Real estate is a hot button discussion for Torontonians, so it's frequently taking centre stage in the media headlines. In fact, we're one of the few cities globally with a newspaper which has its own weekly real estate section!
For years we’ve been hearing that both the combined speed and height of this market simply cannot be sustained. But when will that moment of correction happen? And how do we really know it's a sure thing?
In my most recent seasonal prognostications, I laid out some observations on a number of known influences that will shape the direction of the market in the early part of 2017. If you haven’t already, check out Urbaneer’s Winter 2016 Toronto Real Estate Forecast Part One and Urbaneer’s Winter 2016/2017 Toronto Real Estate Forecast Part Two.
I thought it was time to add an addendum, by taking a look at what some of the pundits are saying in regards to the Toronto real estate market. Along with their justifications for their predictions for where our market will go in the remainder of 2017, I've also added my own observations from the 'Real Estate Trenches'.
Hit The Mark In 2016?
Before we look at 2017- how did the pundits do in predicting 2016? Generally speaking, most of what pundits said was on the mark. Granted, a lot of the warnings around the bottom falling out of a hot market that were dealt last year (and the year before, and so on) did not come to pass, but the market conditions still persist validating the continued fear over the property bubble bursting.
For example, check out this piece from MoneySense: “How Accurate Was Our 2016 Real Estate Market Outlook?” Out of their six predictions, they were bang on for four - including that the national real estate scene would be driven by activity in Toronto, Vancouver and Victoria, mortgage rates would not increase, increase in foreign interest in real estate and that the market wouldn’t crash in 2016.
They wrongly predicted that the Bank of Canada would intervene to cool hot property markets in 2016. There was intervention, but it wasn’t from the BOC. The BC Government introduced the foreign investment tax and the Government introduced the mortgage stress test to help reduce mortgage loan vulnerability. Also, they predicted that record household debt would subside, which it did not. Here's an article published this week in The Toronto Star called Canadian Household Debt Hits Another Record In Fourth Quarter. This is no surprise in hot centres like Toronto, where the price of admission to homeownership means maxing out mortgages and then often taking on substantial debt over your tenure as homeowner to dedicate towards renovations and maintenance.
So what does 2017 have in store according to the pundits? Let’s take a look.
Supply/Demand Mismatch Creating Tense And Tight Conditions In Toronto
If there is one thing that the pundits all agree on, it's the wild mismatch between supply and demand as a factor driving high prices even higher in Toronto. And even though a number of pundits feel that there might be a slight cooling of the market on a national level (here's a piece this week in BuzzBuzzHome called “Cool” To “Eyebrow Raising”: Here’s How Canadian Housing Markets Performed In February 2017), the consensus is that Toronto is still full steam ahead in terms of activity and in terms of price appreciation.
The Canadian Real Estate Association (CREA) expects that the measures introduced by the Federal Government will impact the markets this year, creating a pullback both in price and in sales. Click here to read their synopsis and commentary: “New Forecast Says Record Sales For 2016, But Get Ready For House Prices To Actually Drop Next Year”.
The most recent stats from TREB show that, while listings and sales are down, prices do continue to climb substantially, year-over-year. Toronto Real Estate Board reported on March 3rd that the average selling price of a detached home in the Greater Toronto Area was $1.2 million in February, a 32.5 per cent increase from a year earlier.
While TREB agrees that the Governmental measures implemented this year will cool the market a little bit, they do expect a continued surge in prices. They predict prices to increase from 10 to 16 per cent. They acknowledge that it is the lack of listings, not a host of other factors that are the main culprit behind these sky-high prices (note - housing inventory fell to its lowest level in 16 years at the end of 2016). Here is a story from the Globe and Mail with some backstory around TREB’s predictions: “Toronto Realtors Predict Another Price Surge In 2017”.
MoneySense concurs, citing scarcity of stock behind continued price appreciation: “Greater Toronto’s Real Estate Market Outlook 2017.” Global News presents suggestions from pundits that the Toronto market will continue to climb, but not in the 20 per cent plus range, as it has in past months. They also believe that 2017 will be the hardest year for the first time homebuyer, as their buying power shrinks and the new mortgage stress test rules take effect.
Conversely, a brand new study is blaming demand, not a supply shortage for price hikes, as outlined in the Globe's article entitled "Demand Fuels Toronto House Prices, Not Lack Of Supply, Study Finds". Written by Simon Fraser University assistant professor Josh Gordon for the Ryerson City Building Institute in Toronto, the report argues that the rate of new home building – including condos – has more than kept pace with the population growth, based on historical norms. According to Gordon, Toronto is simply dealing with an unprecedented, overwhelming demand.
