Welcome to my blog on housing, culture and design in Toronto - where I share my insights and experiences on most every aspect of the Toronto real estate market - and life here in Hogtown.
Have you been following the Toronto condominium market this year? Despite the provincial government's efforts to cool our scorching hot market - by introducing the Ontario Fair Housing Plan in April 2017 + the federal governments introduction of a Mortgage Stress Test for buyers putting down more than 20% at the beginning of this year (the Mortgage Stress Test was already in place for high-ratio financing buyers) - the intended attempt to stop run-away prices only occurred temporarily in the higher priced freehold market. In fact, it appears the interventions simply compressed the pool of active buyers into the more affordable condominium market where prices have since ramped up a further 20%. So if you're in any way engaged in Toronto's real estate market - and in particular the Toronto condominium segment - consider reading this excerpt from my recent Toronto real estate forecast:
The Toronto Condominium Market Today
The condominium market in Toronto has long been headline-worthy. Once an unusual housing type prior to the 80s, it's amazing that in 40-ish years it's become the dominant housing type in Toronto's downtown core (if you love architecture here's my blog on how the facades of condos have changed since the 1980s in The Face Of Toronto Condo Living, and to see how much condos have boomed here's an article from April 2017 in The Globe & Mail which shares Toronto's Five Decades Of Condo Growth, Mapped). For years, I've expressed caution around the condo market being the potential Achilles Heel in a hot Toronto real estate market, mostly due to potential oversupply and a high proportion of investor-held units. However, unlike the freehold market which has moderated in the wake of the Fair Housing Plan measures, the condominium market ramped up this year, with price gains of around 20% this past year. Does this mitigate my concerns over the condo market? Here are my thoughts:
According to recent data from TREB, condo prices have been trending upwards, due in large part to the fact that available inventory has continued to slide in tandem. However, given new condo completions this year are surpassing the 10-year average for the first time since 2015 and, according to the highly analytical Better Dwelling site "Toronto Condo Prices Hit A New All-Time High, While Inventory Jumps To 21 Month High" - we may be entering a period where supply begins to balance with demand. Not that it's all roses in condo-land, as there have been a spate project cancellations due to rising construction costs and other red tape issues: “Threat Of Condo Cancellations Looms Over Pricey Toronto Housing Market”.
That said, while the huge prices gains of the freehold housing market peaked and fell rapidly over the balance of 2017 - and began their recovery this year - condominium sales and prices surged. This was one of the unintended byproducts of the government interventions, which I believe was neither anticipated nor expected. The withdrawal, pause and assessment that occurred fueled a decrease in the freehold housing market - where prices are typically over $1mil and require 20 per cent down or more - didn't impact the condominium market where prices tend to be under $1mil. In fact, this under $1mil market whose buyers tend to financially limited, whether by down payment or income, and who were already having to qualify for mortgages under a more rigorous qualification criteria has continued strong and unabated has set new price precedents where the price per square foot in the central core now surpasses in many instances $1000 per square foot. Furthermore, the mortgage stress tests also pushed buyers who once qualified to purchase over $1mil down into less expensive (read: condominium) property purchases.
This value surge in condominiums isn’t just about supply; it rests very much on a number of factors that are propelling demand. Click here to read “This Is Why The GTA Condo Market Is Still Red Hot, Despite A Dip In Sales” and “Toronto New Condo Sales Drop 66%, While Prices Soar 40% In Weirdest Correction Ever”. This story, “Toronto’s New Wave Of Development Looks For Community, Not Just Condos” talks about the rise of condos and how supply will have to escalate in the coming years to meet demand. It also touches on how urban expansion is evolving based on developing communities around amenities like public transit, which is becoming a critical factor in today's purchasing decision.
As I wrote in Part One of my Summer 2018 Toronto Real Estate Forecast, the government interventions effectively compressed demand into lower price points and shifted more focus of both investors and end users from the freehold market to the more affordable condominium. This closed the gap in values between these two markets, and effectively helped restore the natural filtering of housing stock up the property ladder. Basically, freehold houses came down in value or stabilized while the condo market went up in value - giving condo owners significantly more equity to sell and springboard into a freehold dwelling.
