Monthly Archives: March, 2017

Supply and Demand: factors driving the Toronto Real Estate Market

March 31st, 2017 Posted by Blog No Comment yet

We all know that real estate prices in Toronto have been skyrocketing in recent months. Up 22% in January (year-over-year) and 28% in February, the rate of increase has been well above income increases and inflation. While Toronto remains more affordable than Vancouver, and is still well behind super-expensive cities like San Francisco, Melbourne and London, prices are still hard for most locals to fathom – much less keep up with.

There’s plenty of debate about the causes. I have written before (e.g. here and here) about the supply problem – i.e. there are not enough houses (or condos) for all the buyers out there, so buyers have to fight over the listings and that drives up the price. Lose a few such battles and one starts to get more aggressive – maybe due to experience, or maybe desperation – and the price increases escalate. This has been going on for years. In a low interest rate environment with a reasonably good economy, it should come as no surprise that we are where we are.

What’s influencing prices?

The average sale price in 1989 (the previous ‘peak’) was $273,698 (TREB). According to the Bank of Canada inflation calculator, that equates to 484,953.97 today. So, when we look at the average selling price today (TREB February, 2017 stats) and see $875,983, it’s important to note that inflation alone accounts for more than a third of the increase (about $211,256). Next, we have to look at other influences.

I’ll start with what seems to be the most overlooked component: renovations. It’s obvious that improving a home through renovations increases its value. Canadians spend billions of dollars every year on renos, and homeowners (or professional renovators) who chose to sell reap the profits of their investment. That said, it’s hard to quantify, isn’t it? Still, we all know how it works, and when we look at price increases, we have to take that into account.

Another obvious influence is migration/immigration. The population of Toronto continues to grow rapidly, and everybody has to live somewhere. Demand for housing from population increase, totally independent of inflation rates or anything else, will put pressure on home prices where land is restricted. By comparison, in sprawling cities like Austin, Tx (one of the fastest growing cities in the US), where it’s easy to expand, we don’t see the same price increases. This is why so many in the housing sector look with frustration at the Green Belt. (For the record, I’m in favour of preserving green spaces. I’m just noting that it’s a factor in our housing market.) So, we have to squeeze more people into a limited space, and that also causes price increases.

Lack of new rental construction has also been a problem for years in Toronto, although the condo boom and small investors renting out some of those condos has somewhat filled the need. Apartment construction in Toronto dropped in the early 90s, and has only started to pick up again in recent years. (In time, that could take some pressure of the re-sale market….) Keep that in mind when you hear another fear-mongering report about ‘investors’ in the Toronto real estate market: they’re not all ‘speculators’.

In fact, it seems that very few are. Numbers are hard to come by, but RE/MAX Hallmark Realty recently looked at our sales over the last three years (about 35,000 of them, so a much bigger sample size than some other ‘studies’ that got wide play recently). By looking for clients who did more than two transactions over that period, we found that only about 12% of our clients might be called ‘investors’. (Taking into account other explanations, like job transfers out of town and divorces, it could be even lower than that.) If close to 90% of buyers are either end-users (they are going to live in the house) or small investors with only one or two properties, then there’s no threat from so-called speculators who might quit the segment en masse and flood the market with properties, which could cause a crash.

Clearly, there are some simple explanations for why the Toronto housing market is so competitive. Still, plenty of people think that we should Do Something about it. Governments are great meddlers these days, and all three levels of government think they have to get involved in the hot Toronto real estate market – but what to do, really? The last time the city government stuck their fingers into the market they gave us the Toronto Land Transfer Tax. Years ago, that was pegged as an early cause of the supply problem in Toronto, as homeowners hunkered down and made renovations (or made do) rather than moved: why pay tens of thousands of dollars *more* in transfer taxes to City Hall? Lots of folks said ‘no thanks’, and that reduced the overall supply.

(For the record, I would rather see City Hall raise annual property taxes, based on the actual sale price plus inflation – NOT based on MPAC assessments. I think it’s fair to assume that a buyer who pays e.g. $850k for a house today has the means to pay property taxes on that house. On the other hand, charging the same tax amount to a senior who paid $30k fifty years ago for a similar house doesn’t seem fair.)

The feds have been playing around the edges of the mortgage market for several years, now. Of course, they knew from the beginning that Canada already had fairly stringent mortgage qualification rules, that our banks were relatively cautious and the mortgage market fairly safe. Also, the buyers  most affected by those rule changes are the first-timers, but I suppose it was easiest to throw that lot under the bus, eh? Honestly, I can’t see how tying the hands of young buyers impacts the million dollar market…. And, obviously, changing mortgage rules haven’t slowed things down.

Now we have talk of the provincial government getting involved. Ugh.

I believe that the bottom line is that we need more homes on the market. Without a steady supply of new listings, we are left with a logjam – almost nobody wants to sell before they buy, because buying is so difficult. What can the government to do help with supply? I’m definitely not going to suggest anything to make it cheaper for builders! They do just fine, and local governments really do need the money from development charges (to upgrade infrastructure to accommodate growth). How about better transit – dare I say a new subway line or two? That’s something that the senior governments could actually help with, and make a real difference. If the subway went farther, and to other parts of the city, the improved transit options would have the effect of adding supply, and it would encourage redevelopment in some areas (e.g. Scarborough). That would take some pressure off central neighbourhoods. Broader transit options that extend beyond Toronto’s borders would also help. TREB has been on about this for some time.

