Urbaneer’s Spring/Summer 2016 Toronto Real Estate Forecast: Part One

Real Estate

Welcome to the latest edition of urbaneer’s seasonal prognostication: the Spring/Summer 2016 Forecast: Part 1!

If you've got your finger on the world of real estate, you no doubt know the Toronto housing industry keeps on buzzing, with the market oscillating frantically while prices set new precedents. Several of the tried and true factors that are the underlying drivers of this market persist: the mismatch between supply and demand (especially when it comes to freehold housing) escalating prices due to bidding wars, and consistently low interest rates that entice Buyers to take out more debt. However, given the time and the ferocity of some of these market conditions, we are beginning to see more evidence of the subplots of this real estate story that emerge over time, such as generational connections influencing the property market, the continued test of affordability, a property ladder changing shape, the growing weight of psychology in the market, and, the usual suspect: the condominium market (with a twist)!

The energy of this Toronto market is a phenomenon unto itself; the Toronto housing market keeps setting the bar for itself and then knocking it down, with a seemingly unstoppable momentum that keeps pushing and expanding its own limits.

In Part One of this forecast, we're going to explore some of the economic reasons behind this hot market, and reflect on what some of the pundits are saying. We’ll also touch on the growing role of psychology in the housing marketplace. In Part Two, we’ll continue the dialogue, looking at some of the factors that are causing the property ladder to change shape, eroding affordability, and the role of the condominium market.

 

 

The Pundits

Real estate is a frequent headline-grabber, especially so when it comes to the record breaking activity in the City of Toronto. Real estate pundits have been warning for years about the potential pitfalls that can occur in a frothy market. We’ve touched on this and other factors repeatedly, most recently in Urbaneer’s Winter 2015 real estate forecasts. However, pundits have been saying that Toronto is a real estate bubble about to burst for years. Does that mean that they are incorrect, or that the bubble hasn’t reached its breaking point yet?

Recently, CMHC re-iterated its concerns of overvaluation in Toronto, citing price acceleration and general overvaluation as the culprits. Here is a story from the Financial Post called “CMHC Calls Out Nine Real Estate Markets For Growing Signs Of Overvaluation” that breaks those numbers down.

And here is a telling tale, about an article published in the Globe and Mail in 1988, when the market was rampant, and property prices climbed quickly, threatening affordability and access to home ownership at all. The pundits back then were also wary of an influx of foreign investment falsely inflating home prices. Does any of this sound familiar? Click here to read the Huffington Post article called “1980s Canadian Real Estate Stories Could Be Written Today”, which rehashes that G&M story as well as other media reports that draw eerie parallels from the 1980s to today.

We often use the past to predict the future, which is worth remembering when drawing parallels between the markets of yesterday and today. Markets are cyclical. And as the article points out, that hot 1980s Toronto housing market hit an average housing price of $273,698 in 1989 (a then-record, no less). And then the bottom fell out, with average sale price of a home free falling all the way to $198,150 in 1996. Let it be said, I experienced this market transition first hand, for the day I became a realtor in 1989 was the day the market began its downward decline. For the first six years of my career prices dropped upwards of 35% which made my 'in the real estate trenches' experience a vertical learning curve in the art of negotiation. I was selling houses in South Riverdale for $200,000 that had been purchased for well over $300,000. But those Sellers weren't all financially ruined (though several were). Many of those Sellers chose to sell their houses for a 'perceived loss' in order to climb the property ladder.

The Toronto real estate market has historically risen and fallen every seven to ten years in a cyclical fashion since the 1950s, and yet we're now in a market which has been rising every year since 1996, with the exception of 2008 when the market flat lined during the global subprime mortgage crisis. One doesn’t have to be an economist to realize that when the formula of low interest rates + high, swiftly moving prices + highly leveraged mortgages and generally high consumer debt comes in contact with any number of variables (slight interest rate hike, slight market correction – or horrors – both) debt disaster could be lurking with far-reaching consequences.

