In Toronto, a shortage of quality housing in the luxury sector is already beginning to be observed.
As for detached houses, and especially houses in a higher price niche, many factors that play a role in the lower price range condo sector lose their power. This property is bought exclusively for oneself, and people do not part with such property even in the hardest times – one has to live somewhere. That is, speculation is essentially excluded, and it is for this reason that the price growth for this type of property in the past year, although high, was still quite conservative.
A special place in this cohort of houses is occupied by houses in the upper price range, which are classified as luxury homes. Usually such houses are sold for quite a long time, and the fact that a house sits on the market for a year or a year and a half surprises few – it is a specialty product. But price fluctuations for such houses are almost nonexistent; it is a fairly stable market, since those who buy such property do not buy with their last money, and crises do not bother them much.
So, the situation in recent months in this sector has been such that demand is growing, and with it, prices. Most importantly, when speaking about Greater Toronto, a shortage of quality housing in this sector is already beginning to be observed. Moreover, the growth in prices and demand for this type of housing is observed not only in Toronto – the same picture is seen across Canada, and in the western provinces in much more extreme forms. Vancouver is generally breaking all conceivable price records, leaving Toronto far behind.
It is worth discussing the definition of what qualifies as a luxury home. In Toronto, these are homes with prices starting from $1.5 million. However, I find it hard to agree with this definition, because in reality within the municipal Toronto boundary, this figure should be $2.5 million, no less. The thing is that the $1.5 million threshold was set several years ago, and since then the price threshold for all types of real estate has risen, and risen quite significantly.
The definition of luxury homes with a starting price of one and a half million dollars is quite suitable for the suburbs of Toronto, where for this money one can actually purchase a large, impressive house on a large plot of land. Moreover, in the suburbs there is still the opportunity (the availability of large plots of land for construction) where such houses can be built. But within the municipal Toronto boundary, even a price of $2.5 million is in many ways the limit, if not greatly underestimated.
Be that as it may, statistics for the last quarter show that in Toronto, 269 homes worth over $1.5 million were sold during this period, which is 263% more compared to what was sold a year ago. Even compared to the pre-crisis year of 2008, the growth in sales of such homes was 71%. And this is a very important signal.
The fact is that the reason for such a sharp increase in home sales is not that more luxury category homes are being sold, but that prices have risen for all types of real estate, and homes that previously cost much less have fallen into the property sector valued over $1.5 million. And this is an important indicator – when the price of homes bought not by speculators but by people making long-term investments, carefully calculating their capabilities, rises, it speaks to only one thing: inflation has done its job, and we are talking about new realities in prices.
In this context, a simple question arises: how much can prices rise, where is the limit of their growth (in figures)? I think they can grow for a very long time if inflation continues. And it is occurring, and inflation is quite strong. There is no point in talking about any limits. Suffice it to recall that condos that cost around one hundred thousand dollars at the end of the 1990s now have a price exceeding the original by 3-4 times. The same applies to most houses.
Therefore, even if real estate prices increase another 2-3, or even 4 times in the next 10 years, after 10 years it will no longer surprise anyone; people will simply get used to it. This is a very interesting phenomenon – people first cannot accept the price increase, get indignant and do not want to believe that it is for long, then get used to it, and after some time stop noticing the increase. The same thing is happening now with the rise in real estate prices.
The reason, I repeat, lies in inflation, that is, the devaluation of money. Suffice it to compare oil prices a year ago and now – they have more than doubled. Moreover, unlike pre-crisis increases, the current price range looks quite viable and simply reflects new realities. But this is, as it were, the main indicator.
If we look at smaller but everyday things, it is evident that everything is gradually becoming more expensive. The same Coca-Cola or Pepsi-Cola, a two-liter bottle of which cost $1.69 a year ago, now costs $2.19. In restaurants, prices have also risen on average by 15-20% compared to last year. Subway fare increased from $2.75 to $3, although quite recently it cost $2.15. And so on for many items – a silent rise in prices. Even the minimum hourly wage in Ontario has been raised from $9.50 to $10.25, and salaries for many categories of already well-paid professionals are increasing.
All this is called inflation, and it is precisely the engine of real estate price growth in Canada. And as long as inflation remains high, it is unlikely that price growth will stop. Undoubtedly, government measures to tighten mortgage lending, the Bank of Canada's increase in lending rates, and other decisions aimed at curbing price growth will play their role. But they are unlikely to be able to stop it.
In conclusion, once again about the bubbles that are supposedly inflating in the Canadian real estate market. I do not think this phenomenon is occurring. At least in the Toronto market, there is no talk of a bubble. Moreover, in my opinion, there is still a very large potential for further price growth, as real estate in it is significantly undervalued. Given that Toronto is gaining more and more weight among the world's most significant cities, it continues to be very attractive for investment. At least, one of the main reasons for the rise in prices in the Toronto real estate market is the abundant inflows from foreign investors, who see the Canadian real estate market (and Toronto in particular) as a very reliable and profitable investment object.
Finally, what reassures me personally. Even in the worst-case scenario, that is, when the real estate market suddenly falls into stagnation (although I find it hard to imagine what would have to happen for that to occur), the government has the means to revive it. The tightening of credit policy currently being applied to curb price growth gives the government the necessary resource – just remove the introduced tightenings, and the market will come back to life.
Therefore, I have little faith in pessimistic forecasts, and I believe that the rise in real estate prices will continue in the foreseeable future.
Read also related material: INVESTORS MADE CANADA MORE EXPENSIVE
Elena RYABININA.
"Russian Toronto"