Welcome to Part Two of our Spring/Summer 2016 forecast, where we share our musings on the hot Toronto property market. In Part One, we reviewed what many of the pundits were saying in the media about Toronto real estate. We also looked at the economic drivers and some of the human tolls exacted by a super-charged market.
It's not surprising that real estate is such a hot commodity. The bricks and mortar of real estate breathe life into that concept of "Home"; which includes an investment integrated in a community that propogates quality of life. And as far as quality of life goes, Canada offers the very best. Literally. A recent "Best Countries Report" ranks Canada #1 for the best quality of life, and a very respectable #2 for overall best country. When you couple that intangible quality with the signficant upside from an investment point of view in owning a part of that through home ownership, it's not surprising to see the continued surge in real estate in many centres across the country. Of course, in Toronto, you've got a unique market, brimming with opportunity. Click here to read a Globe and Mail article about the "Best Countries Report" called "We’re No. 2! And That’s Pretty Darn Good." There, of course, are unique factors within our city that make the opportunity so ripe, and at the same time present some potential problems - possibly.
For this segment, we’ll take a look at some more factors that are having impact on the shape of the Toronto real estate market, namely the continued erosion of affordability, the changing shape of the property ladder and the role of the condominium market.
The Persistent Question Of Affordability
Eroding affordability is pushing home ownership out of reach for many, at least on paper. But as recent studies are showing, affordability appears to be a subjective term. The first time home buyer bracket, largely comprised of millennials, remains undaunted in their housing dreams despite being surrounded with skyrocketing prices. However, they don’t expect to be able to achieve homeownership on their own. Recent surveys by RE/MAX and RBC show that there is a marked increase among millennials who identify home ownership as a goal, but the vast majority plan to pad their down payment with a boost from the Bank of Mom and Dad. Here is a story from the Globe and Mail called “Your Parents Likely Made A Mint Off Housing, But You Won’t”. This story also tries to set some of the home ownership myths straight, including the sacrifices in lifestyle to buy in Toronto’s current market, as well as aligning expectations on return on investment, compared to what previous generations have experienced.
A recent poll from BMO showed similar results. Of the millennial respondents, 32 percent felt that homeownership in Toronto was an unattainable goal for them. Meanwhile, two-thirds of the respondents were undeterred by high prices and intend to purchase a home, many of which indicated that they intended to withdraw from the Bank of Mom and Dad. Here is a story from the Toronto Star called “Two-Thirds Of Millennials Expect To Afford A Toronto-Area Home, Study Suggests”. In this story, a couple is effectively able to double their mortgage payment with help from their parents.
In this chicken-and-egg-scenario, it’s not hard to draw the conclusion that Mom and Dad, while well-meaning, are actually playing an active role in keeping upward pressure on housing prices by supporting their kids with passage into the property market. This is something that urbaneer has written about on a number of occasions. Click here to read “Is The Bank Of Mom And Dad Behind Rising Housing Prices?” and “Relying On The Bank Of Mom And Dad.”
To put this into context, when I started selling real estate in 1989, parents didn't want their kids buying south of Bloor in the fringe multi-cultural working class neighbourhoods located next to the industrial areas like Lesleville, Queen West, Little Italy or The Junction (now - 26 years later - these are considered amongst the hottest most coveted neighbourhoods). Today, parents are now eager and willing to help pony up the down payment just to convince their kids to buy in the original City of Toronto so they can avoid having to take the highway to see their grandkids. It's all about multi-generational support these days, which includes keeping the grandkids as nearby as possible. However, the Bank of Mom and Dad are increasing down payments in order to extend their kids’ purchasing power, rather than reducing their overall debt loads. And increased debt loads in the face of eroding affordability creates a rather dangerous trend line.
It’s interesting to note that Consumer Insolvencies (bankruptcies) have skyrocketed the last year in Canada and they aren’t limited to areas that have been hard hit by localized economic downturn (i.e. Alberta). You can see how people get into debt trouble when they lose their jobs, as is happening en masse in oil-rich Alberta for instance. An equally dangerous vulnerability? The amount of debt a household owes versus what it owns. In Toronto, people are maxing out mortgages as a matter of course, which creates a very real and very present danger for financial vulnerability should any one of the many variables in the market shift. Here is an article from the Huffington Post called “Canadian Consumer Insolvencies Are Soaring, And Not Just In Alberta" that talks about the impact of dwindling affordability in hot housing markets and associated household debt levels.
And there is speculation that the localized economic downturn in Alberta, and their soft real estate market, may actually also contribute to further demand (ergo price increase) in the Toronto property market, as the labour market shifts from the West to the East. Click here to read this story called “The ‘Oil Recession’ Might Push Toronto And Vancouver Home Prices Even Higher — Here’s How."
Broken Property Ladder?
