Toronto's Downtown Real Estate Market Will Not Fail Anytime Soon
To be clear,
I am speaking of the condo and housing market in downtown Toronto. This is the market I have worked in for the past 15 years and this is the market I know and understand better than any bank economist or newspaper reporter or television news anchor. Unless you understand all the moving parts you cannot provide a complete and relevant opinion as to the outcome.
I am writing this to clarify exactly what has happened as I continue to hear people say, ”the writing was on the wall, it had to correct” or “I told you the housing market was going to fail”. The truth is, the underlying conditions and economic factors which initiated the housing market to heat up have not changed at all. In fact, so much so that the Province felt the need to intervene by creating and implementing legislation in an attempt to cool the market. This is all that has happened and this is exactly the same as what happened in British Columbia last year so we do not need to look very far to understand the effect and outcome of such legislation. Vancouver has fully recovered and prices have already risen to levels much higher than they were before the legislation was introduced. It is irrational to think the outcome in Toronto will be any different. In 2008 we had the largest economic crisis in most of our lifetimes and yet nothing happened so is it logical to think that this legislation will bring down the real estate market?
Of course not.
The legislation tabled by the Province is largely toothless and while it has been effective in the short term when combined with the ongoing media frenzy threatening a “collapse” in the real estate market. The result has been uncertainty on the part of would be buyers and a “wait and see” attitude has many sitting on the sidelines waiting to see what happens. This is nothing more than an over reaction and a confidence issue and will be short lived. With rents skyrocketing downtown right now buyers are already re-entering the market to purchase a home. The smart buyers are taking advantage of this lull in the market and purchasing their homes without having to compete with ten other offers. Others who choose to wait will likely pay more in a more heated and competitive environment. This is going to happen possibly by the fall and certainly by Spring 2018. This short term disruption is providing an advantage to Buyers as it was intended. The long term effect of the legislation will be an increase in condo and home prices and rents in the downtown core.
The new legislation is primarily aimed at foreign buyers who purchase very few resale condos or houses downtown. Instead, they choose to purchase new development condos in the pre-construction phase. Without these foreign buyers, it takes condos longer to be completed and less inventory will be added to the system both in the sale and rental sectors. Rent controls will make many domestic investors rethink their decision to purchase an investment condo which will again add to the already desperate supply shortage. The only result of all of this will be
LESS SUPPLY AND RISING PRICES.
What are the Real Inventory Numbers?
We do not have to discuss houses because there are still so few houses for sale downtown it is not worth tracking. Anyone who is currently in the market for a single family home will agree.
As for Condos, I keep track of the number of condos for sale and for rent in the downtown core on a weekly basis and I have a spreadsheet which has been accumulating these stats for years and despite popular opinion which has been formed by media manipulation of the facts, these are the real numbers for condos for sale and rent south of Eglinton between the DVP and Dufferin:
Condos for Sale: Condos for Rent:
July 25, 2016 1792 1187
July 24, 2017 1379 907
% change -23% -24%
These are the real numbers taken from MLS and they are irrefutable yet the media has manipulated the public into thinking there is a “flood” of property on the market and that we are oversupplied. Ask someone who is trying to find a rental downtown right now how desperate the shortage has become. At no time in July 2016 did you hear anyone in the media saying there was a “flood” of property on the market yet there was 24 percent more properties for sale and for rent at that time than there are today.
That is the inventory situation. Now, let’s look at the economic factors:
Residential Vacancy Rate: < 1% (lowest in North America and close to lowest in Toronto’s history). Developable land is becoming rarer as each parking lot becomes a new building. Land prices have increased five hundred percent over the past 15 years and this trend will continue at an accelerated pace increasing the cost and therefore price to the purchaser of new inventory. In addition, large development areas such as Cityplace, Liberty Village, and the Fort York area have been a consistent source of new condo inventory over the past 15 years and they are almost built out leaving mostly infill sites. Add to this the elimination of the OMB which like it or not is the only mechanism preventing the City Planning Dept. from saying no to every rezoning application. Without the OMB, there will be fewer new condos built which some people who own homes and condos will be happy about but for those who do not, it will mean rising prices.
