Welcome to Part Two of urbaneer’s Spring 2015 Toronto Real Estate Forecast!
In Part One, we compared and contrasted different economist and analyst predictions for 2015 as well as the impact of the relationship between affordability, debt and rising housing prices.
In Part Two, we will look at the Bank of Canada’s surprise move, and the intricacies of the condominium market.
Now, to the “interest rate drama” that we alluded to in Part One of our Spring 2015 Toronto Real Estate Forecast.
Rates have been at historic lows for a number of years now (to the point, for some younger house owners, this may be the only interest rate environment that they’ve known for their whole borrowing lives). Analysts have repeatedly re-iterated the same message: this is not an economic reality, and rates are going to go up at some point.
However, in a surprise move earlier this year, the Bank of Canada actually cut rates even further, which was completely unexpected. At that time, analysts and economists countered by saying that this was most certainly a time-limited offer, in reaction to the swift descent in oil prices and the strong downward pressure that puts overall on the economy. Just when you thought rates were low, they got lower.
Fast forward to mid-April this year, where the Bank Of Canada (BOC) proved the analysts wrong by holding the line on the rates.
In this current rate announcement, they are decidedly optimistic, predicting strong economic growth in the second half of the year, fully expecting to rebound from the “oil price shock” and anticipating growth in the labour market. The expectation is that rates won’t go any lower, and that their recent rate cut has had the desired effect. Click here to read “Stephen Poloz Just Quashed Any Hope Of Another Bank Of Canada Rate Cut” and “Bank Of Canada's January Rate Cut Seems Enough: Poloz”
However, for the BOC there lingers a pressure point for domestic concern: the combination of super high household debt levels with over-valued house prices, and believe it will continue to climb in the short term, which presents a vulnerability in the market. The expectation though is that this debt-to-income ratio to fall eventually, expecting that these lower interest rates will translate to lower mortgage payments, which frees up cash flow. It’s a bit of a balancing act, when you try to curb the downward pull from the oil prices with stimulus, and encourage Canadians to borrow – but not too much. Click here to read “Oil's Threat Vs. Household Debt: Poloz's Delicate Balancing Act”
And if that balance is off, the BOC has pinpointed the housing markets in Toronto and Vancouver as property poster children as illustrations of that vulnerability. This is where it gets a little confusing. Lower interest rates lets me buy more, so why shouldn’t I? True – but only partly so. When the BOC flags a specific market – like say Toronto – it should raise some personal internal alarm bells. The truth is that the housing market in Toronto (particularly if you are seeking a single family dwelling) requires home buyers to leverage themselves – sometimes extensively. We touched on this in Part One of this forecast. The culmination of these reports though suggests that buyers need to think twice about what they are taking on.
Owning a property is an asset that grows over time, to be sure. But what many people forget is that this asset is leveraged against a debt (and both of these values are variable). What this underscores heartily is the necessity of having a plan when you are setting out to buy a house. The plan has to go far beyond securing financing, writing a wish list and setting a budget. You need a backup plan. You need to consider options. You need to play out various scenarios (How far are you willing to go? How will you react in a bidding war? What kind of sacrifice are you willing to make in exchange for securing that property?). Here's two of our most popular recent blogs that may offer you more insights in the dynamics of our Toronto real estate market –> Anatomy Of A Bidding War and Dear Urbaneer: Why Is The Toronto Real Estate Market So Hot?
And then there are other scenarios to consider – what will happen when rates go up? What will happen if the housing market corrects (even a little bit)? How will this impact your cash flow?
As we at urbaneer have said many times, if there are any cracks to appear in the veneer of Toronto's hot market, the condominium market – in particular the point towers – will be the culprit. And as we’ve said numerous times, the story of Toronto real estate has two separate plot lines (houses and condos).
What is becoming more apparent as time goes on though, is size of the gap when it comes to prices between these two housing types. It’s not just that it is gigantic (and growing) but it is also the rate at which it is growing. Click here to read a recent urbaneer post entitled “High-Rise/Low-Rise: The Toronto Real Estate Price Gap”.
As we touched on in Part One of the forecast, affordability is an ever-present issue when you are in maneuvering in a hot market. And as prices escalate, the popularity of the condominium increases, simply because it is the only housing type accessible in the downtown core for buyers who can't exceed around $500,000 (keeping in mind that most houses in this price range require work).