In the filtering of housing stock, historically there has been a natural progression of moving, as first time homebuyers enter the market and buy and sell subsequently, moving up the property ladder as their family life and careers/income support the upward moves. But what's been happening in Toronto over the past decade, is that with the enormous price jumps associated with freehold housing Buyers have been routinely purchasing at the very top end of their budget with an eye to renovating - and/or putting on an addition - over an extended period of time to accommodate their changing needs instead of selling and buying a different dwelling. If this is becoming established as the new norm, then it supports the lack of listings we've been experiencing coming to market.
There are a few other factors that are influencing the lack of listings. It’s straight up expensive to move in this city, with the double land transfer taxes, fees and associated closing costs. Click here to read a past urbaneer blog on this subject : “Dear urbaneer: What Are The Closing Costs For A Property Purchase?". It’s also more expensive to raise children now, so families (or families to be) are saving costs in advance where they can - which may mean taking on the largest family home they can afford right out of the gate. Fewer people are moving because of a growing awareness of how long it actually takes to generate a profit on your property investment, due to those closing costs, and as well as required capital to renovate homes. Given the age of the housing stock in the city, and the likely price point that most of these buyers enter the market, there are fixer-uppers abounding. Click here to read a past blog on the math required to determine how long it will take you to generate a profit on your real estate called "Dear urbaneer: How Much Profit Should I Expect Climbing The Property Ladder?”
Compounding the matter, as the cheaper houses get bought and renovated both by flippers and owners, the supply of affordable market housing becomes even tighter which pushes values up. In fact, we believe in the next five to ten years nothing will be under $1million except the smallest houses on the smallest lots as anything with a decent lot will be enlarged. I'm ensconced in this journey personally, for not only do I sell real estate, I've had a long history in the conversion of warehouses into loft condominiums and, more recently, in the transformation of older housing stock. My latest project is expanding a 1960s purpose built duplex into a larger two-unit residence. If you're a fan of design and renovation, check out my Tales Of Tennis Crescent, where I've recently navigated the City of Toronto's 'Committee of Adjustment' approvals process for enlarging my house. My strategy? I've bought a duplex where - once I've complete the 1000 square foot city-approved addition to the top floor suite - I'll have my personal residence while the existing (and recently renovated) Garden Suite will provide an income supplement of around $2750/month to offset my expenses. And then - in my future - when I require less space and spend less time in Toronto, I'll have the Garden Suite as my pied-a-terre and the larger suite will provide me an income stream in retirement. In other words, I've bought this with a long term vision to meet the changing needs of my lifestyle.
The end result of all of these factors is a property ladder that is fundamentally changing shape on the supply side, which lands impact economically and socially as well.
The Condominium Market
We’re well aware of the two oppositional storylines that have characterized the Toronto housing market for years: the disparity between freehold housing and condominiums. We are seeing some persistent vulnerabilities that continue to exist at the foot of this housing segment. We’re also seeing demographic shift take hold here, much as we have with the question of affordability, which is another by-product of the mismatched supply and demand between the two housing types.
As prices continue to appreciate at breakneck speed in the freehold market, there is an entire cohort that is being effectively shut out of that market. We’re seeing a growing number of millennials selecting condos as their passage into home ownership. Check out this video from the Globe and Mail called, "More Starter Homes Will Be Condos.”
Of particular interest, younger families are snapping up two bedroom condos, and we are also seeing stacked Townes skyrocket in value (fact: three bedroom Townes near Dupont and Lansdowne and King/Sudbury have increased 100k over this past year). This is driven by good old demand, as securing something family friendly downtown for under 650k is getting near impossible. This will continue as we're seeing fewer stacked Townes being built as developers push for higher density mid-rises in same locations.
Another market shift is driven by millennials, with an influx of smaller units onto the market; as more of this cohort are moving along life’s milestones, they are merging two households into one. In housing terms in Toronto, that means that both members of the couple are selling their own smaller condos and combining their collective finances to try to get in to the freehold market - aggressively seeking stock under $1million. This is having two effects: increasing the amount of smaller condo units on the market, and increasing pressure on the already coveted freehold market. We touched on this phenomenon in our February Home Of The Month a few months ago.
There is always the question about supply and demand in the condo market. The suggestion is that, yes there is a large supply. There is no question that condominium building has grown exponentially over the last two decades. A recent report from RBC freshly sounded alarm bells about the current stock on the market, combined with the number of new units coming into the market. Despite this, questions linger on the balance of available stock and demand, in addition to the nature of the existing stock itself. The real issue is about timing; if new stock and resale stock enter the market at high levels, while simultaneously the demand shrinks, values could plummet, punching a dangerous hole in the market. This recent story from the CBC called "Toronto Condo Market Is In 'High Risk Zone' Of Overbuilding, RBC Says," goes into greater detail.
