Welcome to the latest installment of urbaneer’s real estate prognostication: our Winter 2015 Toronto Real Estate Forecast.
So it's been a crazy Fall Toronto real estate market that has left a lot of realtors – and Buyers – oscillating at a frenetic pace. Yup, there's no question the Toronto housing market continues to speed along but, despite the robustness of the market, for we seasoned realtors like I whom have weathered a market adjustment (hello Toronto 1989 to 1995!) there's always that lingering possibility the entire house of cards could collapse. I mean we only have to look to the sub-prime mortgage crisis of 2008 to see how real estate values collapsed across the globe, sparing Canada, thank goodness. But does that mean we're immune? What would happen in the event the market retracted… or even if we had just a small correction? And what is the likelihood of that happening?
In our real estate forecast this season, we examine some of the persistent factors that buoy and potentially threaten – or at the very least – alter the market. In Part One we’ll look at what the media is saying about Toronto and about the role of its ever-controversial booming condominium market.
The Pundits Ponder
You certainly don’t have to sift through many headlines before you come across yet another report that raises concern about a correction in the housing market. And, predictably, given the length, oscillation and volume of real estate being traded while prices soar, Toronto is grabbing a lot of attention from analysts.
The issue is that these warnings have been issued on a number of occasions; given the fact that the market just keeps on a-goin’ the impact of the message gets a little bit lost. However, the validity of the points presented by analysts persists – mostly because of the factors that they list as potential vulnerabilities still exist. And as long as they exist, so does the danger of market correction.
What are these factors? Well, there's the widening gap between supply and demand in the single detached housing market for one, where emotionally charged housing hunts frequently result in Buyers reaching their maximum budgets. We've also got the stress of Buyers being pushed to their limits of affordability for all housing types, where first time and move-up Buyers are feeling the penny pinching crunch and, of course, we've got that usual suspect lurking just waiting to punch holes in our housing industry – the ubiquitous condominium market.
We’ll start by looking at what the pundits have put forth over the last few weeks, and their take on the housing market, and then we’ll move on to explore the other factors.
The latest release of the Canadian Housing Price Index from Teranet reveals the depth of the “regional housing dichotomy” that exists in Canada. Toronto experienced a modest 0.30 percent increase month-over-month, but the year-over-year figures are “eye-popping” (which is an adjective that has been used numerous times in recent media coverage of the Toronto housing market- sidebar). Housing prices went up 9.3 percent in Toronto year-over-year. In fact, four housing markets out of the entire country (led by Toronto and Vancouver) jacked up the entire national average to the highest levels seen since May 2012. What this does is really lend context to the force and the ensuing speed of price appreciation in Toronto. Here is an article from the Globe and Mail that discusses Teranet’s report called “Vancouver, Toronto, Hamilton See Eye-Popping Home Price Increases In Past Year.”
The title of this article from the Toronto Star sort of says it all: “Toronto Housing Market Worries CMHC”. In CMHC’s latest report on Canadian housing centres, they cite rampant overvaluation of property prices in a number of Canadian cities, with Toronto being one of the most major culprits. They state that the high prices in Toronto do not have adequate support from economic and demographic factors. They say that the perfect storm for a bubble is brewing in Toronto based on “overheating, price growth acceleration, overvaluation and overbuilding”.
The Organization for Economic Co-operation and Development (OECD) released a report echoing many of the same sentiments (although they use more alarming language like ‘severe correction’) expressed in the CMHC report, but went a step further to call on the government to take further action to cool the overheated market. They want the government to increase the minimum mortgage down payment or tinker with the percentage of income a borrower can spend on mortgage payments. In Part Two of this forecast, we’ll dive into the potential role of the government in housing as well as the question of mortgage and overall consumer debt. OECD mostly blames an oversupply of condos as a potential Achilles heel in the market. Here is an article from the Globe and Mail that discusses the OECD report in greater detail called “Toronto Housing Market At Mounting Risk Of ‘Sharp Correction,’ OECD Warns”
The great thing with pundits is that there is always someone to play devil’s advocate. CIBC countered the OECD’s report, citing that a low loonie is attracting foreign investment, which could temper concerns about an oversupply of condos. Here is an article from the Huffington Post called “Toronto House Prices At Risk Of 'Severe' Correction, OECD Says, But CIBC Begs To Differ” which explores both sides of the argument in a little more detail.
