In order to understand what will happen to the real estate market in 2016 and what factors will influence it, an expert from "Russian Toronto" suggests summing up the past year by analyzing the prevailing trends.
Changes in the global economy
The main feature of 2015 was that the Toronto real estate market depended on upheavals in the global economy, which had not been observed for a long time. 2015 was the year of entrenched low prices for energy and commodities. This, in turn, led to a redistribution of centers of gravity in the global economy – previously prosperous exporters of raw materials and energy began to rapidly lose their leading positions, while regions with post-industrial economies gained the opportunity to take the lead.
The most striking manifestation of these processes was the noticeable recovery of the U.S. economy, with the strengthening U.S. dollar against other currencies. In particular, the Canadian dollar, which was tied to oil prices, has slimmed down to almost 70 U.S. cents over the past year, although just 2-3 years ago it was at parity with it.
I have written more than once that in the economic sphere there are two Canadas – the western resource-based one and the industrial eastern one, which live almost in antiphase: when one prospers, the other experiences serious difficulties, and vice versa. Starting from the first half of the 2000s, when the rise in prices for raw materials and energy began, the western provinces prospered in Canada, while the industrial provinces of Ontario and Quebec were going through hard times. Now the situation is changing radically – the western provinces are entering a long period of decline, while Ontario, which is tightly integrated with the U.S. economy, is in the initial phase of an equally long period of prosperity.
The only problem is that the emerging trends of growth in the U.S. economy, and along with it the economy of Ontario, are unlikely to yield visible results before 2018. We still, with a very high probability, in the second half of 2016 – first half of 2017, will have to endure a global crisis with a serious downturn in the economies of China, Europe, and the BRICS countries. Which, albeit to a much lesser extent, will still affect the U.S. and Canada.
It is obvious that the listed changes – the fall in the Canadian dollar and the high potential for growth in Ontario's economy – will significantly affect the state of the Toronto real estate market.
Trends in the real estate market
The main outcome of the past year in the Toronto real estate market can be considered the rapid rise in prices for detached houses and townhouses. What happened last year has almost no analogues. At least, I cannot recall such a frantic demand as was observed throughout 2015, although in my forecasts a year ago I predicted a noticeable increase in prices for detached houses. But reality turned out to be much more brutal than my cautious forecasts.
There are two reasons for this buyer behavior – an acute shortage of land and a sharply depreciated Canadian dollar. And if the first factor has been evident for a long time, it is a constant in the equation, then the fall of the Canadian dollar became a "black swan." As a result of this unexpected factor, the cost of Canadian real estate, despite rising prices in Canadian dollars, decreased in U.S. dollar equivalent, which caused an influx of foreign investment into the Toronto real estate market.
Will these two factors continue to operate next year? Undoubtedly. In addition to my fulfilled forecast about rising prices for detached houses and townhouses, I want to particularly note another forecast regarding price increases in the secondary market of condominiums, which did not materialize. So, this forecast remains valid, it is simply postponed to this year. The fact is that the laws of economics have not been repealed, and if some factors have not yet worked, it only means that they will work in the future.
Which factors will be decisive
The main factor remains the shortage of land for development and the increase in its cost. The deficit is only growing, even despite the fact that municipalities in Toronto's suburbs are beginning to issue permits for development in places that were previously untouchable. For example, fertile lands of the "green belt." Also, permits for increasing density and height of development are obtained much easier and faster.
The shortage of land for development is caused by the rapid population growth in the Greater Toronto Area, and this process will only accelerate. Toronto with its satellite cities, due to the crisis in the western provinces, has actually become almost the only urban conglomerate in Canada where one can find high-paying jobs and where there are good opportunities for doing business. Therefore, a stream of specialists from other provinces has come here, and new immigrants also try to settle here.
Another factor influencing the creation of demand for detached houses and townhouses is the "millennials" generation, young people under 35, who make up up to a quarter of Toronto's total population. If in the previous 10-15 years they all sought to settle in downtown Toronto, which largely caused the condominium boom, then in the last few years a reverse flow has been actively forming. Condominium residents, having started families and had children, began to strive to move into detached houses or townhouses in the suburbs. This is a fairly powerful factor, as millennials are financially well-off, plus many of them can count on help from wealthy parents. It is noted that millennials are in many respects in a much better financial position than even the "baby boomer" generation, which is considered the standard of "luckiness."
The next factor is linked to the depreciation of the Canadian dollar against the US dollar. This factor began to take shape roughly a year and a half ago and has now come to exert a fairly strong influence. The depreciation of the Canadian dollar led immediately to two important consequences.
The first is the drop in prices of Canadian real estate when converted into US dollars. Given that the Canadian dollar has depreciated by 1.4 times against the US dollar, Canadian real estate has become cheaper by the same amount. And although in Canadian dollars the cost of houses and townhouses in Toronto rose by about 10% over the year, in US dollars it has become significantly cheaper, making it even more attractive to foreign investors. This has led to a noticeable influx of investment from abroad. In particular, those Canadians who owned property in Florida and Arizona are starting to sell it and invest the freed-up funds in Toronto real estate, as it is much more profitable.