On the flipside, there are those who insist that there is a demographic need that will absorb these units, partly because of the growing favour of the condo for first time homebuyers and retirees alike. There is also a steady stream of immigrants to Toronto, which could buoy the rental market as well.
For example, downtown condos are maturing. The savvy Buyers in the City of Toronto are becoming increasingly more aware of issues like the quality of construction of a building and how well-managed the operations and maintenance programs are of condominium corporations. Prudent purchasers are increasingly paying more attention to not only the Status Certificates of condo corporations but completing more detailed due diligence (like requesting Minutes of Meetings) to scratch beneath the surface, literally. Click here to read our post: "Five Points To Ponder Before Buying A Condominium.”
It’s not uncommon now to see relatively newer buildings (i.e. those built just 10 to 20 years ago) receiving a poor grade from the Canada Mortgage and Housing Corporation (CMHC) because of deteriorating physical conditions, lack of upkeep, or poor financial operations. In some instances, CMHC won't insure high-ratio mortgages for purchasers, meaning only Buyers with 20 percent down can buy in these questionable towers. In one instance, developer Urbancorp who has a history of delivering poorly executed product recently filed for bankruptcy, and owes creditors more than $70m. Click here to read about their proceedings).
Addressing the pundits who feel that the construction is outpacing demand, according to the most recent stats from CMHC, urban housing starts fell in April, pulled back by slowing activity in Ontario and Quebec. Analysts pointed out that, particularly when dealing with urban centres like the GTA, this construction cycles goes in waves to meet demand. This pullback could indicate an oversupply, or simply a lull in the market for new condo construction.
Urbaneer has written many times on the potential vulnerabilities of the condominium market, as well as smart strategies to protect and promote your asset as a condominium owner: invest in the unique. Especially with the proliferation of those ubiquitous box in the sky high-rise condominium building, specific features will allow you to garner top dollar when you resell, including uniqueness of the building, thoughtful layout, noteworthy views, prime outdoor space and terraces, two car parking as well as quality finishes. It’s also essential to have your condominium in a prime location, close to convenient and cool amenities, like shopping, dining, green space and public transit.
Location is particularly crucial when it comes to condos. If you surround yourself with similar product (either in the same building, or same neighbourhood), you create potential selling problems down the road. Give the Buyer a reason to buy by promoting the uniqueness of your property. Think of it, why buy in high-rise tower, surrounded by other towers, when you’ve got other options? Different is not only appealing, it’s the link between Buyer interest and decision to purchase.
Another potential vulnerability in the condominium market is the influx of foreign investment. As this article from the Globe and Mail, called "Chinese Investment In Canadian Real Estate Set To Increase In 2016” says that the steady flow of foreign investment is going strong and will likely continue to do so (China in particular), because of tight investment policies in, as well as economic instability in their respective countries. Toronto and Vancouver have been the benefactors of these foreign investment dollars, but they have also seen property prices increase as a result.
There's no question foreign investment can carry with it an extra layer of financial vulnerability because of the nature of ownership. Many of these investment properties are not owner occupied, which means that the ties to the property are different. In theory, should economic conditions shift either domestically or abroad (particularly in areas where these foreign investors reside) there could be fast and furious liquidation of this stock - which will mean a flood of inventory onto the market and plummeting prices. Click here to read our past commentary on issues around inventory and to view a piece from CBC’s Doc Zone in “The Condo Game."
It has been difficult to track foreign investment specifically, so it makes it difficult to gauge what the potential vulnerability might be. The Canada Mortgage and Housing Corporation (CMHC) has recently said that they are developing plans on how to better track and manage this component of the housing market. Click here to read a story on that called, “CMHC Shares Plans To Better Track Foreign Investment”.
And speaking of condominium investment, there's a new risk for the investor, which is the return of the apartment rental. New luxury rental apartments are being constructed throughout the downtown core, which could really put a dent in the supply chain. We explore why a tenant might gravitate to one of these new buildings in A Shift In Toronto Real Estate Property Investors Should Note.
There are a number of factors that continue to hum beneath the surface of the Toronto property market, presenting it simultaneously with opportunity and potential vulnerability.
Did you miss Part One? Here's Urbaneer’s Spring/Summer 2016 Toronto Real Estate Forecast: Part One!
Given that real estate is a dynamic entity, and that the Toronto real estate market is particularly fast-paced, it is of untold value emotionally and economically to align yourself with a realtor that operates on the principles of research, patience and short, medium and long term strategy as it pertains to your real estate goals. At urbaneer, we draw on a multi-disciplinary education in housing as well as several decades of in-the-trenches experience in lending clarity to the sometimes murky (confusing) waters of the Toronto real estate market.
With decades of experience navigating the highs and lows of our market, and our commitment to remain acutely aware of shifts and trends, may we be of assistance to you, or someone you love?
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