Real estate is a dynamic, shifting entity that, in order to be navigated successfully, requires knowledge, professional dexterity and an understanding of the intricacies of the elements of the market. Nowhere is that more prevalent than in the Toronto housing market, where numerous elements operate separately, but simultaneously, to direct the underlying momentum. In Toronto, one has to know exactly what is going on in the market to accurately predict where it is going.
Welcome to the second installment of urbaneer’s real estate 2013 Fall Forecast, where we look at the role that demographics, investment as well as buying behaviour play in shaping the future of this market. In the first part of our forecast, we looked at the big picture role that lending policy and interest rates play propping up the market. Do all of these factors combined balance each other out? Does the Toronto property market lean towards boom or bust? Read on to find out!
The red-hot Toronto real estate market continues to climb and to carry momentum, which has caught the cautious attention of some (policy makers for one, urbaneer for another). While there is sub text attached to each of the property types, which all reflect different behaviours and stories, much of the furor (as always) remains at the feet of the condominium market.
Foreign Investment vs. Demographics
The condominium market is an attractive one for investors, but there are concerns raised by the type of capital that has historically been flowing into the already potentially shaky condominium market. Simply, when the bulk of a building is owned by investors as opposed to owner-occupied units, there exists the possibility of mass liquidation. Should these investors all decide to liquidate their assets at the same time, the values of this niche market could drop precipitously, which could trigger a widespread collapse. Although most data on this is anecdotal, based on the amount of foreign investment grabbing up inventory, the scenario remains possible, and must be considered when making a purchase decision. Validating this, condo “flippers” may be subject to new, more rigorous tax audits, in a bid to promote the “buy and hold” mentality that should be the baseline for real estate investment. However, there are reports that suggest that the demographic fundamentals that exist within the Toronto market that may lend it support. According to the Conference Board of Canada, the Canadian condo market (including Toronto) will be buoyed by demographic weight, including first time home buyers, downsizing boomers and those who elect urban living as a lifestyle choice. While inventory is expected to grow, demand is expected to grow in tandem. Similarly, the steady influx of immigrants into centres like Toronto and Vancouver suggest that there is (and will remain to be, if trend lines continue) a robust rental market. The problem that some analysts have with this particular point of view is that it looks more at the short term viability, over the long term impacts.
Market Mindset: Bidding Wars & Other Bubble-Producing Behaviour
Purchasing a home has a decidedly emotional component that many other investments do not have. When you are on the hunt for a property that will be your home, and you encounter a property that checks off your boxes, desire to own said property ramps up and dangerously can supersede logic. We believe part of escalating property values in Toronto are a result of demand and economic fundamentals, but they are also the result of active participation in win-at-all-costs, very human behaviour. People know what they should spend, but it is easy to be swept away as good, unique stock becomes less available, and panic quietly injects itself into pragmatism.
The fact that many markets (Toronto included) are at the high end of their price spectrum right now, and affordability continues to erode, seemingly does little to deter eager buyers. Royal Bank’s housing affordability index (which measures things like amount of pre-tax income going towards housing) has pulled back this quarter, reversing gains made in previous quarters. While the change is modest, it does shed light on buyer mentality. Are buyers doing their due diligence to make reasonably cautious decisions, or are they lured into the market through intense bidding wars or a low interest rate environment that suggests a false sense of short-term affordability? The end result, as debt load creeps up and asset values lack a solid base has decidedly bubble-like components. Will this bubble burst?
Truthfully, while the end result of a property purchase is celebratory and solid, the process of getting there, especially amidst the combination of all of these factors can be challenging, overwhelming and at times emotionally draining. That said, navigating the Toronto market successfully is not about fleeing the scene, as alarmist as some of these points and articles may be. It is about understanding the market in the context of these factors, doing research, having a plan and getting support from someone who can help - like urbaneer.com.
Steven Fudge, Sales Representative