Real Estate Forecast for Downtown Toronto
The overall number of sales registered on MLS for the year 2018 was 77,000 which is the lowest number of transactions since the early 2000’s. Prices increased at a modest pace with year over year gains in the condo sector of 4.5%. Transactions are down because prices are up and the number of Torontonians who can afford to purchase a condo is in decline. A 1.25% increase in rates, a 2% stress test and the largest price increases year over year ever recorded in the condo sector in 2017 was a lot to handle. That is the past now let’s look at the future.
Toronto is hot and rightfully so.
Rated as one of the top five cities in the world in which to live in almost every study conducted for the past 5 years and located in Canada which boasts the second best quality of life of any nation on the planet it is not hard to understand why real estate prices and rents are on the rise and this trend is expected to continue moving forward. Now the second largest banking hub in North America next to New York City and soon to be the second largest tech hub in North America next to silicon valley, Toronto is growing at such a rate that residential construction cannot keep pace.
Toronto has the lowest residential vacancy rate and the lowest commercial vacancy rate in North America and currently has thirty million or more square feet of office space in the pipeline or currently under construction in the downtown core which is the most at any one time in the history of the city. At the same time, the downtown core’s ability to produce residential housing is on the decline. Gone are the many surface parking lots which blanketed the core in the 1990’s and large tracts of land such as Cityplace, Liberty Village, Fort York Blvd and the West Donlands are almost completely built out. What does all of this mean?
Well, it means that we will not be able to build as many units in the future as we are building today at a time when the need for residential condo supply is greater than it has ever been. The scarcity of land and increase in construction costs and city taxes on new construction are going to accelerate the increase in prices in the condo sector for the foreseeable future. Chronic undersupply of condos will be the dominant market force in the coming years.
Canada is a full employment and needs more people.
Just two years ago the Canadian government was limiting immigration to this country to 260,000. By next year, that number will be closer to $350,000 (a 35% increase) with the bulk of those newcomers settling in the GTA. Many of these newcomers are bringing with them large amounts of wealth to invest in the Canadian economy and to a large extent real estate. In fact, in 2016 the four countries in the world to receive the most newcomers with a net worth of $1,000,000 or more were 1. Australia, 2. United States, 3. Canada and 4. New Zealand. An increase in population combined with less new housing will again put upward pressure on prices. I expect that in the very near future, the opportunity for Canadians (except the very rich) to purchase and own an investment condo as a way to build wealth towards their retirement will be lost.
Only the very rich (foreign or domestic) will be able to afford to own real estate. Resale investment properties now require 50% down in order to qualify for a mortgage based on rental income versus costs. New construction is moving in the same direction. For the past 15 years anyone could purchase a preconstruction condo with just 15% down (in 2003 a one bedroom downtown could be purchased preconstruction for $150,000 with $22,500) but now most developers are requiring 20-25% ($100,000-$125,000) and you can expect the percentages and the amounts to rise moving forward. I can see a future where the number of projects for sale in the downtown core diminishes to just a few. It is not unreasonable to think that developers will be asking for 100 percent of the purchase price up front and then you wait until the building is built. Why use expensive bank money to construct when it is not necessary.
In the short term, the first half of 2019 will see very moderate price growth in the condo sector with most of the growth happening in the latter half of the year. Inventory of condos for sale in the downtown districts (south of Eglinton between DVP and Dufferin) as of January 7, 2019 are at the lowest level since Jan. 4, 2010 (588 units) which will continue to put upward pressure on prices which theoretically should result in price increases. However, other factors such as rising tensions between the west and China impacting trade and market confidence and problems in the Vancouver real estate market linked to a pullback in Chinese investment may hold price growth back in the next few months. Vancouver’s market is completely separate from the Toronto market and the factors affecting it are unique to Vancouver but the media effect of scaring consumers with “could Toronto be next” stories will have an influence on consumer confidence. Mid to late 2019 I think we can expect some relief with respect to mortgage rates as healthy competition between lenders will benefit consumers. Toronto is suffering from a severe shortage of property for sale and for rent and that is not going to change anytime soon if ever. For anyone looking to own a home or condo in Toronto, the first half of 2019 will be as good of an opportunity as it gets for resale buyers. Wait too long and you may find yourself competing in multiple offer situations by the end of the year.