The Factors At Play
A market trend is a culmination of a series of factors influencing direction. What are some of these factors? Don Pittis of the CBC doesn’t take a position on whether or not the market will crash in 2017, but presents some factors that could decide the outcome, like the US Feds sentiment on interest rates, the state of the Canadian economy, the role (or change in) foreign buyer activity, the rate of construction of new homes, and whether or not the Government introduces more measures into the market. Click here to read: “Real Estate Up, Down Or Flat? 5 Factors That Could Affect Home Prices In 2017: Don Pittis”.
In this story, “7 Key Facts You Need To Know About The 2017 Toronto Housing Market”, there are some additional facts presented that could influence direction this year, including that first time homebuyer will continue to participate heavily in the market, despite the mortgage changes and eroding affordability; most homebuyers will pay down a deposit of over 20 per cent and more buyers in the GTA expect that they will pay over $1 million for a home this year.
Rob Carrick of the Globe and Mail asserts that Toronto's real estate market is largely being fuelled, not by a surge in the economy or a boost in job availability, but by "psychology and adrenaline". In his article, "A Foreign-Buyers Housing Tax In Toronto? Bring It On - And Fast", he calls for a tax on foreign homebuyers, as was instituted in Vancouver, in order to slow the momentum driving the real estate market. Even if only for the psychological impact on our home turf. He believes that building fewer condos and building more housing developments - since a larger number of people are interested in freehold housing - could help even out the market, he know's that's a "medium- to long-term fix for housing [whereas] a foreign-buyers tax is much quicker-acting, so let’s get on it!"
Some would like to keep the blame right where it has historically spent the most time - on the big banks: "How Canada’s Big Banks Pumped Up The Housing Bubble." Macleans author, Kevin Carmichael, reminds us that "the banks earn big profits off soaring house prices, knowing that taxpayers will clean up the mess if the bubble pops."
The Alarm Bells
With predictions, inherently, come warnings, and this is most certainly the case for 2017.
Bank of Montreal economist Douglas Porter did not mince words in his recent research note aptly named “Look Up In The Sky: It’s A Bird, It’s A Plane…It’s A Toronto Housing Bubble”, comparing Toronto’s “frothy” market to the market of the 1980s. “There’s nothing tentative about the red-hot housing market in Toronto and neighbouring areas,” he says. Price increases are spilling over into the condominium segment, as well as to further geographical reach. He says that any area within a two-hour drive of Toronto will register price increases.
Porter says in an email to BNN, “Toronto is a market that isn’t acting normally.” He continues, “My biggest concern here is that speculation will now take full command and the market will absolutely run out of control, eventually leading to a serious correction.” Porter calls on policy makers to take more corrective action to cool the market more.
Here are some stories that discuss Porter’s comments: “Toronto’s Housing Market Could Run Out Of Control. Warnings Mount Amid 27.7 Percent Price Surge” and “Economist Says It’s 1980s All Over Again In The Toronto Market. Remember How That Ended?”
Recently, David Rosenberg, economist with Gluskin Sheff , who famously predicted the US housing crisis and the aftermath had some dire words about Toronto real estate. He says that housing prices are overvalued by 60 per cent in relation to incomes. “Nothing is more bubbly than the Toronto housing market,” he says in a research note.
This article from the Financial Post called “It’s Terrible, It’s Just Discouraging’: Desperation Sets In For House Hunters In Red-Hot Toronto Market” outlines how the Toronto property market is outpacing ultra-expensive Manhattan for price appreciation.
Economic health is one of the lynchpins to support growth in the housing market, and although the OECD recently revised their economic forecast upwards, they feel that housing is still overvalued. Read “Surge In Canadian Home Prices Could Be ‘Precursor’ To Slump: OECD”.
As the OECD and numerous other think tanks outline, the persistent appetite for consumer debt continues to be a potential conduit for economic collapse. The Bank of Canada has put together a cool YouTube video that shows how the combination of a weak economy, high household debt and an imbalanced housing market could trigger widespread economic collapse. Check out this MacLean’s article and the video: “The Bank Of Canada Has Just Laid Out How The Economy Could Tank.”