While the pundits suggest that the market is overvalued, those of us in the real estate trenches suspect a banner year is just around the corner. In this article from the Globe and Mail, called “Toronto Home Prices Surge As Real Estate Agents Expect 'Big, New Record” TREB’s president Mark McLean (and, fortunately, one of Bosley Real Estate's team leaders) suggests that the huge housing price increases will continue. He goes a step further to comment on the impact of double dip municipal and provincial property taxes, long been a problem in Toronto, as a potential threat to affordability.
The Toronto Condominium
So what of that condominium market? How real of a threat does it pose? Urbaneer has long contended that if there is to be any one “villain” behind a market correction, the condominium market holds that role. The concern is a potentially vast oversupply of condominiums.
There is ample data to support these concerns, but there is also data that suggests that the condominium market will be able to manage just fine – in current conditions.
Here are the facts: New condominium completions reached a record high in 2014, surpassing the previous year by over 6,000 units. The expectation now is that this supply flow may stem a little bit, with completions to return to 2013 levels this year, and that supply looks well taken care of for the next three years. Here is an article from the Toronto Star discussing that called “Supply Of Condominiums Good For The Next Three Years.”
Another point brought forward by this article is the widening gap between housing types in Toronto, given the mismatch of supply and demand in both condos and single family homes. The gap has almost doubled in a year’s time, growing by 44 percent.
That’s a lot – and that’s a very short period of time to cover that kind of ground. We witness the material effects of this in our buyers on an ongoing basis. Demographically, what we are seeing is that millennials are meeting each other, cohabitating, and having babies. As these households merge, we are seeing this group collectively trying to unload two 1-bedroom condos to trade for something more family friendly. Those who are after a single family home max themselves out, mortgage-wise. Those that can’t afford a house given the astronomical prices are buying the larger stacked townhouses. Two bed townes are not moving at the same speed as three beds, which are moving faster than one bed condos. Basically, the smaller the unit the longer it takes to sell (and let's face it, in Toronto small units are ubiquitous and 3bed units disconcertingly rare, which creates another chain effect along the property ladder).
It’s always helpful to bring a little context when you’re looking at doom and gloom – especially when it comes to housing headlines. Yes, there is an oversupply of small condominiums – and yes, the economics of this in and of themselves are a threat. But what is the extent of the threat?
When it comes to unabsorbed units, which is the engine behind much of the alarmist headlines, recently CIBC economist Benjamin Tal took a closer look at some of the Toronto condo numbers to really assess the potential damage. And if nothing else, it reminds us to apply the proper context to data.
In this Financial Post article called “Economist Says Bank of Canada And Investors Shorting Canadian Housing Should Look Closer At Numbers” Tal suggests that the data around unsold units in Toronto can, on the surface, be a little bit deceiving.
There is lot of science behind the reporting of the numbers, which Tal goes into in the article, and in further depth in his actual report, but the take away here is to look at the source. The force behind these numbers rested on four developers out of 77, who reported more than a third of their units were unabsorbed.
Does that diminish the potential threat of oversupply? Not really, but it tempers the likelihood of the vulnerability.
While there is not a great deal the average homeowner can do to control the potential pitfalls that surround the condominium market, they can make some proactive choices when buying a condo that can help protect them and preserve asset value. It’s all about the unique. If you can score a unit with a thoughtful floor plan and/or unique features and finishes, it will go a long way to helping your unit stand out in a resale environment.
We’ve written extensively about how to maintain and increase the value of your condominium. Check out “Dear Urbaneer: How Do I Boost the Value of my Condominium? and “How to Elevate the value of a Condominium.”
In Part Two of our forecast, we are going to explore a factor that is unique to this edition: the potential impacts on housing in the aftermath of the recent Federal Election; we are also going to explore the impact of affordability and the vulnerabilities presented with climbing debt loads.
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Steven Fudge, Sales Representative
& The Urbaneer Team
Bosley Real Estate Ltd., Brokerage • (416) 322-8000
http://www.urbaneer.com • info@urbaneer.com
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Urbaneer’s Real Estate Forecasts