Welcome to Part Two of urbaneer's Winter Toronto Real Estate Forecast. When it comes to real estate in Toronto, the stories are emerging almost as quickly as the market is moving.
In Part One, which I presented last month, I explored what might happen to Toronto Real Estate in reaction to Trump’s U.S. Presidential win (yes, interest rates are going to go up), and discussed the mounting challenges that eroding affordability is presenting for first-time (and highly-leveraged) buyers. In Part Two, I continue to chew on the latter issue (like a dog on a bone!), while also considering the factors that keep pushing Toronto's real estate prices up and up and up, and the inherent vulnerabilities involved.
2016 was a huge year in terms of real estate news, with a major story emerging pretty much every month - from the flow of international capital to regional economic weakness (think Alberta) to local developments. Click here to read a succinct summary in BuzzBuzzHome: "These Were Canada’s Biggest Real Estate Stories Of 2016".
Where’s The Ceiling?
The rate and momentum that the Toronto Real Estate market continues to oscillate, frankly, is shocking. Just when you think prices are peaking, and the frenetic movement driving the market can't possibly be sustained, it smashes through the perceived limits and redefines its ceiling. Hyperbole to describe the speed and strength of this market seems to be inadequate. In fact, my post on this recent sale of a shack in Little Italy - which garnered over $1.2 million as land value (which works out to a staggering 135 per cent over asking) - left me at a loss for words: “This Toronto Real Estate Sale May Leave You Speechless.” Here is another whopper: "Toronto House Sells For More Than $1M Over Asking Amid Record Year For Home Sales".
As stunning as these hefty prices are in isolation, what is even more surprising it to look at how they’ve gained so much in a matter of a few years. This post from Blog TO “This Toronto Neighbourhood Has Seen The Biggest Spike In House Prices Over The Past 15 Years” shows the top neighbourhoods in terms of price appreciation from the last 15 years. From the contenders on this list, over last 15 years prices have spiked from 243 per cent to an astounding 327 per cent in the Greenwood-Coxwell Neighbourhood. 327 per cent! Why? In the case of Greenwood-Coxwell, this area has always slid right into the affordability of first time buyers. Even with values escalating over the 15 year time frame, the modest housing stock and its marginal location (next to more affluent neighbourhoods) have accommodated the biggest segment of freehold buyers, namely those bound by affordability. Yes values increased dramatically, but factors like the interest rates dropping and parents helping their kids buy houses have kept this area within grasp of the hottest market segment, even while they drive prices up competing for property.
It still warrants putting this in context. According to research group Demographia, the median individual income in Toronto in 2000 was $61,000 and in 2015 is $78,700. (Incidentally, Demographia in their Annual International Housing Affordability Survey rank Toronto at lucky #13 on their least affordable cities in the world list. In the world). Inflation notwithstanding, incomes have in no way even come close to matching the housing price appreciation. You don’t have to be an economist to follow this trend line, given a false foundation on debt, which is rapidly morphing into a slippery slope. Although as I mentioned, let's not underestimate the power of the Bank of Mom and Dad as a significant factor in beefing up down payments, as outlined in this recent Financial Post article entitled Canadians Are Getting Help From ‘Bank Of Mom And Dad’ To Buy First Home, With B.C. And Quebec Leading The Way.
While there is plenty of risk when people are taking on as much debt as they are just in order to get into the market, there are those that feel that most are able to manage - even in the event of a correction. Here is a story from the Financial Post, "Massive Drop In Housing Prices Would Still Leave Canadian Households With More Equity Than Debt". Even CMHC seems to think that Canadians in general are able to balance their current debt loads (click here to read "Canadian Home Buyers Can Still Manage Debt Effectively"). The danger of course, emerges when interest rates creep up, which will cause all variable credit products (variable mortgages, credit cards and lines of credit) to rise as well.
Although escalating prices can be a bit of a self-fulfilling prophecy, with Buyer competition and the willingness to buy into the market, regardless of the costs (both today and tomorrow) there are a number of factors at play, beyond the usual supply and demand issues that create such a frothy market.
Supply constraints do persist of course - especially for the freehold housing market - which is not only causing prices to go up, but is creating new heights in terms of aggressive Buyer behaviour - which places another emotional layer on top of an already emotionally challenging marketplace. Click here to read "Shrinking Inventory Making Toronto Home Buyers Even More Aggressive".