This compression of buyers keen to purchase property resulted in a vertical trajectory in values for condominiums this past year. And it's been astonishing. What the interventions have done is create significant equity growth for those condo owners who purchased three to five years ago. In that short window of time condos - which were purchased in the $500,000s - are now selling in the $800,000s+! Young professional couples who may have used their RRSP savings to put $40,000 down on a $500,000 condo a few years ago can now sell their first property purchase and clear $300,000+ in capital for their next buy. And given freehold houses have not surpassed April 2017 values (in the year prior house prices went up 30%), what would have been prohibitively expensive at one time is now 'affordable' for this target market. In fact, had the government not intervened, the low rise / high rise price gap may have continued broadening, leaving two distinct market oscillating under their own accord. Instead, this massive financial gain for condo owners is enabling the filtering of condo buyers into the freehold housing market. In fact, it's been a significant part of my business this year.
For the housing market to be healthy we need properties to trade in all price points, so this unintended byproduct of the interventions has been beneficial (though boomers considering down-sizing are expressing resistance as they're not seeing much upside to selling their house to buy a smaller pricey condo). In fact, as condo values continued their trajectory up I have witnessed increased Buyer resistance. Will Buyers - and prices - pull back? It's ultimately about affordability, and this hefty increase in prices has eliminated a lot of buyers who'd like to purchase for reasons of affordability. As a result I think it is feasible condo prices have crested and values will plateau for the next while. And I still have reservations for the stability of the condo market. Given investors have riskily bought units which don't even carry the precedent-setting rents Toronto is currently generating (and yet now have their income stream capped thanks to the Provincial Rent Controls which you can read more about in --> The Other Side Of Rent Control And Toronto Real Estate) the sustainability of values for this housing type is precarious, particularly if interest rates rise and investors start dumping their units. If you're going to buy a condo, my rule of thumb is to buy the unique, whether that is for a condo's higher ceilings, intelligent space plan, architectural styling, outdoor space or protected view. I also favour buying loft and boutique condos in Triple AAA locations where there is less competition like Leslieville, College Street, The Annex, St. Lawrence Market proper, near Trinity-Bellwoods Park/hip Ossington and Roncesvalles Village. Future hot spots? St. Clair West and The Danforth (here's A Brief History On The Intensification Of The Danforth In Toronto)!
So, as demand grows, all across the city, developers continue to to break ground...
Although investors have long been part of the buying profile for condominiums, they appear to have ramped up their commitment to buying them even when they're taking a loss. In this CBC News article called Rental Investors Bought Half Of GTA Condos Last Year, But Rents Fall Short, CIBC Report Says, stats show more than 44% of the investors with a mortgage were cash-flow negative. Seriously? These buyers are obviously hoping their return on investment comes with an escalation in property value, rather than seeing it as investment income. I think this is risky, given a property has to escalate in value by about 7% just to break even, as I wrote in How Much Profit Should I Expect Climbing The Property Ladder?. And, in my Dear Urbaneer blog - Does It Still Make Financial Sense To Invest In Downtown Toronto Real Estate?, the answer on whether it makes sense to pick up a condo and rent it as an investment leaned more to "No" rather than "Yes" unless you've got deep pockets (you have to put around 50% down to break even), are buying for the long term, and you're really strategic. In this recent article called "Is Toronto's Affordability Crisis A National Issue?", the piece tracks how once the BC government intervened to cool their skyrocketing values of Vancouver real estate, the Toronto market went into overdrive. And, if you're following Canadian real estate as a whole, you'll see that Montreal has seen its value surge since the Ontario government intervened. Interesting!
But the Toronto condo market is not just comprised of investors, who have long been competing with First Time Homebuyers, who consider this housing type an affordable starting rung on the property ladder. With the high prices of freehold housing in Toronto, this will remain very much the case from here on in. Likely compounding demand is that with both rising interest rates and the tighter qualification requirements for mortgages, there will be a new cohort of buyers considering a condo purchase whom might have otherwise pursued a freehold home purchase. Ultimately it's really about affordability, price point, a convenient location and turn-key living, because the condominium is the only product offering those carrots that can be acquired for under $1,000,000 in Toronto. And if you're a busy professional or down-sizing, it's really really hard to find a spacious 'house-sized condo' in the city centre because developers long-catered to first time buyers, cranking out a lot of one and 1+1 bed spaces, so big units sell fast. Buying square footage falls in line with my 'buy the unique mantra' - as bigger is better as long as it's in a building with similar sized suites and not a one-off. What's golden for down-sizers? Something with a terrace where you can barbecue! Here's some supporting content in Dear Urbaneer: What Is The Value Of A Condominium Balcony Or Terrace? and Downsizing: The Challenges Of Finding A House Sized Condominium.