Another consequence of the falling value of the Canadian dollar is that construction is becoming more expensive due to rising prices for building materials, since much is imported from the US. Incidentally, due to the change in exchange rates of the Canadian and US dollars in 2016, we can expect a noticeable increase in prices for food and goods that have so far remained at the same level.
Given that companies in Ontario will be doing fairly well due to the recovery of the economy, they will be forced to raise salaries for specialists to compensate for the cost of living in Canada, and this process will become widespread. If they do not do this, a mass exodus of specialists to the US will begin, where salaries converted into Canadian dollars are much higher.
What could cool the real estate market
Since the trends mentioned above will persist throughout the year, it is easy to assume that prices for detached houses and townhouses in Toronto will continue to rise.
It is worth noting that rising prices in the Toronto and Vancouver real estate markets are causing concern among experts who believe these markets are overheated and measures need to be taken to cool them. So how likely is it that the government will intervene and begin to regulate the market?
In my view, the likelihood of this is extremely low. The price growth in Toronto and Vancouver could be slowed by raising the mortgage lending rate and imposing restrictive measures on foreign investment. But nobody will do this, because for the fragile Canadian economy, which is in a transitional state, this could be a fatal blow.
Overall, real estate markets in Canada are in a dire state due to the crisis in the commodity and energy industries. An increase in the mortgage rate would simply finish them off, without having a serious impact on the Toronto and Vancouver real estate markets, which stand apart and each live by their own laws, unrelated to the rest of Canada.
Also, the government is unlikely to introduce any measures that could negatively affect the country's construction industry, which is a key sector in Canada's economy. In particular, limiting the inflow of foreign investment could become a strong destabilizing factor that no one would dare to take on.
The only thing that can really affect the rate of price growth in the Toronto real estate market is a global crisis, which is possible in the second half of 2016 and early 2017. But whether it will happen, and if it does, how strong its impact on the Canadian economy will be, is difficult to say now.
Personally, I think a crisis is very possible, but it will hardly affect Canada. On the contrary, it will open up additional opportunities for it. Moreover, the situation may turn out such that due to the conflict in the Middle East, oil prices could go up again, and then instead of a market cooldown, we could see an even more rapid price rally than in 2015.
I repeat, this year may bring many surprises. However, the intrigue of the moment lies only in how much prices will rise and in which market sectors. But that they will rise, I personally have no particular doubt.
Attractiveness of real estate for investment
So, the main result of 2015 can be considered that real estate in Toronto has sharply cheapened when converted into US dollars. This will determine the situation in the real estate market.
Real estate prices in Toronto were already noticeably lower than in global metropolises of a similar level, making it extremely attractive for investors. Now, after the fall of the Canadian dollar, its attractiveness has only increased.
Most importantly, everyone understands perfectly that the slump of the Canadian dollar is caused by the fall in oil prices, while for a long time the Canadian economy was focused on the development of the commodity sector.
It can be predicted with fair confidence that within the next 3-4 years, oil prices, while not returning to previous levels, will still rise noticeably. After the redistribution of the oil market ends, they will be brought back to a level comfortable for oil-producing countries.
Non-commodity sectors of the Canadian economy will also grow, being integrated into the US economy, which has now entered a phase of prolonged expansion.
As a result, in the next 2-3 years the Canadian dollar should strengthen, and in dollar terms the value of Canadian real estate will also increase. Therefore, now is a very favorable time for investment in Toronto real estate. The conclusion is that demand for it will remain high in the coming years, which will affect the rate of price growth.
It is also worth recalling that the Canadian real estate market is considered very reliable, and investors prefer to put money into it in troubled times, when other markets, even if more profitable, become too risky. These times are now upon us, and talk of an impending global crisis is becoming a common topic.
Condominium market
Speaking about the prospects of the real estate market in 2016, I want to especially note the secondary condominium market. The fact is that the price gap between apartments in newly built condominiums and homes in the secondary market is becoming more than noticeable. At the same time, the inevitable increase in construction costs due to the low Canadian dollar will lead to an even larger gap.
As a result, at some point the psychological factor should kick in, after which there will be a surge of interest in apartments on the secondary market.
This is also facilitated by the fact that prices for detached houses and townhouses have become so high that for a large layer of buyers they have become simply unaffordable, so condominiums for many who want to buy their own home actually have no alternative, which creates increased demand in the condominium market.
Therefore, I personally tend to think that the main activity in the Toronto real estate market in the coming year will take place in the condominium market.
Summing up, we can say that by all indications we are in for another rise in real estate prices in Toronto in 2016. The only question is how high this rise will be.