My Observations From The Real Estate Trenches
As a realtor who started his career during the collapse of the last real estate bubble in the early 1990s (where I witnessed values drop upwards of 35% during the 1989-1995 crash and recovery), I can tell you first hand the freneticism of the market has escalated to the point that Buyers are beginning to withdraw from the market and move to the sidelines. Many of them are seeing prices skyrocket so fast that they're being priced out of the freehold market and, with young children, they're unwilling to consider the condominium market. It's feasible they may have to reconcile this as a future reality, but for now they're finding family-friendly rental accommodations with the objective of waiting it out for the next two to three years. In my 25+ year career, I've never experienced Buyers consciously withdrawing from the market in droves like I'm seeing now. This is disconcerting; we need first-time buyers to maintain a market momentum so that there is a continued filtering of housing stock both up and down the property ladder. If market segments stall or withdraw (trends we're starting to see right now), including Boomers who are holding onto their detached homes, then the market is more likely to go sideways. There is a laundry list of factors contributing to this, but here's a recent post of mine which touched on three factors being under-reported by the media as to why there are a shortage of Toronto real estate listings.
Last month, I sold a detached 4+bed executive home in Lytton Park. Listed at $1,995,000, the property garnered 9 offers and spiked in competition to command $2,452,000. Of the nine offers, six of the Buyers were Chinese. While I did not communicate with all of them, I did have conversations with several of these Buyers who came through the Open House. They shared that they're Landed Immigrants - who arrived in Canada over the past decade or less - who already own real estate in the suburbs of Toronto like Markham and Richmond Hill. One made the accurate observation that the prices of detached dwellings in the suburbs have increased at a higher percentage than those in the downtown core, which now presented an ideal opportunity for them to cash out and climb the property ladder to secure a more premium and prestigious dwelling in North Toronto. Why? For one, these Buyers want to secure a property in one of the very best school districts. Second, they really liked that the gracious 1935 Tudor had been thoughtfully renovated into a turn-key residence but it retained many of the original features. They said they liked the property because it was "very Canadian". This particular Buyer was attracted to the allure and status of the 'Canadian establishment', and felt it would be the right setting for his young children who would be afforded better opportunities. While I'm not sure if any of the six Chinese Buyers were 'foreign' versus 'landed immigrants', it was apparent they had access to significantly more capital (including a favourable exchange rate) than other Buyers (one had just purchased weeks earlier another North Toronto residence in the $2mil range as an investment).
This well-crafted highly-informative Globe and Mail article from August 2016 called "Meet The Wealthy Immigrants At The Centre Of Vancouver's Housing Debate" outlines how China is just emerging as a untamed capitalist nation akin to the robber barons of an industrializing America. It offers a point of view critical to the Canadian real estate market. In a nutshell, new immigrants from other countries - including Russia and the Middle East - have access to huge pools of money which they want to invest in Canada. Given the country has long invited affluent immigrants to immigrate to Canada - which has been critical for the long term growth of our National Economy - I respect the challenge in trying to balance access to affordable housing for everyone with a city centre that is home to the uber rich, exclusively. As a 'City of Neighbourhoods', which has long been home to different cultural groups of different financial means, we're seeing a new kind of gentrification as Landed Immigrants arrive and usurp the 'old guard'. Here's a post I wrote for my site Houseporn.ca about how a $4 million tear down became a $15 million mansion in Forest Hill. Basically the status of the old guard is being smashed by a new wealthy elite in Toronto (as Toronto Life wrote about in McMansion Wars), which we have not seen the likes of before (or at least with such 'in your face' impact).
I've written about the myriad of reasons for the intensity of the Toronto real estate market, including the truth that we have low interest rates that make owning 'just like rent', and three generations of Torontonians competing for real estate in competition with more recent Landed Immigrants. There's also the Bank of Mom and Dad whom, in the act of kindness and the generational transference of wealth, are contributing to higher prices. Plus, the way technology is speeding up our access to information has unleashed FOMO - the Fear Of Missing Out. We've got the omniscient Bully Offer at play, plus don't underestimate the power of the media, including our obsession with renovating our homes to look just like those on HGTV, as a factor for driving up prices.
While we can never be completely certain where the market is headed, I - and my team - can make solid decisions about strategy based on history, existence of key influencers, and likely trends. At urbaneer, we understand the intrinsic value of being aware of what the experts say, and assessing their advice within the context of our own experience. Please know we are here to help!
~ Steven and the urbaneer team
- earn your trust, then your business -
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