The High-Low Dilemma
As I’ve mentioned a number of times in the past, Toronto is a city of two real estate stories - that of the freehold housing and of the condominium markets, which oscillate differently when it comes to supply and demand, and their respective target markets (by and large, houses = families and investors while condos = first time buyers, investors and down-scaling boomers). However, emerging in the last few months particularly is a more specific story - the increasing gap between the availability of low and high-rise housing. Prior to the arrival of the condominium as we know it in the early 1980s (here's The Face Of Toronto Condo Living which explores the trends of condo facades over the past 35 years), Buyers had limited housing options. In fact, for the most part, outside of a smattering of co-ops, co-ownerships and condominiums in Toronto, one bought a freehold house. But in the 1980s, condominiums - marketed to a new generation of urban professional singles, mingles and investors seeking affordable low-maintenance shelter - exploded in popularity, such that it's now our dominant housing type in the original City of Toronto. And it will continue. While the amount of freehold housing stock will remain more or less the same (it will actually decrease as we tear down houses to build more condos), the supply of condos will continue to exponentially increase. Which means what freehold dwellings exist are going to proportionally shrink as a percentage of the total number of dwellings in the City as more condominiums are built. Think about it. With every 50 storey condo tower constructed from hereon, it puts another 1000 residents overlooking the streetscapes of our vintage freehold housing stock, many whom covet a dream of purchasing one.
In fact, right now in the original City of Toronto there are about ten times more condominiums for sale than houses at any given time. As the supply of condominiums increase, and the number of houses don't, the gap in availability to purchase, and price points, between these two housing types will broaden. In my opinion, it's realistic the trajectory of price escalation for the freehold housing market will continue to outpace the condominium market indefinitely and, in the next decade, the cost to purchase a livable freehold house in the central core of the city will become prohibitively expensive for the middle class.
Check out these past urbaneer blogs on this subject: “How The Demand For Low-Rise Housing Is Fueling Toronto Real Estate Prices” and “High-Rise Versus Low-Rise: Exploring The Toronto Real Estate Gap”
In a recent post, ”Tight Market Conditions in November 2016,” which demonstrated yet another month of stellar sales in Toronto Real Estate, TREB Economist and Director of Market Analysis Jason Mercer comments on how initiatives to date to cool the hot market have been focused on demand. He says now that the attention needs to turn to supply - specifically low-rise supply: “Going forward, more emphasis needs to be placed on solutions to alleviate the lack of inventory for all home types, especially in the low-rise market segments,” he says in a statement. Click here to read the Financial Post’s story on the same release, “Toronto Home Prices Soar As Short Supply Frustrates Would-Be Homebuyers.”
As land becomes more scarce, developers naturally are building up - rather than out - and are trying to create more affordable housing for a segment that may not (especially now with the recent mortgage changes) otherwise be able to access homeownership. This is also in an effort to curb urban sprawl. The problem is that by and large, there has been a clear indication of Buyer preference that contravenes these efforts. FYI, ground-oriented housing is defined as detached, semi-detached and townhomes.
A study from Ryerson University revealed a few concerning facts:
- In 2015 ground-oriented homes outsold condominiums two to one
- In 2015 ground-oriented homes accounted for only 27 per cent of housing starts, marking the 7th year in decline, while condominium starts continue to increase.
- There have been a number of studies that suggest that Torontonians would choose condominium living in more dense, location-efficient communities over larger detached homes (which may be in part the justification for the uptick in condominium building). However, the authors of the Ryerson study believe that these studies are skewed and don’t accurately portray actual Buyer preference, because sales figures paint a different picture.
At the end of the day, when you consider the nature of housing and how it is largely the basis for lifestyle and ultimately the quality for life, it is how Buyers want to live and how they picture their lives unfolding in their “Home” is what will drive decisions. There is psychology at play here as well. When you are dealing with a supply/demand imbalance that places upwards pressure on prices, supplying the “wrong” product only serves to widen the gap, essentially shrinking supply even more, intensifying competition and pushing prices stratospherically high.
