which will continue to push prices up. In fact, just a few weeks ago the Bank Of Canada Interest Rate, which hasn't changed since May 2018 when it rose to 5.34 per cent, inched down to 5.19 per cent, which is the first time it has decreased in almost three years. As the "Mortgage Stress Test Rules Get More Lenient For The First Time", it could translate into an increase in values as purchasing power increases in a climate where supply is short in-demand areas. Price increases are expected in Toronto overall, and this continued mismatch between supply and demand is a big part of why.
As for the FTHBI, although in theory, it clears a pathway for homeownership by assisting with affordability, it doesn’t address supply either (other than offering larger compensation for new builds). In fact, by helping this segment of first-timers afford shelter, you are increasing the buyer pool where supply is already constrained.
New Government Policies
Much of the press about the Toronto real estate market lately is around recent government policy- namely the aforementioned mortgage stress test and the First Time First-Time Home Buyer Incentive (FTHBI), CMHC’s shared equity mortgage offering. Both of these initiatives are intended to help with affordability, but how relevant and helpful are they in a market like Toronto?
---> First Time Home Buyer Incentive
Taking effect on September 2nd providing the property purchase closes on or after November 1st, 2019 is the Federal Government’s newest plan to help with housing affordability: The First-Time Home Buyer Incentive. The goal of this plan is to “help middle-class families get on the housing ladder”, according to Finance Minister, Bill Morneau. Under the FTHBI, eligible first-time homebuyers receive an interest-free loan of 5 per cent towards the purchase of a resale home and either 5 per cent or 10 per cent towards the purchase of a brand-new build (the objective is to help boost housing supply and sustain the construction and development industries).
FTHBI provides an interest-free loan of 5 per cent toward the purchase of a resale home and either 5 per cent or 10 per cent toward the purchase of a brand-new build. It’s intended to make housing more affordable by reducing the amount of the mortgage and making payments more affordable. There are rules, of course - like the Buyers making a purchase can’t have an annual household income which exceeds $120,000. Furthermore, the mortgage can’t be more than four times the annual income or said mortgage cannot exceed more than four times that income, meaning the purchase price can be up to, but not more than, $480,000. Knowing these limitations, which is exacerbated by the cost of housing in Toronto and how challenged home buyers are finding affordable properties, is this incentive even useful for Toronto house hunters?
Given the high acquisition costs of real estate and the limitations placed on Buyers, those hoping for a freehold dwelling will pretty much be out of luck. In reality, this program is more suited to condominium shoppers purchasing outside the city (in the suburbs), as the cost per square foot in the city core is approaching $1000 per square foot. This infographic from Zoocasa: "Where Can the First-Time Home Buyer Incentive Be Used in Toronto?" actually breaks down neighbourhoods where average prices would let first-timers hoping to take advantage of the FTBHI.
That said, I don't believe this program was ever intended to assist Buyers in larger metropolitan centres like Toronto, Vancouver or even Montreal, but residents (and voters) in the rest of Canada. What this policy effectively does is increase demand for housing, rather than address the severe lack in supply of affordable housing.
In reality, although government initiatives have had some isolated successes in bringing balance/aiding with affordability etc. to the market, there is a sense that the impact is Impermanent or lacking in size of scope. This article, "Pearson: Immense Housing Crisis Requires Effort From Everyone To Correct", brings forth some very pertinent observations around the shortfall - and real responsibility - of government programs to aid with affordability.
It's POV relates specifically to London Ontario, but it accurately reflects how the national situation is no different. The decline in government initiatives and incentives to create affordable rent-geared-to-income housing over the past 30 years has resulted in a significant shortfall in housing constructed to accommodate those in need. Yes, exploring changes in zoning, density, laneway housing intensification and development bonuses (for example, securing approvals for additional floors in a residential high-rise in exchange for allocating a certain percentage of the units to an affordable housing program) are essential, and viable solutions to expand and diversify the housing types and options essential to help diffuse our affordable housing crisis; however, let there be no doubt that a comprehensive, long-lasting solution requires all three levels of government partnering with civil society groups to publically commit and make the substantial financial investment to build safe, pleasing, code-compliant, all-season, sustainable shelter with the essential comforts of heating, plumbing, electricity, cooking, refrigeration, and clean running water for anyone in need.
