Once affordable Toronto is becoming increasingly expensive
From one of the most affordable to one of the most expensive
As "Russian Toronto" notes, at the end of 2018, one of Canada's largest metropolises ranked 12th among the world's most expensive cities, joining the ranks of New York, London, and Paris, where average real estate prices are slightly higher than in Toronto. This is despite the fact that in the mid-1990s, real estate prices in Toronto were among the most affordable in major North American cities, not to mention European metropolises. For example, compared to New York, average prices in Toronto were at least 7-8 times lower.
Now we see a completely different picture: prices in these two cities have almost equalized. What happened over the past 25 years to bring about this result?
First, Toronto transformed from a dull industrial city into a world-class metropolis, confidently taking a place among the top ten most important business and technology centers in the world. What Toronto was 25 years ago and what it has become now is a huge difference; they are essentially two different cities. Naturally, these changes led to a noticeable increase in real estate prices. On average, prices over the past 20-25 years have grown by 7-8% annually.
Another explanation is that in recent years, rapid residential construction has taken place in the central part of the city, completely changing it. If 25 years ago the central part (what is called downtown) consisted only of industrial buildings and the housing stock was represented by old, unattractive houses, now almost the entire center consists of complexes of residential high-rises. Accordingly, this changed the demographics of the area, the number of residents sharply increased, the center came to life, with young people predominating. To a large extent, the price growth in Toronto occurred thanks to the condominium construction boom.
Finally, unlike the US and Europe, which experienced two serious economic crises in the late 1990s and 2008-2009 that primarily hit the real estate market, Canada avoided these crises. At least, Canada was the only developed country that went through the 2008 crisis without losses, and it had virtually no impact on it.
All this ultimately led to Toronto becoming one of the most expensive metropolises on the planet.
The main reason for price growth is a housing shortage
One of the main rules for investors is that you need to buy on an upward trend, when there is potential for price growth. But when prices have reached a ceiling, you need to sell. In this regard, the question arises: what is happening now in the Toronto real estate market, have prices reached their ceiling? And in general, does it make sense to invest in Toronto real estate if it is now one of the most expensive markets in the world?
To answer this question, it is worth considering the reasons for price growth over the past 20-25 years.
So, the main reason for price growth in Toronto is a simple shortage of housing. The city is a magnet for businesses, highly qualified specialists, students, and indeed anyone who needs opportunities. Toronto is not just the largest city in Canada and its business center; it is the third most populous metropolis in North America, one of the most important global business and scientific centers.
In this regard, Toronto is experiencing an active influx of population, including a large flow of immigrants, and highly qualified and wealthy immigrants at that. Housing construction simply cannot keep up with this growth, and the housing situation worsens year by year.
To a large extent, the reason for this state of affairs lies in the excessive regulation of everything related to construction. Canada has some of the strictest laws in the world on environmental protection, consumer rights protection, and there are many other areas that require expertise and inspections, plus the issuance of permits and inspections at each stage of construction takes time. As a result, developers have to wade through a mass of bureaucratic obstacles, and the construction process from the start of planning to the commissioning of the facility takes a considerable amount of time.
Also, municipalities impose taxes and fees on developers, obliging them to improve the surrounding space and upgrade adjacent infrastructure. All this raises the cost of construction, and developers have to carefully weigh whether to undertake a particular project.
In particular, over the past year, there has been a series of cancellations of condominium construction projects, including those where all apartments had already been sold – due to bureaucratic delays and rising construction costs, such projects became unprofitable for developers, and they considered it cheaper to stop the project and pay fines.
And although the new provincial conservative government is taking measures to remove bureaucratic obstacles, this process is complex, and it is unlikely that the situation will radically improve in the coming years. Therefore, the housing shortage will only increase. And as long as the shortage persists, prices will continue to rise.
Is there enough solvent population in Toronto?
Obviously, the housing shortage is the main factor in price growth. However, if there are no people who will pay for housing, then no one will buy it, and prices sooner or later should go down – at least in the secondary housing market. Therefore, the question arises: how many people in Toronto are able and willing to pay such prices?
Well, there are very many such people. Canada is generally one of the wealthiest countries in the world, and even if we do not take into account highly paid specialists, of whom there are many in Toronto, and do not take into account immigrants with money, who also mainly settle in Toronto, even local residents with savings are enough to support price growth.
Among local residents of older age, a large percentage are not just well-off, but very wealthy people. Many help their children and grandchildren with real estate purchases, and even that is enough to support price growth.
But, as mentioned above, the market is also influenced by highly paid professionals. They need somewhere to live, and even though housing is becoming more expensive, they will not leave Toronto, because only here can they earn high salaries—which, by the way, are constantly rising.
Higher housing prices mean they will have to pay them off longer, the living space will be smaller, and payments will eat up a more substantial portion of their income. But nevertheless, it is all quite affordable for them. Besides, real estate is still an investment, so people continue to buy it even though prices are already high—tomorrow they will be even higher.
Finally, wealthy immigrants. Since a large share of immigrants are wealthy people, especially from China, prices in Toronto do not seem high to them—on the contrary, compared to prices in Hong Kong or Shanghai, prices in Toronto are significantly lower. Therefore, this category is also actively buying real estate here.
Profitability of investments
Given that Toronto has a housing shortage and the rental situation is simply catastrophic, with a chronic lack of rental housing, investments in real estate continue to be extremely profitable. This is the reason why a lot of investment money from abroad flows into the Toronto real estate market. It is this housing shortage and the presence of solvent buyers that drive prices in Toronto and create a large potential for their further growth.
In confirmation of this, we can cite cities that Toronto is now in the same league with—New York, Los Angeles, Paris, London. Prices there have been very high for a long time, yet they continue to grow at least at a rate of 5-10% per year, and this process is irreversible.
It must be understood that this is a feature of all major global business centers, where people earn good money and are willing to pay more for housing. And Toronto is among them, so the trends here are exactly the same.
So the answer to the question of whether prices in Toronto will rise and whether it is worth investing in Toronto real estate is unequivocal: yes, real estate prices in Toronto still have good potential for growth, which means investing in real estate makes sense.
Another factor in favor of the argument that prices will rise is inflation. Inflation always occurs; it is an inevitable companion of the economy during times of growth. However, there are periods when inflation begins to accelerate. Right now is just such a period, a global phenomenon. And in such times, people prefer to invest in real estate as the most reliable and liquid instrument.
Geographic heterogeneity of prices
Finally, it is worth paying attention to the following—when talking about high real estate prices in Toronto, it primarily refers to its central part (downtown). However, Toronto is a huge city, especially if you take the entire Greater Toronto Area. And the farther from the center, the lower real estate prices become. Moreover, the difference can be very significant. And if in the last ten years or so everyone sought to move downtown, especially young people, now the trend of settling in the suburbs is gaining strength again.
Now more and more professionals are starting to work from home, and many companies are moving to the suburbs, where everything is cheaper. In addition, the Greater Toronto Area is actively implementing an ambitious program for the development of public transport, including increasing the number of lines and trains on suburban routes, expanding the metro that extends into the suburbs, building dedicated rapid bus lanes, etc.
All this makes living in the suburbs more preferable, especially given the significant difference in prices. And right now is a very opportune moment to buy such real estate, as the suburbs are clearly set for a real boom and price growth in the coming years.
As you can see, there are plenty of reasons to be confident in the further growth of real estate prices in Toronto. And therefore the answer to the question asked—whether it makes sense to buy real estate in Toronto now—is unequivocal: yes, it does.