It’s simple, really - the economic relationship between supply and demand. But what begins as a simple premise has created widespread impact with financial, social and demographic implications in the City of Toronto. Welcome to part one of Urbaneer’s Toronto Real Estate Fall 2014 Forecast. This is an excerpt - you can read the full forecast here.
Many of the same market influences continue to linger: a potential oversupply with condominiums, a red-hot market that continues to test the limits of affordability, the continued roles of foreign investment and a low interest rate environment. However, due in part to the intensity and duration of the current market conditions, there are new issues that are making themselves more apparent. There is specific, significant price appreciation with freehold housing types in pockets around the city and buyer experiences that are evolving into phenomenon. These are beginning to raise the possibility of shaping a demographic shift with significant social and geo-physical impact.
Add to that the emotional intensity of being a buyer in a market that simultaneously holds opportunity and intense pressure and competition. This has resulted in major highs and lows which contribute to cycles of buyer fatigue, buyer euphoria and buyer despair - all in a rotation unique to each buyer.
The Usual Suspects
The headlines have been repeating themselves for a couple of years now - just with different words, but the meaning still remains the same. The gist of it is, ‘beware the red hot market- and the pitfalls that can ensue’. While homebuyers may feel that there is a bit of a “the sky is falling” thematic thread from analysts, their message is still valid - and should still be heeded. Bottom line - caution and knowledge are your best allies when negotiating a market that has speed and momentum on its side.
Furthermore, although there is no arguing that the scenarios that could potentially still spell disaster for the real estate market are still present (i.e. interest rate hike, overloaded debt holders, housing prices rising quicker than incomes, foreign investment and a booming condo supply), the counterbalances (good employment, positive economic fundamentals, demographic support) are still there too.
The continuation of low interest rates, while presenting a vulnerability from a leveraging point of view, are still an important tool in terms of keeping the market moving and all signs indicate that this will continue.
Supply, Demand and Dollar Signs
As many analysts indicate, the real yardstick for health in any particular market is the measure of affordability. We know that prices continue to climb, but why is that, beyond the basic mechanics of a wide gap between supply and demand? Namely, what makes that gap so distended?
There are barriers presented to homebuyers on various rungs on the property ladder. It’s hard to get into the market; it is equally as difficult to move up into a larger property, should your needs change. With the lower interest rate environment, more and more buyers are buying homes at the very top end of their budget, with an eye to staying put for a number of years to come. Rather than relocate, they plan to renovate.
As more and more homeowners stay put it impacts the natural filtering of our housing stock up and down the property ladder, which has a further effect on the mechanics of supply and demand, squeezing the options for Buyers, which in turn pushes prices up. The freehold housing stock in the original City of Toronto is already limited to begin with.
Also inadvertently placing upward pressure on prices is a CMHC policy on $1 Million properties. The gist of it is that CMHC will only insure high-ratio purchasers (a down payment of between 5 to 19.99 percent) for properties that sell below $1 Million. Once a property goes over that million dollar threshold, the down payment requirement goes up to 20 percent. This has placed even more pressure on the sub-million dollar property pool, which is constrained enough as it is in the city centre.
What are some of the effects of this wonky supply and demand? How does the condominium market figure into this fray? Stay tuned for Part Two of Urbaneer’s Toronto Real Estate Fall 2014 Forecast, where we address these points, as well as some of the more human behaviours and consequences that are characterizing the market.
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. Whether you're purchasing a personal residence, or you're investing in your financial future, we're here to help!
~ Steven and the urbaneer team
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