However, realistically the days of large quantities of freehold housing being constructed in the original City of Toronto are over, beyond replacing existing single family homes with newer similar properties, or perhaps the creation of townhouses. These new freehold properties won't be inexpensive either. In fact, they'll be geared to the executive market. Buyers are having to reconcile that they're either going to have to locate farther outside the City in order to secure a freehold dwelling, or they're going to have to be content with owning a condominium. In fact, whereas in the past I've expressed concern about the condominium market suffering, skyrocketing values for freehold houses this past year channeled alot of Buyers back into the condominium market, even when their preference was for a house. For those who want to live in the City, securing a freehold house is now beyond the reach of many. This reality has forced many Buyers to refocus their attention on the condominium market, including young families who now covet the stacked townhome as a viable option for family life (count on these types of properties jumping in value more than high-rises). It also means the two bedroom + condo market is going to see more demand and a push up on prices this coming year.
Policy: More Harm Than Help?
At varying levels of government, there have been policy interventions to help provide some balance to the hot market, as well as reduce vulnerabilities presented by monster debt loads, like new restrictions placed on mortgage lending. In Ontario, in a bid to assist with eroding affordability, there was an increase to First Time Home Buyer Rebates (both of which we discussed in Part One of the Forecast). Curious about all of the new policies introduced this year? Here is a handy reference guide: "A Look At Key Canadian Housing Measures Unveiled In 2016".
As if high housing prices in Toronto aren't placing enough strain on affordability, Toronto homebuyers are being hammered with higher municipal taxes.
Other policy though, in particular when it comes to land development and home building in general seems to be creating more problems than it is solving. CEO-designate of the Ontario Real Estate Association, Tim Hudak is urging Toronto City Council not to increase Land Transfer Taxes, because it would be "greedy" in such an expensive market. Click here to read "Don't Hike 'Punishing' Land Transfer Tax, Realtor Advocate Says To City Council".
The Places to Grow Act, which is intended to help support urban growth in a strategic way, reducing urban sprawl and providing affordable housing options has been widely criticized for having the opposite effect. Its proclivity for hi-rise housing and multi-layers of red tape have hampered any success that this plan might have. In this story from the Toronto Star “Growth Plan Fueling GTA Housing Prices, Developers Told” and the Financial Post, "Greenbelt Likely Contributed To Tighter Housing Market, Ontario Bureaucrats Told Ottawa In June" CIBC Economist Benjamin Tal calls out Toronto developers saying that this act is “the number one reason GTA house prices are rising and “Affordability and Places to Grow cannot co-exist.” This was recently challenged in this succinct Globe and Mail article called Stop Blaming The Greenbelt For Toronto's Housing Prices.
Even in the more “affordable” condominium market, Home Buyers could see prices increase given the hefty development costs, as additional development levies and fees are implemented. Click here to read this Toronto Star story, “If You Think Condo Prices Are High Now, Fasten Your Seatbelt: Carras”. It's true that condominium prices continue to rise, it will potentially place this property type out of reach for a home buying segment (namely first-timers: "As Home Prices Soar, Some First-Time Buyers Reconsider Home Ownership Dreams").
To make matters worse, as housing becomes more and more unaffordable, Buyers are more commonly electing to purchase properties with an eye to renovating or putting on an addition, in order to suit their needs for the long term, rather than trying their luck in climbing the property ladder (Have you read Dear urbaneer: How Much Profit Should I Expect Climbing The Property Ladder? which examines how costly it is to move?). In fact, this is one reason why values are going to keep increasing in the freehold housing market. Fewer homes are coming to market, because GenX and Millennials have bought for the long term and Boomers are staying put. I can personally attest, very few of my clients who bought freehold dwellings over the past two decades have sold (this is my 26th year as a realtor), or even plan to in the near future.
For those wanting to renovate or rebuild new, the fees can be exorbitant, along with the weight of the bureaucracy on the permitting process, which each contribute to growing debt. Both instances do little to help curb a hot market and inject a little common-sense based affordability. Here's a recent urbaneer post that addressed The Pitfalls Of Permit Fees And Toronto Real Estate for home owners looking to add additional units to their existing dwelling.
I’ve encountered this myself in my Tales from Tennis Crescent Series, and was covered off in recent Dear urbaneer posts: "Dear urbaneer: What Are The Steps To Home Renovation?" and "Dear urbaneer: What Are The Steps To Add Onto A House In Toronto?", including my own journey navigating the Committee of Adjustment.
There is that saying that you can’t fight City Hall. But it seems when it comes to affordability, City Hall is fighting us.
