Bosley Realestate

Urbaneer’s Summer 2017 Toronto Real Estate Forecast Part One

June 29th, 2017 | Urbaneer's Real Estate Forecasts

Welcome to the newest edition of our seasonal prognostication: Urbaneer's Summer 2017 Toronto Real Estate Forecast: Part One!

Reflecting back on my forecasts for the the past two years, there are distinct trends that have remained influential and dominant in the moving current of Toronto real estate, only occasionally ebbing and flowing with the seasons. First and foremost, the market has continued to swirl frenetically, setting new records and then smashing them, always pushing home prices and debt loads to new heights. In fact, the forces behind this swift and continuous price appreciation have been building fairly ominously for much longer than the media would have you think (since 1996, actually)! They of course include low interest rates, the mismatch between supply and demand in both the freehold and condominium market segments, and the influx of foreign investors and speculators.

The depth and length of impact of these forces quite distinctly reveal the complexity of the city's housing market. It’s no longer just about buying and selling homes, but rather understanding the dynamics of these influences - both separately and cohesively - as well as their minute fluctuations; only then can one effectively create set up a successful property strategy. Consider revisiting Part One and Part Two of my Winter forecast for a perfect example of these influences in play on multiple levels.

But this time around, the real estate story in Toronto really gets interesting, because for the first time in years, the winds of change are not just a gentle breeze lingering on the periphery. The market has shifted - quite dramatically - in response to a number of recent policy changes.

In Part One of this summer forecast, I’m going to talk about the recent policy changes and the impact to date on the market. In trying to determine if these changes will have the desired effect on the market, I’m also going look at the real estate market Vancouver through the lens of hindsight. Vancouver’s market was equally as hot and had some measures introduced to cool the market, much like Toronto. Let’s consider the impact of their similar policies, about a year after implementation.

 

 

What Have These Policy Changes Done To Date?

Last autumn, the Federal Government introduced changes to the Principal Residence Tax Exemption, intended to discourage speculative property investment. In April, the Provincial Government introduced the Fair Housing Plan, intended to make housing more affordable for people, slow swift price appreciations as well as try to bridge the gap between supply and demand. 

In the first full month since the 'Fair Housing Plan' was introduced, the market began slowing towards more balanced territory. According to CREA, Toronto housing resales plummeted a sharp 25.3 percent in May, as more supply entered the market. Across the country, sales dropped by just over 6 per cent, which marks the biggest decline that has been registered in the last 5 years, which just goes to show the force of the Toronto property market.

Data from TREB showed similar results for the month of May, with sales falling by just over 20 per cent. Not surprisingly, there was a marked uptick in new listings during the same period, up just over 42 per cent from May 2016, which was the lowest level that had been seen in 15 years.

From my point of view in the 'real estate trenches', while the change in the market wasn't instant, the announcement of these measures towards the end of April did result in a shift in both buyer and seller behaviours toward the market. The preliminary numbers in the data for April showed that the market had effectively begun to cool, but while still busy - and still registering price increases - the frenetic pace that had characterized the market was less evident. By May the slowdown took even more root, with more noticeable results. Multiple offer bidding wars were still occurring, but whereas I was receiving 9 to 13 offers competing for my listings in April and prior, during May the number of offers received on the offer date were dropping to six or so, and in June my competitively priced listings were seeing three Buyers simultaenously duke it out. As the multiple offers diminished, Open Houses became notably quiet too. And as the heat of summer increased, Buyer interest definitely cooled, as more Buyers moved to the sidelines, preferring to focus their attention on summer leisure while taking a breather from the freneticism that had long plagued our real estate market.

For the first part of June, the downward trend has continued, with stats showings sales dropping more significantly (to the tune of 50 percent, year-over-year), while listings increased by 22 per cent. This story from the Globe and Mail called “Toronto’s Real Estate Market Sees Shift Away From Earlier Frenzy” discusses this trend, as well as marked change in buyer sentiment. It prompted me to write about the change, as I counseled my clients in “How Sellers, Buyers And Realtors Are Adapting To A Shifting Real Estate Market”. This post remains equally valid now as when I wrote it at the beginning of the month.

It's important to remember that, although these figures certainly indicate a cooling of a market, it takes more than a month or two to establish a solid trend line. Let’s consider what has happened to the hot market in Vancouver in the past year, which received policy changes because of the similar problems to Toronto: sky-rocketing prices, an influx of foreign and speculative investors, and eroding affordability.

 

 

Did Policy Really Cool The Vancouver Market?

There's great debate on whether the scorching hot Vancouver market would have slowed without its government's policy changes, given there were signals it was cooling, but there are a few things to consider. When you look at the Vancouver since the B.C. Government intervened last year, data followed a similar trend line to what we’ve seen in Toronto in the past months. However, the trend line in Vancouver is a bit of a cautionary tale when you look at the market in the several months after policy introduction. While the policy measures did definitely subdue foreign investment (though evidence is suggesting foreign buyers are back and pursuing less expensive property) and brought some balance to the supply/demand dynamic (both of which are factors that contribute to rising real estate prices), they’ve done little to actually pull housing  prices back down to earth and increase affordability, which is still paper thin in Vancouver.

