Welcome to Part Two of Urbaneer’s 2018 Winter Forecast! We’ll start the year off by considering what 2018 has in store for Toronto real estate, based on what we’ve seen in the last few months, and what influences that persist that are likely to shape the trajectory of the market.
In Part One of my forecast, I reviewed what some of the pundits were saying about the market. I also looked at the growing impact of globalization, foreign ownership and the general shifting of wealth in Toronto. In this edition, I’m going to 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.
Buyer/Seller Profile and Demographic Shift
For years and years, the profile of Buyers and Sellers had much to do with their age, stage in life and intended position on the property ladder. With escalating prices, low interest rates and continued low supply, the motivation to buy and sell isn't a clear cut as it once was. Certainly, Buyers continue to aim to purchase as much space as possible at the top of their budget with the objective of holding long term, which is always an intelligent strategy. After all, rather than climb the property ladder multiple times, Buyers are increasingly cognizant of trying to purchase a place they can stay in long term, even if it means putting on an addition later. The costs to climb the property ladder are so significant, selling to buy the next property is being viewed as a last resort these day. It's one of a few reasons why we've been facing a supply crunch for the last few years. As a realtor who has been trading property for over 25 years, I've noticed fewer of my clients are selling as often as they once did in the past, instead choosing to renovate, dig out their basements, and putting on extensions. This suggests properties in the original City of Toronto may continue to come to market less frequently, it will put a continued pressure on prices. This long lack of supply will see demand fuel our market momentum as the Spring unfolds. Right now I'm anticipating a run up on prices for the downtown freehold market, as Buyers bid up house prices so they get closer (or surpass) the spring peak. Here's a post that addresses three significant reasons for Where Are The Property Listings?.
While Sellers have locked down their tenure in a property for the long term, it's forced Buyers, navigating the growing chasm between supply and demand, to change their ideas of what homeownership looks like. Whereas the purchase of a condominium was once considered the initial or end purchase on the property ladder, today the condominium may be the only form of ownership for many buyers as the price of freehold housing hits price points which make it untenable. Our only hope? It's that freehold property Sellers - considering how high the value their residences might command - will shrink their timeline to cash out, in order to benefit from the significant increase in prices this past decade. Click here to read my post: How Sellers, Buyers And Realtors Are Adapting To A Shifting Real Estate Market.
It's possible. During the price surge last spring, I received a number of calls from clients considering cashing out early (i.e. ahead of their intended or traditional timeline for their current properties) given the massive price gains in their property in recent months. With the market transitioning slightly after the market tempered over the summer, most of these Sellers have paused to reconsider, but I think the seed was planted on making a change. This brings to light an important point, as the market readjusts and more supply drifts back into the market after a pause, Seller expectations have had to come back down to earth slightly. That said, it's all relative. Yes, maybe Sellers can’t necessarily expect the huge (at times shocking) sums that homes in Toronto were routinely garnering in early 2017, but prices still rose considerably during the year prior. When you consider your return on investment, even in the current market, for those who years ago employed the “buy and hold” mentality, it’s still lucrative.
My intuition is there's a segment of property owners who are considering selling their homes sooner than later, which should help to drive some supply into the market. One challenge the older demographic are facing, given the freehold market flatlined these past 8 months while the condo market continued its escalation, is that downsizing boomers are finding it harder to locate an 'affordable spacious condo' that accommodates their idea of downsizing while allowing them to keep some of the gain from their house sale in the bank as savings. For those wanting to downsize from a house to a condo, they may forgo purchasing and opt to rent instead (though it, too, is challenging given the lack of product and skyrocketing rents). Here's a recent piece in Better Dwelling called "TREB: 1 In 10 Toronto Homeowners Planning To Sell Real Estate, Will Rent Next".
However, I've noticed this shift towards cashing out one's equity in one's home isn’t just limited to older homeowners. In fact, there is an entire generation wanting to cash out from the 'rat race' (i.e. Gen X and younger Boomers) who are younger than one might think as 'retiring', but seek to simplify their lives, or pursue other lifestyle goals. Their massive equity gains give them the platform to accomplish that. In fact, last spring I had one couple sell their condo - which had escalated $250,000 in 36 months - to relocate to Mexico to embrace a simpler life. Here is an interesting article about homeowners in Canada’s other hot market, Vancouver, doing just that : “Vancouver Homeowners Cashing Out For Smaller Markets With More Space”. My recent post discusses my experience with this phenomenon in the recent market: How Demographics Affect Toronto Real Estate.
