Welcome to the first installment of urbaneer.com’s prognostication, our Spring / Summer 2013 Forecast.
This installment explores the dynamics of the central Toronto freehold housing market, with our second installment - coming soon - analyzing the city's condominium market.
The question is, is this the trend line for 2013?
Right now, the central Toronto freehold housing market, which comprises around 42 'village neighbourhoods' spanning from The Beach west to The Kingsway and up the Yonge Street corridor to Sheppard, has fractured into multiple dynamics dependent on the type of dwelling, its location and its condition. Regardless, it's significantly more competitive than the condominium market. Essentially, anything deemed 'desirable' and an 'opportunity' was snapped up in bidding wars throughout February, March and April.
Want a chuckle? Click HERE to read our light-hearted (albeit slightly acerbic and bitter sweet) look at the recent realities of House Hunting in Spring!
Yes, the bidding wars have been consistent every spring for well over a decade. Freehold buyers in the $500,000 to $900,000 range continue to find themselves in an intense property situation, with more interested parties than properties available. Homes in various locales around the city - particularly Triple AAA neighbourhoods - found their values pushed upwards as market demand set new value precedence in the original City of Toronto.
When the federal government took the initiative to cool the market by setting new lending criteria in July 2012, and investors began to flee out of fear of a price correction, prices did roll back in the condominium market but not for freehold housing. In fact, through the autumn we witnessed prices decline to 2009 values in the condominium market, but this was distinctly at odds with the market stability for downtown freehold houses. We addressed this tumultuous time in our on-going series called Tales From The Real Estate Trenches. Click HERE to see a November post, and click HERE for a February post called 'The Up, Down and Sideways Market', which sheds more light on our recent market dynamics.
This wonkiness led everyone to question what direction the market is going.
To understand the nature, depth and truth of this vulnerability, we think it helpful to look at the market in a few different contexts:
We contend that the mechanics of supply and demand for centrally-located freehold housing will remained tipped towards demand for the balance of the year.
Well, for starters, we simply aren't building freehold properties in the City anymore and those which are being re-built, renovated, or newly constructed are expensive. Our very livable city of neighbourhoods, with its efficient transportation system and village amenities is popular with urban professionals and young families. And it's been this way now for over a decade. More and more Torontonians - and we're referring to the three most recent generations (in their 20s to 50s) who grew up living in the city - all covet a house in, or near, the neighbourhoods familiar to them. Combine that with a city that remains one of the country's principal destinations for immigrants, and you've got a demand which is ultimately outstripping the supply of freehold houses in the downtown core. If we had to identify the most critical factor for the strength of the freehold housing market it would be 'Demographics'' This factor alone is fueling the continuing gentrification of former working class neighbourhoods across the Original City of Toronto. And, in our opinion, Toronto is destined - albeit perhaps in an ebb and flow manner - to keep growing. By our accounts, freehold property in a demand central location will always remain a solid long term investment.
Yes, home buyers at various stages of the property ladder are being effected by dwindling levels of affordability. And yes, it is a well-noted fact that property values in Toronto, where bidding wars are often a consequence of daily business practice, are outpacing inflation (i.e. incomes) at a great rate, and have been doing so for some time.
And while we are witnessing the number of buyers for property is slowly beginning to dwindle (although we're still seeing bidding wars for good product have anywhere from 2 to 18 offers right now), this isn't being reflected in values or the propensity for good product to continue to increase in value. Why is this?
Without question, Toronto is one of the main economic engines of our country. As a result, it is home to a large number of well-educated high-earning professionals who are often double-income households. Headquartered in the Toronto satellite offices of International Corporations, holding court as the old guard bastions in the upper ranks of Canada's industry, and spearheading the booming post-industrial economies of finance, technology and health care (along with their commiserate services), this city has a concentration of wealth (including affluent parents who are helping out with the down payments) that affords its high-earning residents greater opportunity to leverage their incomes and substantial down payments against debt.
As a result, as long as the federal government's Bank Of Canada keeps the interest rates low to continue serving the rest of Canada and its resource-centric economies, our low mortgage interest rates (currently 2.79 to 3.64 percent for five and ten year terms) will continue to fuel the City of Toronto's market demand for centrally-located family housing coveted by urban professionals.
Right now most central city house buyers are electing to max out their purchasing power to secure the largest mortgage at the longest term and amortization afforded them. Rather than climb the property ladder multiple times and incurring significant buying and selling costs (totaling around 10 percent of the property value each time), they're opting to leverage themselves once and adopt a long term 'Buy and Hold' approach. In other words, they're spending top dollar knowing exactly what their monthly payments will be for the next five to ten years. We give these astute buyers' props, for they're using their current income to qualify for a mortgage knowing that, as their career path grows, their income to debt ratio will diminish while their property remains a stable investment, if not escalate in value.
The potential kicker? With everyone so concerned interest rates will rise, they're competing wildly - and pushing up values - for houses which are sometimes based not on what they're actually worth, but what those Buyers can currently afford. These Buyers rationally understand that, should interest rates rise, prices could drop. But they don't really care. Their motivation is to buy a freehold house to raise their children (or, in the investor market, to generate a reliable income stream) to hold for the long term. If it's secured with a long-term low-interest mortgage that they can slowly chip away at over time, then they will stay and weather any economic calamity.
Click HERE to read a recent relevant article in The Globe And Mail which accurately captures how Buyers are pursuing the best freehold properties on the market.
And this is why many pundits believe we're living in a Housing Bubble. Click HERE for our January post responding to a Toronto Star article about the pending Cooling Housing Market.
Bubbles Don’t Sustain Weight
Pick your bank, economic report or policy maker and they are all delivering the same message-with varying degrees of detail. Most pundits and experts feel the property market in this nation as a whole is inflated (depending on who you listen to, property values are anywhere from 10-40 percent beyond where they should be). The city of Toronto is apparently suffering from the same affliction, but while urbaneer.com thinks the potential oversupply of condominiums could bring prices down, the fact that urbaneer is representing buyers who are consistently competing against multiple other buyers in bidding wars for premium freehold properties suggests it may be a season or two before we move into stabilization in the downtown core.
From property peaks invariably come property valleys. Canada, like most countries, has a flat-lining economic forecast which means we'll be managing at a sluggish pace far slower than the boom cycle we experienced through the 1990s to mid -2000s. And, as the media keeps reminding us, Canadians have maxed out their debt borrowing.
Over twenty years ago when I began my real estate career, Toronto property prices declined upwards of 35 percent from their peak 1989 values over a six year period. Once the market stabilized in the mid-1990s there were a few years where the steady pace, called a 'normal market', meant your property would be for sale for around 60 to 90 days before it attracted a satisfactory offer. It's been almost fifteen years since we lived in those market conditions, free from bully offers and bidding wars. Amazingly, the majority of licensed realtors have never operated within these conditions, which means a lot of the industry players and consumers are going to be learning a new way of doing business.
At 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.
By the way, did you read our recent newsletter "What Property Will You Invest In"? Click HERE to link to it.
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~ Steven and the urbaneer team