Commercial Vacancy Rate: 4% (lowest in North America). To compensate Toronto is building more commercial office space than every before. Between 1990 and 2001 there were not any new office towers built downtown. In the past few years we have seen Bay/Adelaide 1 and 2, The Ernst and Young Tower beside Hy’s Steakhouse, the two RBC towers which Oxford has just completed on the Lakeshore, The Allied building at Richmond and Peter, the Telus and PWC towers on Bremner, RBC Dexia on Front Street, the new Globe and Mail building on King Street East and a lot more smaller projects completed. Construction is underway at the Allied site on King West between Portland and Bathurst and also on the old Globe and Mail/Downtown Toyota site at Spadina and Front which will see twos 50 storey office towers rise over the next few years. Cambridge Ivanhoe is building two 50-60 storey towers in the parking lot east of the Air Canada Centre on Bay Street complete with a rail deck park, CIBC is moving into two new office towers on Front street across from Union Station, Cadillac Fairview is building a new office tower on Simcoe, First Gulf is planning a 10 million square foot Commercial and Retail facility on the old Lever site at DVP and Lakeshore, General Motors is building a six acre development campus on Eastern Avenue on one of the movie studio sites and the list goes on and on. All of this means a lot more people will be working downtown and wanting to live downtown in the very near future.
GDP growth Toronto:
Population Growth: 130,000 GTA/Yr. There has been a consistent number of new residents in the GTA over the past number of years. In addition, Toronto is experiencing what a lot of Cities globally are experiencing and that is urbanization. The current trend is a movement from the suburbs into the core and we are seeing large corporations who received tax incentives from Mississauga and Vaughan for building their corporate headquarters in those Cities making a move to take on more office space downtown in order to attract the brightest and best talent who have no interest in living in the suburbs. Microsoft and Deloitte are two such companies.
Amount of Office Space being created: > 10,000,000 sq. ft (over 70,000 jobs) and another 10,000,000 square feet or more planned.
International Buyers: Canada and specifically Toronto and Vancouver are now on the map as an international destination to park money in assets as such as real estate. There used to be 10 or so countries which would receive the flow of money from international destinations but Canada was not at the top of the list. With growing uncertainty about the future or the EU, there are fewer people looking to invest their money in the Euro. In fact, of the 84,000 people globally who had a net worth or $1 Milion or more who relocated last year the top four countries to receive them were Australia with 11,000, United States 10,000, Canada 8000 and New Zealand 4000.
The argument that Canadians are carrying a debt to income ratio of 1.67:1 is a bad thing does not hold any water either. These figures include mortgage debt so would it be better if all Canadians sold their properties to foreign investors and then rented back the property from them so that our debt ratio would go down? Of course not, that is ludicrous. If you do not have mortgage debt then you have rent which is equal to and sometimes more than mortgage debt unless of course, you are planning on moving back into your parent's basement.
We all have to live somewhere and owning is the only way to ensure for the future that that place will be downtown Toronto.
I have heard a lot of poorly thought out arguments over the past 15 years as to why Downtown Toronto is going to have a real estate meltdown and most of which have come out of the banking and financial services industry and are fed to media outlets to try to scare Torontonians into divesting out of real estate and purchasing Mutual Funds.
Well, let’s look at this from a logical standpoint. There are far more people coming to work Downtown and it costs more to build new housing than the resale cost of existing housing. Therefore in order for new housing to be created, prices have to increase. In the absence of a major change in any of the major economic indicators including interest rates, unemployment or GDP growth housing prices will increase. This is the most simple economic principle of demand outpacing supply. It is inaccurate to say “the housing market had to correct, or what goes up must come down” at this point. In fact, none of the factors which are responsible for the meteoric rise in Toronto real estate prices have changed and they are not likely to change anytime soon.
This is one of the greatest Cities on the planet to live in but it seems that we are the only ones who doubt its value. For those outside of Canada searching the globe for a place to invest, it is a bargain. Whether we like it or not, in the absence of a recession or a dramatic increase in interest rates, real estate prices will continue to rise. To think otherwise is to ignore the facts.