Gentle readers: pour yourself a cup of coffee and get ready for an intense and feature-length commentary on the complex market that is Toronto real estate.
This may seem contrarian in an era where posts are increasingly bite-sized, but the length of this content is necessary because there are a multitude of factors which have shaped our unique real estate market I believe worth exploring in detail. So buckle up, as I jump into it.
Although real estate has historically been cyclical, with ebbs and flows that see property values recede and accelerate over time, over the past decade a culmination of factors created a significant imbalance between supply and demand, sending Toronto property values soaring. And while the provincial and federal governments recently intervened in an effort to calm our real estate market, there have been some pretty broad trends which have fueled an increase in real estate prices. Many of these trends have roots towards the beginning of the movement, which I documented in my blog here seven years ago in "Understanding Our Market Momentum", which shows that a market like the one we have now doesn't happen overnight.
Here's 7 reasons which have contributed to prices escalating in Toronto over the past decade. Are they still significant enough to keep the momentum of our market? Let's explore:
1) The Rise Of The Speculative Real Estate Investor
Real estate investment can be lucrative, but typically you need to employ a 'buy and hold' mentality to really benefit from real estate asset growth. You’ve got to consider the market, as well as all of the costs one incurs when buying and selling homes (due diligence expenses, land transfer taxes, legal costs, etc.), and allow for time to help you generate a return on investment. However, in recent years - with the Toronto real estate market firing all cylinders - we witnessed a growing presence of speculative real estate investors in the city. With values skyrocketing, investors bypassed the traditional 'buy and hold' strategy in favour of flipping properties in short succession. This shift from investing to speculating not only spurned hysteria in the market (end users were losing to speculators who were snapping up listings and then relisting them with modest improvements, if any), but it also resulted in upward pressure on pricing by constricting an already tight housing supply.
While speculation became rampant in the freehold housing market over the past few years, it has been present for much longer in Toronto's exponentially growing condominium market. The most revealing and must-see commentary on this subject was dissected in CBC's Doc Zone's 'The Condo Game' (2013). This fascinating documentary explored how the political economy shapes our urban environment, including the profiteering of developers who build 'cheap' super towers that serve not buyers, but the international commodities market (foreign buyers) with zero regard for the integrity of their product. It also explored how the Ontario's Municipal Board (now undergoing change) operated, zooming in on their approval history; their process for approval offers no socio-economic benefit to the local community, but did usurp a struggling Toronto Planning Department. Unfortunately, the Department was nearing collapse, thanks to crippling pressure from our exponential building boom, and an ill-conceived amalgamation of six municipalities dating back to 1998.
The recent government interventions including Ontario's Fair Housing Plan, although still flirting with the idea of a vacancy tax and the banning of shadow flipping have caused enough of a market chill to spook speculators with the recent interest rate hikes and Changes To Canada’s Principal Residence Tax Exemption. As soon as speculators realized generating easy financial windfalls with minimal effort were far from assured, their participation in real estate transactions waned contributing to the calming of the market this past summer.
If you're interested in a more in-depth exploration of speculating don't miss this post: Toronto Real Estate: Are You Investing Or Speculating?. As a follow up, this piece incorporated specific examples to quantify how marginal at best the returns are based on income and expenses in Toronto: Does It Still Make Financial Sense To Invest In Downtown Toronto Real Estate?.
So, given those reduced margins, are speculators gone for good? Only for now. Until values align with income generation - which in most instances mean prices must depreciate first - the market is not conducive to speculation. An investor should only buy taking a long term position with any property acquisition in Toronto today.
While real estate speculators can be both domestic and foreign investors, foreign investment played some role in elevating housing prices, which I'll look at next.
2) Migration, Landed Immigrants And Foreign Buyers
Plain and simple, people keep locating to Toronto, or at least want to own a slice of it. In a country with a home ownership rate approaching 70 per cent - one of the highest in the world - landed immigrants are buying in. Compound that with the global spotlight cast on Toronto this past decade, a lot of foreign capital also started pouring into the city. Given property values are determined by how much consumers are willing to pay for it, it isn’t surprising to see property prices skyrocket when you’ve got an international audience with deep pockets who are extremely keen to own Canadian real estate too. After all in a free market Buyers paying the highest sums in blind bidding wars are the ones who successfully secure properties. And when the demand exceeds the supply, these sales serve as price-setting precedents for the next, driving prices up. But what if those successful Buyers are foreign - or landed immigrant - investors who have access to large sums of capital that exceed the purchasing power of the majority of the local market? We've been seeing this all decade in Toronto, but as the market oscillated even more frenetically these past few years, I was witnessing the high-earning cash poor (under 20% down-payment) middle class being shut out entirely due to diminishing affordability.