This older post that talks about how the Buyer/Seller demographic and the fundamental change to property ownership, demographically speaking. It’s interesting to see how this phenomenon has gathered momentum and grown more stable roots in Toronto real estate over the last several years: Why Some Say Housing Prices Aren’t Coming Back.
There's another factor which I can see shifting our freehold housing market. Homebuyers aren’t just singles, couples or nuclear families buying property downtown, but extended families seeking multi-generational housing. Multi-generational living, whether because of financial, cultural or socio-economic reasons has experienced a swift increase in Canada over the last decade. In fact, Stats Canada says that multi-generational households have increased 37.5 per cent since 2001. That’s even more telling when you place that figure against the overall rise in household number during the same period: 21.7 per cent. What that says is that Canadians in large numbers are fundamentally changing the components of their households. Click here to read “Why More Of Us Are Living In Multigenerational Households”.
When you translate that into Toronto real estate, you see more and more multi-generational Buyers on the scene. Why? From an asset transfer standpoint it lets Boomers effectively “share the wealth”. It also assists members of the multigenerational family on a couple of counts; aging parents can be in touch with their adult children and grandchildren more actively and receive support as they age in place. This movement in many cases also allows adult children to get support with childcare from the grandparents, which is no small item in a city like Toronto where childcare is outrageously expensive. You can ready about one family's journey to multi-generational housing in our recent Home of the Month post November 2017 - Home Of The Month – Scarborough.
As multi-generations of families bond together to purchase, this accomplishes a couple of things. Budgets are extended higher because of the accumulated wealth of the parents and the current earning power of the adult children. This will result in driving prices higher. It also changes the shape of the property ladder a little, as it impacts the natural ebb and flow, and potentially the already tight supply of freehold housing.
For more on this movement, read “How An In-Law Suite Can Add Value To Your House” and “Wealthy Baby Boomers May Be Keeping Canada Unequal By Helping Their Kids Buy Homes”.
Another point to include, demographically speaking, is the fact that a cohort that wields great purchasing power is now moving into the age and stage of their lives where they'll be testing the water of the real estate market. The sub-generation -"Peak-Millennials" (Millennials born between 1987 and 1993) is the largest cohort of Millennials-. Chronologically speaking, they will be primed to move out of their parents homes in large numbers, which many expect is going to contribute to price appreciation, because of size of this group. Here is an article that talks about that influence: 'Peak Millennial,' Condo Nation, And Other Toronto Real Estate Trends To Watch In 2018". Furthermore, it is likely that this cohort will be focusing their search on the condominium market, which could have impact specifically on that market segment.
When you consider the context of demographics, you can more easily see a likely outline of the direction of the future of Toronto real estate. Demographics suggest that demand will continue to be robust in the coming years, which may continue to influence prices upwards. This article talks about how Toronto’s population will shift, according to age, living dynamic and immigration: “How Toronto’s Population Will Change Over The Next 50 Years”.
Toronto is expected to continue to grow exponentially (due in part to Toronto’s increasing presence and appeal on the world stage, as I wrote about in Part One of my Forecast). There will need to be accommodations and planning around this population increase, which will no doubt affect real estate as well. Ontario’s Places to Grow act was brought about initially in response to this growing demand for housing, along with scarcity of land and stock. The effectiveness of this plan to keep up with population growth is in question. Click here to read, “Ontario Urged To ‘Get Ahead’ Of Coming Population Boom,” , "Immigration Has "Undoubtedly' Escalated Housing Prices In Vancouver & Toronto” and “Future Of GTA Property Market Is Up In The Air”.
The Role of Government
Government playing a role in keeping the housing market under control, alongside trying to protect Canadians from the inherent (and widespread) vulnerabilities of over-indebtedness is nothing new. However, we've been witnessing more and more programs, policies and initiatives intervening on our market by all levels of government that have already had an impact on Toronto real estate and will continue to in the coming months. I summarized these in detail in my recent post, How Our Three Levels of Government Are Impacting Toronto Real Estate Right Now.