This is one of the dangers of repeating yourself. Your message tends to lose some of its gravity over time. However, because these same troublesome market factors persist, then so do the very well-founded worries about what could happen. It starts to come down to probabilities.

 

 

Why Do Prices Keep Climbing?

The single biggest factor behind the continued surge in housing prices? A widening gap between supply and demand. To put this in context, TREB’s latest figures for April show that active listings tumbled by 26.9 percent from a year ago, and new listings fell by close to 10 per cent. As this supply drops sharply, and demand persists, prices push skyward. The average price in the city of a single detached home in Toronto surged nearly 19 percent over the same time period. Here is TREB’s latest Press Release.

Not only is the gap between supply and demand in freehold housing pushing market values up, you’ve got another mismatch creating a potential vulnerability. In the past 30 years, there have been roughly ten times the number of newly constructed condominiums introduced to the market versus the freehold housing market (limited to new infill), which is a ratio put further out of whack when you consider this in context of the size and population of the city. Basically, one out of every ten properties for sale is a freehold house, and the other nine are condominiums.

It’s not just lack of stock; you’ve got a scarcity of land, a substantial population of six million, and a transit infrastructure that, while functional, will clearly have its limitations as the population grows (side note: this is in part the reason why purchasing a property with access to public transit is essential). It’s not just about convenience today – it’s about growing asset value for tomorrow.  In fact, you can literally delineate the geographic core where house prices are rising based on the subway and transit lines. Check out our recent post  “The Value Of Public Transit In Toronto” and What Are The Real Financial, Emotional And Health Costs Of Commuting?

Creating even more pressure on the supply of freehold housing is that most of the available stock is in the range of about 65 -140 years old, meaning that it is obsolete and likely requires substantial work in one way or another. This means houses are either being substantially renovated, topped up, torn down or even seeing their lots severed into multiple building lots or even sites for infill projects like condo townhouses, mid-rises or high-rises (North York is a testament to this). As more houses undergo transformations to cater to the rising executive class and more condominiums are built to accommodate other groups, the freehold market experiences tremendous pressure by a growing demand for a diminishing supply of highly coveted property. We’ve seen this time and time again, most recently in our February Home Of The Month which outlines the challenges of millennials who are meeting, procreating, and having to sell their two condominiums to gain entry into the Toronto downtown freehold housing market.

Creating even more pressure on property values in the city of Toronto – given the age of freehold housing – is that most every city street now has a substantially renovated or new house on it, which sets the precedent for a new lifecycle to a neighbourhood (case in point- our Modern Cube Of Perfection In Roncesvalles Village listing which sold for $1,950,000). We’ve seen it happen often. Click my own story for having A Nose For Leslieville to read the 'where' and 'how 'of my 1986 Urban Studies Thesis On Gentrification In South Riverdale. As streets once considered 'edgy' and 'fringe' have houses that garner values in the $1.5m+ price point, it feeds the price fire. This is happening across the city including, East York, Riverdale, Little Italy, Trinity Bellwoods, Roncevalles Village, and High Park/Swansea (to find out about these and other neighbourhoods, click our Neighbourhood Pages.)

For all intents and purposes, affordability is evaporating in the original City of Toronto. We’re going to continue to see values grow exponentially and largely outpace incomes. In fact, we're predicting that in seven years the only freehold houses you'll be able to buy downtown for under $1million will be tear-downs (land value) or tiny houses on small lots. It's not pretty, but we'll explore the impact of shrinking affordability further in Part Two our Spring Forecast.

 

 

The Rise Of Property Panic

This economic story that is Toronto real estate is not on paper only; it’s real-life steeped in real-time drama. Just ask any of the many beleaguered buyers trying to secure a property for the last several months.

Instead of house hunting being an idyllic experience that involves wish lists and dream homes, the current conditions in the Toronto property market have injected a 'roller derby-esque' element, where house hunting unfolds in an aggressive, winner-take-all arena. It’s not just about getting embroiled in bidding wars anymore, which have moved from commonplace to expectation. The stakes are higher because of the combined effect of scarcity of the product that everyone is after, with the skyrocketing of prices. As if it’s not enough to narrowly miss out multiple times in your property search, there is a sense of screaming urgency as prices climb. It’s that old affordability trap: If you don’t get in now, will you be able to afford it later?