It’s not like the condo market is immune to escalating prices either. Click here to read an article from the Toronto Star called “Condo Market Feels Heat As House Prices Soar”. What this article points out is that the condo market, while not suffering from the frenetic supply and demand issues that persist in the single family market, still oscillates in its own dichotomy; namely there exists a lack of larger units, thoughtfully-designed space plans or otherwise unique spaces.
This is something that urbaneer has counseled on in the past – the value of the unique when it comes to condominium ownership. It is imperative to seeking top dollar to be able to set your property out in a sea of otherwise ubiquitous units. If your place is even remotely cookie-cutter, click here to read urbaneer’s HomeWatch news: “How To Add Value To Your Condominium”
The price gap between housing types, along with the scarcity of land and a preference for urban living could redefine homeownership, according to this new report from BMO. Click here to read Condo Living Will Be The New Normal In Ontario: BMO. In this report, they counter the frequent argument that a potential over-supply of condominiums would effectively soften the market. They suggest that a lack of available land, coupled with a steady stream of buyers will absorb “excess” stock.
However, there is ample data to suggest that this potential oversupply remains a real threat though. New supply continues to flood into the market at a rapid rate. In fact, new construction approvals mostly for condos) absolutely skyrocketed this spring in various pockets around the country. Click here to read “Construction Approvals For Condos In Canadian Municipalities Surge 43.7 Per Cent In March for a detailed breakdown of those stats. Of course, none of these projects would be available without financing – which continues to be readily available. Click here for articles that discuss how banks keep rolling out the financing for developers, even as unsold units hit a 21-year high this past January (Big Banks Boost Condo Financing Even As Unsold Units In Toronto Hit 21-year High and BMO: Number Of Unsold Condos In The GTA Hits 21-Year High In January).
This data suggests, as well as the fact that many of these new units are investor-owned, rather than owner occupied, that the condo market may experience a moderate slowdown in the year to come as well. This article Toronto Condo Market Likely Headed For ‘Moderate Slowdown” discusses a report released by condo research firm Urbanation that scenario in more detail.
Our concern? For the past 15+ years developers have fueled the condo market through the creation of small one bedroom and one bedroom and den condominium units to serve the investor and first time buying market at the expense of creating larger suites that would appeal to the more affluent lifestyle-oriented white collar professional, family-geared buyers or down-scaling boomer markets. While these small 'affordable' units purchased by investors served the expanding rental demand at a time when the existing purpose-built rental housing stock was stagnating and deteriorating (fueled in part due to the disincentives of Ontario's Rent Control Legislation), or became the first rung on the property ladder for the burgeoning Millennial generation (whose parents – the Bank Of Mom And Dad – facilitated the purchase with a pre-inheritance down payment so their kids could bypass the rental market and start the first chapter of their lives in a 'just like rent' equity-building investment –> see Is The Bank of Mom and Dad Behind Rising Housing Prices?), the question today is “Are we at risk that most Investors and Millennials have already bought?”.
The success of the housing market requires the filtering of housing stock up and down the property ladder. As the Millennials meet each other and move towards co-habitation, they're facing selling their two 'first time buyer or investor oriented suites' in order to acquire suitable larger accommodations. If we experience an over supply of smaller units – and/or demand for them diminishes – then the entire real estate 'house of cards' could be impacted. We need fluidity in all market segments for it to remain robust, otherwise it can derail. Along with monitoring how interest rates affect the Toronto real estate market, we need to pay close attention to what's happening to the supply versus demand for smaller condominium units.
The Toronto real estate market is complex, requiring each Buyer to navigate a property matrix specific to them that balances the factors of price, condition and location. Gathering, processing and reconciling the ample, frequent data and media reports that surround a real estate market which constantly oscillates is no easy feat. But it is what we do at urbaneer. If you're interested, here's Urbaneer’s Spring 2015 Toronto Real Estate Forecast Part One that offers you more insights.
With decades of experience navigating the highs and lows of our market, and our commitment to remain acutely aware of shifts and trends, we're here to help! All without pressure or hassle.
May we be of assistance to you, or someone you love?
~ Steven and the urbaneer team
– earn your trust, then your business –
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Urbaneer’s Real Estate Forecasts