The House of Cards: Urbaneer’s Spring 2015 Toronto Real Estate Forecast Part Two

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Welcome to Part Two of Urbaneer’s Spring 2015 Toronto Real Estate Forecast!

In the first part of the forecast, we discussed various analyst predictions as well as the role of affordability, debt, and emotional constitution in shaping the Toronto property market. In part two, we’ll take a look at interest rate drama (yes, drama!) and the ever-changing condominium market. (Note, this is an excerpt. You can read Part 2 in full here.)

Interest Rates

To keep our economy buoyant, interest 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 (BOC) actually cut rates even further. 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 it put on the economy overall. The BOC proved the analysts wrong by holding the line on the rates with the two subsequent rate announcements, the most recent at the end of May.

While the BOC continues to be optimistic, there lingers a pressure point for domestic concern: the combination of super high household debt levels with over-valued house prices. Furthermore, the BOC has pinpointed the housing markets in Toronto and Vancouver as property poster children for 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.

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?).

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?

The Condominiums

While interest rates are one variable to the market, the exponential growth of the condominium market is another. 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. The price gap between housing types, along with the scarcity of land and a preference for urban living could redefine homeownership. We cannot emphasize enough 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.

There exists the argument that a potential over-supply of condominiums would effectively soften the market. While it is possible that a lack of available land, coupled with a steady stream of buyers will absorb “excess” stock, new supply continues to flood into the market at a rapid rate.

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.

Our challenge is that 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 oversupply 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. If you own a condominium, be aware that this market could face some volatility in the imminent future.

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 is constantly oscillating is no easy feat. But it is what we do at urbaneer. With decades of experience navigating the highs and lows of our market, it's our commitment to remain acutely aware of shifts and trends. All without pressure or hassle. May we be of assistance to you, or someone you love?

Want to learn more? Read Part 1 and Part 2 in full; our real estate forecasts provide a comprehensive overview of the Toronto real estate market. At urbaneer, we're committed to source and deliver real estate data and news we consider relevant for your real estate dealings.

And please remember, we are always here to help.

~ Steven and the urbaneer team

We're here to earn your trust, then your business.

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