The question remains though, do any/all of these Government-driven policies and programs go far enough to have the desired impact on the market (i.e. help with affordability)?
The Federal Government is mostly trying to rein in the level of indebtedness of consumers in an effort to mitigate any fallout if the market were to crash, while simultaneously introducing policies that require more reporting and accounting in an effort to ensure financial gains are suitably taxed.
Specifically targeting rising consumer debt in the face of rising interest rates is the mortgage stress test that has recently taken effect in January 2018. They’ve also introduced the National Housing Strategy intended to help create affordable housing in supply constrained areas. Here is my post :Today Is National Housing Day, With News For Active Buyers!. For more commentary, here is an excellent article from MacLean’s written by urban planner Jennifer Keesmaat (and former chief planner for the City of Toronto):“It’s Time To Rethink Canada’s Housing System”.
Keesmaat discusses the social and economic fallout that act as collateral damage in a hot housing market, including displacing seniors, stress on the shrinking middle class, long commutes being a reality for families and lowering quality of life and renters lacking security and stability in their accommodations. This underscores how owning a house is much more than holding an investment or having shelter. Housing is deeply enmeshed in our social, economic and political fibre - to the point that the consequences of market dynamics can create a lifestyle or even hardship as a result.
She intimates that the Federal Housing Strategy is a start in helping to introduce measures of affordability. She also suggests that the rest of the country needs to take note of Vancouver’s housing strategy, which creates supply in tandem with specific need. The problem, she believes, with Canada’s National Housing Strategy is that it looks at subsidizing the costs of housing, rather than going to the root of the problem to fundamentally fix it.
“It’s time to call out and specifically identify market failures in a housing system that is perpetuating unsustainable levels of household debt, discouraging young people from having families and consigning another generation to a long commute,” she says.
Here in the Province of Ontario, policies have been introduced where The Provincial Government has introduced policies - specifically rent control - which don't favour the free market but does serve to remind us that housing the proletariat should be considered a right and not a privilege. The consensus is that while rent control may protect existing tenants, it's at the expense of seeing sufficient capital flow into new rental housing which, from inception, is bound by a marginal rate of return (which is set by the government in the form of rent increase caps). If there's no incentive to create market rental housing then we'll continue to experience a housing shortage. And it seems unfair that people are less likely to move because they're afraid to give up their rent controlled units (or because they can't afford to move). I don't have the answer but it's a quagmire. What this does indicate though is that this could constrain supply, placing pressure on prices.
In a Toronto Star article called "Is Rent Control Making Toronto’s Vacancy Squeeze Worse?" Joseph Feldman, director of development for Camrost Felcorp suggested that "if developers were allowed to add 10 floors to every building proposal this year, there would be thousands of new rental units on the market in a short time. Ten storeys — that takes an extra 10 weeks on the construction cycle. A new 10-storey building takes a couple of years,” he said. “By just allowing a couple more floors, the impact to the typical pedestrian is negligible at grade. It’s low-impact but it will lead to a healthier market.” While I'm not suggesting every development being increased in height this substantially, I do think it's time for governments to consider implementing a program where increasing density would be allowed if a development integrated affordable rental housing into a development. A developer might add a number of floors which could be its own condominium corporation that could be sold to a Pension Fund or Investment Group, or investors could purchase individual units within a section which have covenants that restrict it being sold to anyone other than an investor. I think its time for a large-scale initiative to combat the lack of rental housing, especially product which is affordable. This could be a way to integrate and solve a housing dilemma in a place where density is low relative to other urban centres, as outlined in the Fraser Institute News Release: "Canada’s Biggest Cities Much Less Dense Than Other Major U.S. & International Urban Centres". Sadly, apparently the efforts to create 'Inclusionary Zoning Legislation' for more affordable housing is a fail, in that the incentives for developers aren't significant enough to motivate embracing change. Here's a recent post in The Toronto Star called "Province’s Affordable Housing Plan ‘Achieves The Exact Opposite,’ Councillors Say".