As affordability erodes in Toronto, there has also been a marked shift in “what homeownership looks like”. Whereas there was a time when couples owning their first condo purchase would sell that home to buy a house in the burbs to raise their kid(s), over the past five years I've witnessed a baby boom in the city core; couples are re-evaluating their concept of the property ladder in favour of lifestyle, as couples elect to stay in proximity to work and raise their offspring in a high-rise. This is part product of a dwindling supply of detached housing and part product of sky-high prices, placing that housing type out of reach. It is also the product of a generational shift that redefines how and where people live at this stage in their lives in Toronto.
I think we're at a crossroads where a generation used to growing up in low density housing is reconciling that what they'll be buying may not match the homes that they had in their own childhood; they are sacrificing that vision of a low-rise home with a yard, but are embracing the lifestyle benefits that urban high-rise living affords them. Namely time - which as any young family will tell you, is invaluable. What's causing this shift? Hands down it's because commuting in Toronto is horrific. In fact Toronto was just ranked the worst city in North America for commuting with "73% of local commuters making at least one more of transportation change on a single journey, and the average driver sits in gridlock for a whopping 47 hours every 240 work days". As I wrote in my blog What Are The Real Financial, Emotional And Health Costs Of Commuting, the value of living as close to work as possible results in more quality time which, for parents, translates into being together as a family. Whereas ten years ago kids living in condos were rare, there's now a baby boom occuring in downtown condos. It even prompted this Dear Urbaneer blog when one of my clients asked Should We Raise Our Kid In A Condo?
Where Is The Toronto Condominium Market Heading?
One of the challenges about assessing the market during the Summer, is that the heat waves always results in the summer doldrums where only the most motivated of buyers will look at real estate. In scorching weather and melting humidity, a lot of people would rather chill with a beer and contemplate a move, rather than making one. As a result, the sellers selling tend to be more motivated due to a relocation, change in marital status, or household size (here comes baby!), or they've found their own real estate opportunity that prompts them to risk coming to market when there's a smaller pool of less engaged buyers. Last Autumn was the first time in years where the market stumbled along, whereas in the past it had roared back to life. Which will happen this September? From my place in the real estate trenches, I'm anticipating a steady stream of both Buyers and Sellers who are trading in real estate not for investment, but for the next chapter of their lives. I do think we'll see hestitation - and reluctance - from some condo buyers who are finding the rising interest rates are impacting their ability to secure the kind of suite they want. Will this see values drop? We'll see them stabilize first for the Fall Market, so be prudent and take your search or sale cautiously, taking into account our market conditions may change over the next six months.
As I recently wrote, "with all the economic, social and political influences in recent months and current day, being a Buyer or a Seller in Toronto real estate can be a bit daunting. But as we look forward to the future and consider the direction forward, rest assured that Toronto real estate continues to have a number of fundamental that position it for continued growth. For instance, check out this article "Toronto Ranked One Of The Most Future-Proof Cities In The World" that discusses how highly Toronto ranks globally based on influences like higher education infrastructure, innovation capability and technology firms. These are just the things that support the path ahead, and Toronto cracked the top ten in the world, taking the #9 spot".
This is an excerpt from Urbaneer’s recently posted Summer 2018 Toronto Real Estate Forecast. Want to learn about what's happening right now with Toronto real estate? Here's the links to Part One and Part Two of Urbaneer’s Spring/Summer 2018 Toronto Real Estate Forecast!
Thanks for reading!
~ Steve & The Urbaneer Team
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000
- we're here to earn your trust, then your business -
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[The title image is the property of Ivy Condos - A fresh approach to downtown living!]