What about a foreign buyer tax? To me, that has a bit of the old “Canada for Canadians” ring to it…. On the other hand, if foreign buyers are treating our housing stock like just another investment, and in a manner that harms Canadians (inflating our market and decreasing our access to it) we have a right to address that. As much as I’m skeptical of government intrusion into markets, this one might help. (Yes, I realize that I’m at odds with TREB and OREA on this.) That would impact the demand side, and in a city growing like Toronto is one can’t say how much of an impact it would have, but if the Vancouver experience is any indication, it could make a difference – but, one that might be filed under Be Careful What You Wish For….

And what conversation is complete without blaming Millennials? Maybe if they could get out on their own, their folks would put the ol’ family homestead on the market and help increase supply! 😉

Without government intrusion, we could see a market that just ‘is what it is’. Builders would build more to meet the demand. Homeowners would sell and cash out, maybe move to a condo or the cottage, or take a work transfer to another city; such things happen all the time. Investors would build more triplexes, or divide up existing houses. Lots of things would happen naturally. What government intrusion into markets does is create uncertainty (“what the hell are they going to do next?”), and that doesn’t help at all. Governments can and should to more about infrastructure, trade and tax reform, and leave real estate markets alone.

That house sold for *whaaat*?!

March 28th, 2017 Posted by Blog No Comment yet

I’ve been a full-time, professional Realtor for almost 15 years, and I have seen lots of interesting influences and changes to the Toronto real estate market. Over almost that entire time, the market has been strong. As far back as 2002 there were people (buyers, the media, maybe even some Realtors) thinking that the run we were on then was due for a break. Well, the market roared along through the early 2000s. Then, the ‘Global Financial Crisis’ caused a dip in late-2008-early-2009, but that only lasted for a few months, and now barely registers as a blip in the charts. (Scroll down to the table TREB Housing Market Charts – TorontoMLS Average Price, Monthly Time Series With Trend Line.) Since then, the market has been charging ahead. Today, we have a reasonably good economy, moderate job creation and continuing low interest rates, which all points to a continuation. It seems like there is no end in sight….

The first few months of 2017 have been remarkable. I’ve never seen price increases like this – I doubt that many Realtors have. I have written before about the years-long supply problem we’ve been having, and it’s worse than ever. That said, the ‘spring market’ usually generates lots of new listings. That’s starting, but isn’t fully going, yet. So, we are still in a super-competitive time.

Current conditions are making it hard to figure out what a house or condo is going to sell for. My job as a Realtor is to chaperone my clients through the buying and/or selling process, including guidance on pricing – i.e. what a property is worth. We look at recent, local sales and compare them to the subject property (number of bedrooms/bathrooms/parking, etc.) to come up with a fair price that works for my client. To be certain, we’ve had competition (i.e. “bidding wars”) for years now, and it has always been winner take all. Still, these days it’s different. With some of the prices we’ve seen recently, either the buyer didn’t get that guidance from their Realtor, or they didn’t care: it’s ‘kill or be killed’ and only one offer is gonna win!

So, if you ask me what your house is going to sell for, or what we should put on the offer for that condo, we’ll go through the comparables, talk about your finances and come up with a reasonable number. But, don’t hold it against me if the final sale price is way more than that! That’s just the market these days. On the buy side, we’ll do our due diligence, craft good offers and make the best presentation we can…. If you don’t get it, we’ll move on to the next good option. On the sell side, it’s probably best to plan your budget based on a price close to some recent comps. Then, we’ll market the property right, and enjoy the process – because no matter what, you’ll do fine. 😉

 

 

February 2017 Market Review

March 14th, 2017 Posted by Market Review No Comment yet

Sometimes I feel like I could just copy-paste last month’s review, update a few numbers and be done! The Toronto market has been reliably consistent for years and years: prices go up. Sometimes the supply goes down and sometimes… well, it always seems to be down these days. 🙁

With the consistently strong demand for Toronto real estate, sales volume in February was up 5.7% to 8,014 transactions (7,583 in Feb ’16). There were just 9,834 new listings, down 12.5% (11,234 in Feb ’16). By the end of the month, only 5,400 listings were left on the market. At the end of Feb ’16 there were 10,902; that’s a drop of 50.5%. With supply dropping by half, it’s no wonder that prices continue to surge. The average sale price (for all housing types) leapt 27.7%, to $875,983.

Do you know anybody who is still dumping on the condo market? Tell ’em that sales in the 416 were up 14%, and prices climbed 18.2%. That’s getting up around low-rise rates of increase…. On the bright side, the average condo price for the month was $515,424, far below the average house price.

There are always multiple factors affecting markets – supply and demand, interest rates, land transfer taxes, the job market, foreign buyers, etc. – but the biggest, most obvious challenge these days is supply (which you know I’ve been on about for a while now). There are lots of qualified buyers ‘out there’, and they are fighting like mad to get the home they need in the neighbourhood they want… and sometimes the neighbourhood they didn’t know they wanted until they got priced out of one or two others! I see it every day, and there’s no getting around it. We need more listings, but there’s no easy solution to that.

This city needs more low-rise housing, better transit and improved infrastructure – I know, *news flash*, eh? Fortunately, there are always people who can cash out of the Toronto market and move to another city. There are lots of good reasons to do that, and I happen to know a couple of people who are doing that this year. Stay tuned! 🙂