It's also important to note both the Provincial and Municipal Governments have significant land transfer taxes that take the bite out of Buyers. I wonder if there's any press that explores the impact on buyers - and how significant the revenues are to these governments (if the market were to crash, it could sink governments too if the revenue streams were to dry up). Here's an article that addresses the concern about the City's potential shortfall in their budget in "Toronto 2018 Budget Keeps Property Tax Down, Drawing Concerns".
The Municipal Government is navigating Airbnb - which brings in tourist dollars while exacerbating the housing shortage by removing rental properties from the market. They're also exploring a vacancy tax (like Vancouver) as a way to motivate property owners to rent their spaces. Here's my recent post called With 65,000 Vacant Units, Will A Vacancy Tax Be Helpful To Toronto Real Estate?. I struggle with this, as property owners should have the freedom to choose how they manage their own assets. I don't know of any other product (except the recent debate to prevent ticket scalpers from profiting on resale) where a government requires an owner to give up their freehold rights or face a penalty.
However, data is signaling that market values are tempering across the Greater Toronto Area - which one would expect given all the layers of government intervention. This may not be ideal for some (those who fear they've paid too much, or those trying to cash out), but it demonstrates our real estate market is responding to government interventions – which is significantly better than a crash and burn. However, given this is limited to the more expensive freehold housing rather than the under $1M market does suggest demand may still be outstripping supply. In fact, I shared in one of my recent Tales From The Real Estate Trenches posts from January 24th, 2018 - called 35 Offers On 3 Downtown Properties Last Night Signals Rocketing Demand - that the market is quickly recovering from its hesitation. The post shares the real-time outcome of three bidding wars in the downtown core as Buyers flood back into the market at a time when the supply is very tight. As Buyers compete for property, their strategy has become to pay as much as they need to secure the dwelling as long as it doesn't surpass the values garnered in the Spring. That way they still feel they're being prudent, ahead of the market, and given they tend to be buying for 5 to 10 years+, they can weather any future change in the market.
The Continued Role Of The Condominium Market
2017 was a banner year for the Toronto condominium market, with new condo sales hitting an all-time record in October. As detached home sales took a hit after the measures of the Fair Housing Plan took root over the summer, the condominium market was not as impacted. More tellingly, condo prices appreciated 23.1 per cent in 2017, far outpacing the gains of the freehold market, which rose only 12.8 per cent. Click here to read the TREB report for 2017.
These articles shows exactly how tight the condo market is: “From Glut To Dearth: In Toronto, Just 197 New Condos In Inventory” and “Condo Sales In Toronto Just Hit A New Record”.
To play devil’s advocate a little, here is an interesting article suggesting that there are a number of new houses coming into supply, and questions the validity of the data showing a housing supply shortage, mostly making assumptions on Census Data. The underlying message here is that it is in fact Buyer behaviour that is driving prices up, rather than a straight lack of supply. Likely, it is probably a little bit of both that results in price appreciation. Click here to read this story: “Toronto Real Estate Will Get Over 57,000 New Homes In 2018”.
For years there was concern about an oversupply of condos in the Toronto market - which I've long contended would be the first place to show cracks in our market - but there is quite a bit of evidence to the contrary. The prediction is that the Toronto market will continue to see price gains in the coming year, pushed along by the strength of the condo market. This is being driven particularly by a couple of factors: the growing appeal of the condo for families and the growing gap between freehold and condominium housing prices.
Family Friendly Housing
As the reality of the current market sets in homebuyers (particularly those with families, or those who are hoping to begin families) are realigning their concepts of home ownership to match their budgets, the market and available stock. Traditionally, family-friendly housing has conjured up images of a yard and space. In Toronto, young urbanites with families (or who hope to have families) are increasingly viewing condominium living not as not only an affordable option, but a lifestyle that offers significant upside. That’s because living in a condominium helps keep their housing budget intact, offers an opportunity to achieve that elusive work-life balance by reducing commutes and also offers the opportunity to live near live-enriching amenities. Click here to read my recent post: Dear Urbaneer: Should We Raise Our Kid In A Condo?