Policy makers need to take into account the hyper-charged emotional component of this market, where Buyers are identifying homeownership as a goal - no matter what the long term implications might be. With more stringent lending policies introduced, people who fail to qualify through the traditional (and regulated) route, may be tempted to try to get financing through riskier (and less regulated) avenues. Click here to read "How Tighter Rules Are Pushing Homebuyers Toward Riskier Mortgages". As a by-product of policy, another level of vulnerability is potentially introduced to the market.
Foreign Policy Investment
If Toronto’s real estate story is the tale of two property types, Canada’s real estate story is the tale of two cities, both hotbeds for price appreciation and immensely appealing for foreign investment: Toronto and Vancouver.
Yes,Toronto’s market is hot, but Vancouver’s was scorching until the B.C. government introduced an additional tax of 15 per cent on foreign investment. While the tax has, by all accounts, slowed the Vancouver market, there was some concern Toronto might shift to being a preferred option for foreign investors. The net result is that the Toronto market may receive even more Buyers with lots of cash to spend (largely Chinese foreign investors) into a pool where there is very little stock to go around anyways. Essentially, Vancouver’s cooling efforts could effectively fan the flames even more in Toronto.
Here are some observations on that point: “New Tax On Foreign Buyers Might Induce Price Growth Instead – Analysis”, “B.C.'s Real Estate Tax Sparks Concerns For Toronto's Housing Market”, "The 2017 ‘Tug Of War’ In Canada’s Housing Markets", "Vancouver’s New Tax Pushes Chinese Buyers To Seattle, Toronto" and '"Toronto Leads Housing Prices As Vancouver Cools".
By reports, this tax is beginning to take material root in the marketplace. Foreign investors are deterred (click here to read "Chinese Real Estate Billionaire Says Customers Troubled By Vancouver Tax"). In addition to the B.C. Government's tax, the Chinese Government is placing new foreign investment policies domestically, which is suppressing foreign investment additionally. Click here to read Globe and Mail story "New Chinese Money Rules Threaten Tide Of Foreign Buyers In Canada".
The Condominium Question Lingers
That leads us to that lingering Achilles Heel in the Toronto market: the condominium market, which could become even more vulnerable if more foreign investors do flood to Toronto. As we’ve seen evidenced, the supply and the continued development of condominiums vastly outpace ground-level housing.
Although data is hard to come by (although here is a new report from CMHC), it is a widely known fact that many of these units in ubiquitous high-rise buildings (think CityPlace, for example) are held by foreign investors as rental properties. These owners have different motivations than owners who reside in their units. And should there be a shift (i.e. domestic policy, the global economy, etc.) there is the threat of mass dilution of these units, which could effectively pull the floor out of the market.
As a prospective condominium Buyer, what is your best way to mitigate this risk? Purchase the unique: including an intelligent floor plan, a great view, quality finishes, good amenities, a stellar location or a soft or hard loft. Buying a parking space (men love their cars) will also help your unit stand out in the resale market. These features also hold true if you are a property investor intending to purchase a rental unit, which I discuss here (along with an upward trend in rental construction) with a concern: "A Shift In Toronto Real Estate Property Investors Should Note".
There has also been an uptick in construction in purpose-built rental buildings. Renters are less vulnerable to dislocation usually in these rental buildings over privately owned units. It's interesting to note that this some of this development is trying to cater to the appetite for ground-oriented housing as well as offer suitable rental options to those priced out of the market. There are infill projects springing up around town on existing apartment building land. Check out this story from the Globe and Mail- "Builders Flock To High-End Rental Development".
One segment of the condominium market that I consider underserved are the Baby Boomers - aka Zoomers. With developers focused on building cheap and cheerful units for investors and first time singles and mingles for the past three decades, I am seeing an uptick in baby boomers who are beginning to consider downscaling (in the next three to ten years). They're looking to sell their houses in the $2mil to $4mil range and buy a one-level suite that's central, with 2+ bedrooms, in the $1.2mil to $1.7mil range. Properties like this are in surprising short order, and I anticipate demand will begin to outstrip supply until developers focus their attentions on creating more product like this.
Phew! There certainly is a lot going on in real estate, from numerous angles in the City of Toronto. If you haven’t already, check out Part One of our Winter Forecast.
With the vast amounts of information and the growing need to be able to decipher the data to help you make smart purchase and selling decisions, it is of untold value to have an ally who has the vision and the experience to guide you. With decades of experience, a multi-faceted education in housing, and compassion for the emotional struggles faced by Buyers and Sellers, please know my team and I are here to help!
~ Steven and the Urbaneer Team
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