In this article, the Globe &Mail’s Rob Carrick conceded that foreign buyers were only a small part of the real estate puzzle, but that a quickly implemented foreign buyer tax could slow the market. And in a run-away market, every effort counts: A Foreign-Buyers Housing Tax In Toronto? Bring It On - And Fast. In April, the Ontario Fair Housing Plan targeted foreign buyers as well with a 15-percent Non-Resident Speculation Tax intended to curb sales activity and make supply more available.
In the first set of data released after the implementation of the Ontario Fair Housing Plan, it was determined that 7.2 per cent of buyers in Toronto were foreign. That’s not a huge chunk of the pie, but when you consider how how incredibly tight supply recently was - not to mention how frenzied Buyer demand was - if this small 7.2 per cent segment of buyers were the wealthiest, they were part of the tipping point that impacted our imbalanced market.
Here is a story from the Globe and Mail about that data: How Much Have Foreign Buyers Affected Toronto’s Housing Market?
In a post from earlier this year, I looked at what some of the pundits were saying about what was influencing the market. While many listed 'foreign buyers' as a contributing reason, as a realtor 'in the trenches' I found landed immigrants - and their access to foreign capital - were also significant players behind price appreciation. Click here for my insightful post sharing my observations in What The Pundits Are Saying About Toronto Real Estate!
In my opinion, global capital will always pour into the destination that offers the highest return on investment - even if there's a fee in the form of a tax - that may offset some of the profits. But when that investment is shelter, it creates a conflict between bricks and mortar as a commodity versus a place to call Home. Herein lies the challenge for each level of Canadian government, for their objective is to ensure their constituents can achieve the basics in Maslow's Hierarchy Of Needs, while attracting global capital to help their economies grow. Toronto real estate market prices skyrocketed beyond the affordability of the local market, shifting shelter as a fundamental right to one of profit and privilege. This is why government is intervening.
3) The Role Of Demographics + The Bank Of Mom And Dad
Demographics always figure heavily into shaping any market where goods are bought and sold, and real estate is no different. In Toronto real estate, demographics are playing a key role because of how they are influencing supply, particularly with the activities of that impacting segment: the Baby Boomers. Click here to read my post on How Demographics Affect Toronto Real Estate.
For the property ladder to function properly, those at the top need to vacate their homes to make way for those moving up. The problem is that Boomers are aging, but they aren’t downsizing in the same way that analysts had predicted. They are choosing instead to age in place in the homes that they’ve lived in for years, constricting supply, and creating problems for millennials trying to get into the market.
What is also driving prices up is that many of these Boomers are tapping into the considerable equity that many of them have accumulated over the last few decades (and their inheritances) to help their adult children (and grandkids) gain a foothold into the property market, transferring their wealth. Basically, many of the Depression-era grandparents who squirreled away their money fearing the markets would crash a la Black Tuesday bequeathed it to their Baby Boom children. However, those Baby Boomers didn’t always require any money for they, in turn, rode the post-WW2 prosperity wave of their generation all the way to unintended riches. Which means many Canadian grandparents and parents are sufficiently ‘financially comfortable’ that they welcome helping future familial generations secure Toronto real estate.
Given prices are so high, many first time homebuyers are unable to afford home ownership on their own accord. Rather than waiting for the market to balance and homeownership become more affordable, The Bank Of Mom And Dad is stepping in funding (with pre-inheritance gifts or lending) their kids the money to pay the high prices, especially if it means their children (and grandchildren) can live closer to them. It's a bit of a chicken and an egg scenario, because as long as supply is constricted and people are willing to pay whatever they have to buy, prices will remain out of reach or many. Unless you have family helping you. There are three generations of Canadians actively supporting their families in today's real estate economy on some level. This isn't going to change.
4) The Single Life And The Rise Of The Condominium Market
Also under the demographic category is the fact that more people are staying single for longer. This increase of single homeowners has fueled the condominium market specifically and the natural filtering of housing stock. This trend to smaller household formation for longer periods has had a dramatic impact on the housing market. No longer do people postpone buying property until they cohabit or marry like they did in previous generations. At the other end of domestic union there's the reality that half of marriages end up in divorce, and people are single and attached multiple times during their lives, which means we need more housing units for the same size of population.
In Toronto, and Canada as a whole, this burgeoning demand for homeownership by singles has been served by developers constructing entry-level, efficiently-designed condominiums in proximity to public transportation in our urban centre. Not only attractive to local and international investors and speculators (see The Condo Game above), these smaller units at “affordable” prices have met the needs of young urbanites, dominated by single women (one of the largest growing markets), the newly divorced, and down scaling empty nesters.