For this niche - but growing - market, there is already a mismatch between supply and demand which will place upward pressure on prices. Although families have warmed up to the idea of condominium living, they don’t want just any condo; space and layout is an issue, as is proximity to key amenities like parks, transit and staple-rich amenities. The buildings themselves need to include amenities that families will favour as well. There is evidence to suggest that supply has not kept up with this demand either. According to this article: “A Condo That Fits Families: Builders Incorporate Family-Friendly Ideas, But Price Remains A Roadblock”, as freehold housing has jumped astronomically in price and out of reach for many families, new development of condominiums of two bedrooms or more (aka the “new” family housing) has fallen proportionally by 21 per cent in the 1900s, according to research group Urbanation. This doesn't bode well for those struggling with affordability, especially given more affluent Baby Boomers who are downsizing may compete for the same product. Here's a recent article in The Globe and Mail called "Looking For The Best Return In The Condo Market? Buy Old", which documents that older condominiums with larger suites are the properties escalating in value the most.
The City of Toronto has just released a study called “Growing Up: Planning for Children in New Vertical Communities” to help builders plan their projects to meet demand, encouraging development of buildings with larger units, proximity to parks and community resources and on-site amenities that support family-based social life. According to this report: “In 2011, 10,000 more families with children and youth lived in high-rise buildings than in 1996. While the overall number of households with children and youth will grow as the population increases, the long-term demand for family suitable housing will exceed the anticipated supply if current trends continue. This mismatch between demand and supply is exacerbated by a lack of large unit types and a trend towards smaller units.”
The Deep Divide Between Markets
There has been for some time dual plot lines in the Toronto housing market: the story line between low rise housing and high rise housing. For years, hopeful buyers of low-rise housing vastly outnumbered the supply, creating substantial pressure on prices. Click here to read my post High-Rise/Low-Rise: The Toronto Real Estate Price Gap .
That gap continued through the Spring of 2017, growing even wider. However, as the condominium market gathered steam through 2017 while the freehold market flatlined, we're seeing over $1mil freehold market shrink proportionately in relation to the more affordable condominium market, changing the composition of demand entirely and fracturing the market further. What’s more is that this divide has been solidified by price point, namely homes under $1mil price point versus over $1mil, underscoring the vast difference between buyer profiles.
Using this other measure as a consideration; there has always been a steady stream of Buyers for condos and the harder-to-find house under $1mil, who have down payments which are less than 20 per cent. Whereas the market with Buyers able to put 20 per cent down or more - who can also buy in the $1mil+ categories - is smaller, because of obvious affordability pressures. Add to that the recent policy interventions (i.e. the addition of the mortgage stress test) that has clawed back the purchasing power for some homebuyers, and we can anticipate seeing more Buyers pursuing the more affordable condominium market, diverting them from purchasing more expensive properties. This should also contribute to continued price appreciation in the condo market - where demand will remain strong.
However, there is a potential upside in our market. The massive double-digit gains we're seeing in the condo market this year - while freehold more expensive houses flatlined - are allowing some condo owners with substantial value gains to sell and climb the property ladder into the freehold market when they might otherwise have been excluded. I think we're going to see this begin with our Spring market, as condo owners see an opportunity to lock down a house before they increase in value to the sums being garnered in the Spring of 2017.
Here's some of my past blogs on Condominiums, if you're considering this type of housing form:
As the years roll on, more and more layers are added to the complexity of the Toronto real estate market. As we begin to see marked change in how homeownership and the property ladder is perceived by both Buyers and Sellers, as well as the continued intervention of all levels of Government, the market will continue to react. What this drives home is how essential it is to be knowledgeable not just about drives the market, but to understand the source and the likely trajectory. Do you or someone you love need assistance buying or selling? We are here to help!
Curious to see what kind of homes our Buyers purchased last year? See a sampling in this post: Toronto’s Best Houses & Condos Of 2017 By Urbaneer.
Are you a Buyer ready to rev up your housing search in 2018? Here is what you need to know before you jump in The Four Values Of Real Estate For Bidding Wars And Bully Offers In Any Market Climate (Plus Cats!).
To learn about how we employ strategy for Sellers in this complicated market, read Marketing Your Toronto Real Estate With Urbaneer’s Steven Fudge and Marketing Your Home With Urbaneer: Social Media.
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000
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