One bright spot in Government-generated housing initiatives is the low-cost loans that CMHC is extending to developers. Development fees and other costs have been prohibitive in Toronto, which is impacting affordability in a couple of ways: the costs of development and other fees are being passed on to homebuyers, greatly increasing the cost of a home purchase. High fees had also been discouraging developers from forging ahead with development in areas and with the supply that was most needed. This article "Developers Can't Get Enough Of Canada's New Loans To Build Rental Housing" shows that there is some support to assist with supply in a much-needed segment: the rental market, and it would be a better way for large-scale investors (like Pension Funds) to invest in real estate rather than buying entire floors of condos, which is not unusual according to 'The Condo Game' (2013) and ‘PUSH’ (2019), which are two documentaries featuring the commodification and financialization of the Toronto condominium market.
Monitoring current trends and demographics closely is instrumental in helping to predict trendlines in real estate, which I did back in 2016 in this post: "A Shift In Toronto Real Estate Property Investors Should Note". In this post, I discuss the lack of rental units in recent years, despite demand, which had investors snapping up condominiums for property investment purposes. As policy shifts to support the creation of more rental properties, this could impact the potential ROI on this type of property investment while easing our affordability crisis should investors withdraw by some measure in buying condos as part of the investment portfolios.
Some are a bit sceptical of the timing and the frequency of the influx of housing policy announcements, given the proximity to the upcoming Federal election. As is pointed out in this article "Experts Question Level, Rollout Of Federal Housing Announcement", the amount of spending today isn't substantially more than with the previous government, as the issue of eroding affordability continues to gather steam as prices increase and supply still remains behind demand. The hope is that the supply issue could be addressed comprehensively and long-term, in order to let Canadians reap the full benefits.
The Issue Of Supply And Demand
With the growing awareness that more needs to be done to address the supply side of the equation, we are beginning to see more creative solutions to boosting supply, with the end goal of introducing some to alleviate the strain of the supply crunch and improve affordability.
This story from the Huffington Post ("5 Predictions For Toronto's Housing Market In 2019") discusses some of what is likely to come in Toronto real estate in the near future. Among other things (like an increase in rental prices and an uptick in mortgage refinancing) they suggest that finding creative ways to add supply to Toronto’s housing market is part of the new reality. They talk about potentially building upon the laneway bylaw changes (click here to read About Laneway Housing In Toronto, By Sustainable And Urbaneer) and looking at parcels of land around town that could be repurposed for multi-use and housing.
I wrote recently about the transformation of the brownfields in Davenport Village. Through smart planning and out-of-the-box thinking, Davenport Village has been transformed to be a housing hot spot that is rife with lifestyle-enhancing, family-friendly urban amenities. Notably, there has been the development of a good mix of housing types, which makes the neighbourhood more inclusive, by helping with the plight of housing for the missing middle, and increasing housing choice at varying price points. Click here to read: From Brownfield To Playing Field: A Brief History Of Toronto’s Davenport Village.
Similarly, I explored what might happen with the rezoning of yellowbelt land and changing of high-density rules to create housing in urban locales for the missing middle, which could help greatly with affordability. Click here to read, Toronto Real Estate, Yellowbelt Zoning & The Missing Middle: Part One. It's worth noting as well the additional challenges on supply that currently exist in these yellowbelt neighbourhoods. Older property owners choosing to age in place in these yellowbelt neighbourhoods are, with their decision to stay creating additional strain on supply, where supply is already dangerously constrained. This impedes the natural filtering of a housing stock specifically developed and designed to accommodate its originally intended occupants, which are families, working their way up the property ladder to meet their lifestyle needs. Click here to read "Canadian Seniors’ Housing Wealth To Reverberate Across Markets".
By including higher density housing in existing amenity-rich, urban neighbourhoods, the city could increase housing supply considerably. It would not only help with affordability but would help bring balance to the other gap in Toronto real estate that is growing: income separation between homeowners and housing types (or being able to own a home at all).
With the right leadership and policy changes, Toronto has a solid chance at remedying their housing problem.
Stay tuned for Part Two, where we are going to take a closer look at how these influences are impacting the market in the real estate trenches!
Thanks for reading!
~ The Urbaneer Team
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000
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