Nowadays, the condominium market which once served singles and mingles, is now accommodating young families who can no longer afford to climb the property ladder into freehold housings. The lack of supply in the low-rise housing market has largely placed this property type out of reach as prices have skyrocketed. This market has been emerging for over a decade, but has ramped up significantly in the past five years, as I explored in my recent Dear Urbaneer post: Should We Raise Our Kid In A Condo? High-rise condos already outnumber low-rise dwellings by about 10 to 1 in the original City of Toronto. Given high density is the best way to house people, this is the wave of our future. Any one owning a freehold house in the original City of Toronto is assured a profit, barring calamity.
5) Low Interest Rates, Mortgages, And 'The Cost Of Rent'
Twenty years ago a five-year mortgage interest rate was around 12 per cent. Today it’s available for less than 5 per cent. This means you can borrow about twice the amount of money and have the same monthly payment than you could twenty years ago. Add to that the opportunity to take longer to pay back the mortgage with a 30-year amortization rather than the once-conventional 25-year time span, and living with housing debt has never been easier. It's also the most obvious factor as to why prices have skyrocketed. If it costs less to borrow, you can borrow more!
Becoming financially burdened in this manner is part of a collective “conspiracy” between governments and corporations. In a global climate where governments and corporations themselves are saddled with enormous debt, and who very badly need to keep fueling the engine of our global capitalist economy, indenturing the proletariat as much as possible through cheap mortgage rates keeps the national (and world-wide) economies flowing. This is one way how contemporary capitalism works today.
In the distant past, high interest rates created a distinctive divide between renting and buying. But with ultra-low interest rates having extended over the better part of the last decade, for many, the cost of paying a mortgage became similar to the cost of paying rent, especially in Toronto where a one bedroom rental is now approaching $2000 a month!
I believe low interest rates have fueled prices more than any other factor. With cheap money readily available amidst a limited supply of housing fueled by bidding wars and the Fear of Missing out, the choice to leverage oneself heavily with mortgage debt became more and more commonplace. Low interest rates and easy access to mortgage debt (if you can put 35% down or more you can get a mortgage without qualification - for the moment) also facilitated the ability for foreign investors and speculative investors to increase the return on their property investment, contributing to that extra pressure on supply.
Today we're managing the psychology of debt. There are now two generations who have never experienced a market correction of significance in Canada, so a lot of people are immune to how financially vulnerable they are being house poor at a time when - during our recent frothy market - home ownership was the ultimate prize. It’s never been about “should we” when it comes to mortgage debt, but “can we?” And if the answer is yes, at least on paper, the debt has kept accumulating. Here are some great complementary posts that tell the tale of low interest rates in: Interest Rates In The 1980s And Now and Interest Rates, Affordability, And The Toronto Housing Boom.
From hereon in, as interest rates rise - and the Federal government imminently introduces new Mortgage Stress Tests to limit the impact of hefty mortgages and the avalanche of credit options - it will be fascinating to see whether the indebtedness of Canadians is a factor which causes our collective House of Cards' to tumble. In my opinion, if the Canadian economy goes sideways, this is how our market is at most risk of a correction.
6) Accelerated Gentrification And The Cost Of Redevelopment
It’s fascinating to watch the evolution of a neighbourhood, as it moves from marginal to must-have. This has happened in a number of urban boroughs in the City of Toronto, which were originally home to Toronto's working class, when property values reflected the affordability of its residents. As the downtown core shifted from industrial to post-industrial, and the population expanded with well-educated high-earning professional DINKS (double income, no kids), homebuyers looking for opportunity and an easy commute to work inevitably started flocking towards these affordable communities. The speed of gentrification of these working class neighbourhoods (which started in the 1970s) into affluent enclaves has been radical, driven by the lack of supply and huge demand, which has resulted in significant price appreciations.
Two decades ago I was featured on a Global Television newscast on gentrification. One sound bite became the promotional commercial for the story where I said "Gentrification? In the 70s it was Cabbagetown, in the 80s Riverdale, in the 90s College Street, and for the new millennium it's Roncesvalles Village!" Since then we've seen Leslieville, Brockton Village, The Junction, and Parkdale each undergo the forces of gentrification, while East York, North Toronto and Swansea/High Park are seeing bungalows being replaced with substantial luxury new builds (pretty much anywhere in the original City nowadays). Here's some of my observations over the years about this phenomenon in Gentrification In The City and - with a synopsis on my university thesis in Urban Studies - A Nose for Leslieville.