What this does, among other things, is exacerbate the highs and the lows and the ensuing emotions that invariably come with any house hunt. We touched on this recently in our must-read post called A Real-time Tale On The Struggle To Buy Toronto Real Estate In Spring which shares the five failed attempts of one of our Buyers' efforts to secure a house (fortunately they just did!). House hunters not only need their property check list and their budget in order in their house hunting tool kit; they need a timeline for their hunt, perseverance, faith, and straight up stamina for what could very well be a long-distance race. Touching on this very point is a recent Toronto Star article aptly named, “Spring Housing Market 'A Whole Other Level Of Insanity.'

You know that market factors are strong when a whole separate phenomenon is created as a consequence, that actually adds strength to the current movement. For example, a recent study by TD Bank looked at how some of the red-hot housing centres (like Toronto) are being driven by supply and demand, but by buyer psychology as well. They’ve coined the term as “FOMO” (simply, the 'fear of missing out'), where homebuyers rush to buy in potentially overvalued markets, without fully understanding the financial implications of the huge mortgages that they are taking out. This survey indicated that 20 percent of respondents worried that they hurried through the buying process so that they’d be able to buy a home before losing out to another buyer; 13 percent said that they rushed into their purchase because they were concerned that if they waited, the rising market prices would shut them out.

The suggestion of this study is that this housing psychology is actually becoming a bit of a self-fulfilling prophecy. With the volume of people rushing in to purchase, they are effectively pushing prices up, creating the housing market that they feared in the first place. Here is the infographic from the TD survey, with some interesting stats. To complement that, here is an article from the Huffington Post that expands on the “FOMO” movement called “ Canada's Hottest Housing Markets Driven By 'FOMO' (Read: Panic Buying)

This high-octane environment indirectly shapes the market, and introduces a different, intense dimension for those navigating around the Toronto housing market. And while the City of Toronto has re-defined its limits in terms of prices and activity – and then shattered those limits, pushing them higher again and again, one has to wonder if the buyers have limits too – and not just those extended by their bank accounts. If you're a Buyer overwhelmed by the intensity of demand, check out our behind-the-scenes reveal in the Anatomy Of A Bidding War In The Toronto Real Estate Market, how to realistically establish the market value blindly in A Winning Bidding War Strategy and, from our Dear Urbaneer Series (awesomeness if we say so ourselves), Why Is The Toronto Real Estate Market So Hot?.

So, what is the advice that the industry experts are dispensing for home buyers embroiled in a highly emotional market? Take a breath. Understand the implications of your purchase in the present moment and for the years to come. The approach that urbaneer takes? As with many things in life, patience is a virtue, and the best decisions are those that are calm, rational, and deeply researched. Plus – and this isn't easy navigating the freneticism of real estate but 'Trust the Universe'. In a market with this many moving parts, we educate and inform our clients on the market dynamics specific to their search while gently refining their housing needs, wants and wishes into a  'cohesive intention'. By cultivating each clients 'meaning of Home' while teaching the pragmatic 'nuts and bolts' of a constantly changing real estate climate, when the right property comes along our Buyers are well-positioned to buy. This is the foundation of our success at urbaneer.

 

 

Stay tuned for Part Two of our forecast, for our discussion on affordability, how the dynamic and mindset of the first-time home buyer is shifting, the changing shape of the property ladder, as well as that potential real estate Achilles Heel: the condominium market!

Do you need help applying your own personal context to all of the factors that exist around the Toronto real estate market? At urbaneer, we have decades of experience navigating the market dynamics. In addition to our own experience, we spend hours on a regular basis connecting with media reports and data-based information to help shape our own insights and advice. Could we help you on your house hunt, sell your home for top dollar or strategize your investment position or guide your climb on the property ladder? Please know we're here to help, all without pressure or hassle!

 

~ Steven and the urbaneer team
  earn you trust, then your business

Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage – (416) 322-8000

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