CMHC shows that new mortgage payments in Vancouver last year rose 4.5 per cent, outpacing inflation (while Toronto’s new mortgage payments soared 11. 5 per cent during the same time period).

Take this story for example. “Has Vancouver Home Affordability Actually Improved?”. Data in this story shows that while sales and listings continue to drop, prices continue to escalate. From The Globe And Mail, here's a current article (July 5th/17) called "Vancouver Condo Prices Surge Amid Apparent Thaw In Foreign-Buyers-Tax Chill". Putting house prices in the context of income, owning a detached home in Vancouver rests at 126 per cent of the median household income. RBC measures that home ownership costs in Vancouver snap up 84 per cent of a household’s income. National Bank economists calculated the length of time it would take in various cities to accumulate the down payment required to buy a non-condo (i.e. a detached or row home). They estimate that it would take the average household 428 months to accumulate the down payment required for the median house price above $1million. Yikes!

 

 

 

What's Next?

It's still early, but while prices barely flinched in Toronto in May, where headlines spouted “House Prices Post Record Rise In May As Toronto Chill Yet To Be Seen,” it's inevitable - as summer unfolds - we'll soon see data indicating values are adjusting in the more expensive freehold market. One factor is all those Sellers who bought prior to the policy change at the end of April who then had to turn around and sell their property and - being potentially caught with two properties - had to slash their price in order to find a Buyer. Another mitigating factor is the 'cashing out crowd' - Sellers who are changing their lifestyle by exiting the city to begin the next chapter of their lives (which represented a significant part of my business this spring). Many of these Sellers are reconciling they won't be getting the sum they might have garnered even a few months ago, but recognize they'll still be significantly financially ahead because they bought some years ago. In April's Dear Urbaneer advice column I offered my insights to Sellers asking 'Will We Have To Accept Less For Our Home If The Market Shifts?' It offers a rational perspective for those considering bringing their property to market for sale in the near future.

As a realtor who operates in the original City of Toronto - basically the central core from The Beach west to Kingsway and from Lake Ontario north to Yonge/Sheppard - there remains far less inventory than elsewhere in the GTA - so I'm not anticipating we'll see prices decline by the same magnitude, or as quickly, as the suburbs. It's not only due to a lack of listings, but also because the downtown freehold housing stock offers a greater variety in size, age, condition, style and price point - all within a smaller geography than it does in the swaths of suburbia - where you'll find greater homogeneity in product across a larger area. Typically in the central core there's only a handful of similar type houses for sale in any given neighbourhood (I cover 42 neighbourhoods) which helps support values, whereas in the suburbs there's more competition of near-identical product, which means there is both more choice, and likely more motivated Sellers competing for the same Buyer, which allows Purchasers greater negotiating power to drive a better bargain. In Central Toronto, the good houses offering the trifecta of size, condition and location are still going into bidding wars. For example, this Queen West Victorian Bay 'N Gable listing of mine sold within 48 hours of coming to market for 75% more than what it sold for 5 years ago, when the first three prospective purchasers viewing the property all submitted bid triggering a bidding war!

Another interesting - and surprising situation - is that the condominium market in the downtown core has remained consistently strong. Pent-up demand - in particular for two bedroom or larger suites - has kept the condo market buoyant for the better part of May and June, as all those Buyers who had reconciled the downtown freehold housing market had sky-rocketed beyond their affordability focused their purchasing power on city condos. Whereas only a few years ago the idea of raising kids in condos was met with pause, it's now considered not only ok - but beneficial and 'value-added'. After all, if Mom and Dad can cycle from work to the grocer, before retrieving their kids from daycare without late fees, and enjoy a family meal, within the same time allocation of a Go Train commute, then doesn't that outweigh taking an elevator to get to the playground? The Toronto Star recently published "Why We’re Raising Our Kids In A Condo" while a Toronto Life featured the article "Four Kid-friendly Toronto Condos, And The Families Who Live In Them" demonstrating the growing acceptance of this housing type becoming 'family friendly'. And the Toronto Star just posted "Downtown Baby Boom Sparks New Kind Of Traffic Jam" which offers some pretty amazing stats on the growth of families in the downtown central core. Two bed condos - and stacked townhomes located in the central core can be purchased in the $700k's right now - which falls into the framework of affordability for many urban professional couples who work downtown. Although these same units sold in the $400k's and $500k's only two and three years ago, the hidden benefit is that many of these condo Sellers - by garnering massive equity gains in such a short time - are finally able to climb the property ladder into a freehold house when, only a few months ago, that dream was dwindling or near impossible. As the freehold Toronto housing markets flat lines and the condo market remains active, it fuels the opportunity for some to climb the property ladder, which is important. After all. we need the filtering of housing stock to maintain its momentum.

 

Stay tuned for Part Two of Urbaneer's Summer Forecast,  (*link added July 7th) where I explore the measures that may improve affordability and slow price appreciation. Because the question still looms above our heads: will the recent policy changes be enough to cool the market effectively, or is there more to it than that? If Vancouver can be considered an adequate indicator for what kind of profit - if any - the aforementioned measures might bring to Toronto, then there may be a need for much more (and different) policy interventions.

 

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~ Steve

Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000

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