In a nutshell, with limited new low-rise housing being built, smaller, dilapidated properties in these working class neighbourhoods are being snapped up and substantially renovated or torn down and rebuilt. The end result jacks up property values in the 'hood as a whole. Gentrification not only impacts property values, but changes the visual and social fabric of a neighbourhood, from the housing stock, the emergence of retailers and eateries that reflect the tastes and needs of these neighbourhood's new occupants, often at the expense of the existing residents.
Click here to read Why Are So Many Downtown Houses Being Renovated? and Exploring Toronto Real Estate Property Values which sheds light on the rapid residential redevelopment of single family housing in the City of Toronto. This is a good opportunity to mention that the costs with redevelopment are significant too (Builders in Toronto are faced with compliance costs of $46,569 per unit). The cost of Permit and Development Fees in their own right are contributing to high property values, as I recently wrote about in The Pitfalls Of Permit Fees And Toronto Real Estate.
7) Lifestyle Factors, Declining Transit Efficiency And The Increasing Costs Of Commuting
There are certain amenities we desire to both enhance our lives as well as preserve and boost our Home’s asset value over time. As Toronto sprawls, access to reliable, convenient transit becomes paramount in the minds of Buyers, so access to this amenity is coveted. Also on the rise? The request from Buyers to be able to cycle to and from work. These are dominant reasons Buyers want to purchase in proximity to the urban core, which is putting pressure on supply and driving prices up. There is a collective realization that the financial, emotional and physical costs of commuting are just not worth it for more and more Buyers. They’d rather pay a premium to live somewhere central, where their commute time is reduced.
Click here to read my thoughts in What Are The Real Financial, Emotional And Health Costs of Commuting and On Cycling In The City: Then And Now.
Also impacting supply (and ergo prices) is the fact that more millennial Buyers are feeling the weight of the substantial costs of childcare in Toronto. It’s not just housing that is prohibitively expensive in Toronto. Childcare is taking a huge chunk out of salaries that are likely already pretty stretched to keep up with the other costs of living. What this does effectively, is cause young parents, who may have been inclined in a different market to make their gradual climb up the property ladder to stay put while children age and the cost of childcare diminishes. Instead of the usual cycle of supply and demand as people make their way up the traditional property ladder grinds to a halt, creating more pressure on supply.
I wrote about the impact of the cost of childcare on housing supply - as well as our exorbitant Closing Costs - and the movement from Flipping To New Builds in Dear Toronto Real Estate: Where Are The Property Listings? These each contribute to rising Toronto real estate prices.
Where To Next?
Although some of the reasons fueling skyrocketing prices were recently addressed by the Federal and Provincial Governments, will these measures be signficant enough to anchor Toronto into balanced territory? Although the Provincial intervention in April did cause the market to retract - with values plummeting upwards of 20% (which I documented in this August post called The Wackadoodle Toronto Real Estate Market) - I believe if governments' objective is to rein in the Toronto real estate market, there needs to be more intervention.
At the moment everyone is in queue for the Federal government to increase interest rates and introduce the proposed mortgage stress test where all buyers - regardless of down payment - must qualify to handle an interest rate hike of 2% more than they’re paying, amidst a re-calculation of the loan-to-value (LTV) ratio of their property. These actions should dampen market conditions.
Is this good? It really depends on your own objectives - and how much of a free market advocate you are. The direct impact to the real estate market is that borrowers will most likely qualify for less, which invites perceived sellers' values to slowly soften. It will shift the lending landscape as buyers borrowing and sellers refinancing may require co-signors, or consider alternate lenders with higher rates, fees and penalties. With access to capital constricting, the housing economy, which includes the soft and hard costs of property construction - including trades, planners, architects and designers, plus the myriad of retailers for appliances, housewares and furnishings - will see their revenues drop as everyone attempts to keep their financial situation status quo. Even the provincial and City of Toronto governments will feel the pinch, as they generate significant revenues through Land Transfer Taxes.
As a first generation Canadian, I personally believe housing is a right, not a privilege. Tinkering with our market for greater social harmony is, for me, a suitable goal though I'm not confident government has found the right solutions. Then again, if government hadn't intervened where would we be if the housing bubble - which we were mired in this Spring - burst into flames?
One of the most current and informative articles on the state of housing in Canada is in Maclean's Magazine. Written by Kevin Carmichael, this August 2017 piece captures the balancing act the federal government is addressing in its efforts to assure shelter as a right in Canada. Check this out --> For Many Young Canadians, Home Won’t Be A House.
For the Urbaneer Team, understanding the complexity of the Toronto real estate market helps us serves you. In a market oscillating with a multitude of variables, it's critical to carefully craft a strategy tailored to your specific needs and objectives when buying and selling real estate in Toronto. Don't you agree?
If you, or someone you love, needs guidance - without pressure or hassle - please know we're here to help!
~ Steven and 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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