Toronto remains the country's main economic center, attracting specialists from all over Canada
An expert from the publication "Russian Toronto" does not share the general optimism, although she is confident that the current problems in the real estate market are temporary and the market will recover. However, this is unlikely to happen in the coming months.
Statistics that gave reason for optimism
Data on residential real estate transactions in Greater Toronto for October showed a 12% increase in sales compared to September. An average annual price increase of 9.7% was also noted, with a 0.6% increase compared to September. This increase in the number of transactions, the price increase, and the overall positive dynamics allowed realtors and economists to start talking about the market having bottomed out and resumed growth.
I repeat, I do not share the general optimism, although six months ago I wrote that it would be in October that the market would begin a correction toward recovery. Below I explain why I do not consider the current surge in the market to be the start of a full recovery, and what factors are hindering it.
Why prices will rise in the medium term
I have explained the reasons for my confidence that prices in the Toronto real estate market will rise for years to come many times in my previous articles. So, all those factors that work to heat up the market and increase prices have not gone away. On the contrary, the situation is only worsening.
In particular, construction costs are not decreasing. On the contrary, they are only rising, including due to increased tax burden on builders and the cost of project preparation due to bureaucratic red tape in municipal authorities. Getting a building permit is as difficult as before, although the city is actually experiencing a full-scale rental housing crisis.
For example, just days ago it was reported that the Museum Flats condominium project was closed. Despite the fact that this project received a lot of positive feedback, the apartments were almost completely sold, and the developer had already invested millions of dollars in preparatory work. Nevertheless, it was decided to close the project because the municipality did not issue a final building permit, and it was unclear when it could issue one.
Or another example. The federal government is preparing to change building codes, planning to tighten them in terms of increasing energy efficiency. This means using more expensive materials in construction and major home renovations, more massive insulation, installing more expensive energy-saving household appliances and service units, and so on. This will add at least $35,000 to the cost of an average home.
Another reason is that Toronto, which was and remains the country's main economic locomotive, attracts specialists from all over Canada because it is easiest to find a job here, and a high-paying one at that. In addition, Toronto is visibly gaining weight in the world ranking – after it secured the status of one of the main global financial centers, it is now confidently asserting itself as one of the main innovation and technology centers of the Western Hemisphere. All this also works to attract large companies to Toronto, which need more specialists.
For example, quite recently Google chose Toronto as its main platform for creating prototypes of the city of the future. Toronto is also considered one of the main contenders for opening a second headquarters for Amazon, which promises to invest $5 billion and create 50,000 jobs.
And of course, immigration is an important factor. Against the backdrop of Canada increasing immigration intake, with plans to accept almost 1 million people in the next three years, according to the most conservative estimates, about 170,000 of them will settle in Toronto.
Even taking these factors into account, it is obvious that one cannot expect a decrease in demand for Toronto real estate, nor that prices will stop rising.
Reasons for the current situation in the real estate market
So what is the reason for the current situation, why did the market suddenly freeze, and why such optimism about the increase in sales?
Let me remind you that in all previous years, prices in Toronto and the suburbs grew at a fairly rapid pace. However, since the beginning of 2017, the market has entered a qualitatively new state, prices began to gallop, and there was literally a fight for every house. In particular, in April, the average price of a property increased by 33% compared to average prices in April 2016.
For those who are well versed in the Toronto real estate market, the reasons for such a surge in activity were, in general, understandable. As was the fact that the market should have cooled down by summer and returned to its usual state. Market mechanisms should have done their job.
However, the Ontario government decided to intervene in the situation, as it seemed to them a good opportunity to score points before the elections. The fact is that housing affordability is a rather sore subject in Toronto, and Kathleen Wynne decided to show concern for people in this way.
As a result, the Liberal government introduced a 15% tax on foreign buyers of real estate in Toronto, limited rent increases to 2% per year, and introduced a number of other administrative measures. That is, it actually decided to start regulating the market by command methods.
Naturally, these measures did not make housing more affordable in any way, and certainly did not stimulate the emergence of new housing. These measures only scared sellers, buyers, and investors. Sellers temporarily removed their homes and apartments from the market – no one will sell real estate cheaply. Buyers froze in anticipation that prices might go down and began waiting for that to happen. Investors simply left for other jurisdictions where they were welcome.
As a result, the market froze. In May-September, only those who had no other choice were selling – for example, if people had bought a house or apartment before the new rules were introduced and needed to sell their property at any cost to pay for the new purchase.
Exactly what I wrote about in April-May of this year happened, when the government's measures to cool the market were announced. Then, I recall, I advised everyone who was thinking about buying a house or apartment to do so in the summer, because that was when there were a large number of sellers who needed to sell their property at any cost. At the same time, I wrote that by mid-September all these homes would leave the market, the market would recover, and in October we could expect an increase in sales and a resumption of price growth. Which is what happened.
Why it's too early to expect a market recovery
So why don't I share the general optimism, despite my forecasts coming true? The fact is that the government has not stopped interfering in the market. True, now it's not about the provincial government, but the federal one.
The fact is that economists predict a recession for the Canadian economy, even though it is currently showing good growth, higher than any of the G7 countries. If this happens, the large debt Canadians have taken on in the form of mortgages could become a problem. Therefore, the government is trying to act preemptively by tightening mortgage lending rules.
As a result, the new mortgage rules, which significantly increase the annual income requirements for borrowers, will make it impossible to get a mortgage sufficient to buy a house or even a large apartment. That is, a large number of potential buyers are being washed out of the market and will move to the rental market. This tightening of mortgage rules will be the limiting factor for the growth of the Toronto real estate market at the beginning of next year.
In general, it should be noted that the government's measures, both provincial and federal, lead to nothing good. Most importantly, they deal a tangible blow to the economy and increase the risks of entering a recession, which they themselves are trying to avoid and are very afraid of.
Forecast for the future
As I see the situation, the problems of the Toronto real estate market are not over yet. The surge in October is indeed largely the expected correction I wrote about six months ago. However, an additional push came from those who planned to buy with a mortgage. They are now rushing to take advantage of the opportunity to get one, because after the New Year, it will be unrealistic for many.
Therefore, it is quite possible that activity in the Toronto real estate market will continue to increase until the end of the year – even though usually from mid-November the real estate market would quiet down, and any activity would cease before Christmas.
As for 2018, the situation looks like this. Personally, I have the feeling that next year could be one of the most unsuccessful for the Canadian real estate market. Undoubtedly, the Toronto real estate market is not as susceptible to fluctuations, but it will not escape the crisis that the federal government is creating by tightening mortgage issuance.
Usually, seasonal activity in the market begins in mid-February, or, as was the case this year, already in January. However, in 2018, as I see the situation, due to the complication of mortgage rules, it is unlikely that we should expect high activity at least until mid-spring.
What will sell next year?
The real estate market is heterogeneous, so each segment will react differently. In my opinion, the condominium market will remain active. It is worth noting that over the past six months, condominiums have been actively bought and sold, and it is in this segment that price growth has been observed – compared to last year, prices in this segment rose by 21.8%.
By the way, a couple of years ago, condominium prices hardly rose, and I wrote that this was abnormal. The gap between prices for single-family homes and townhouses on one hand, and condominiums on the other, was too large. Therefore, I expressed confidence that we should expect a noticeable upward correction in condominium prices, which we are now seeing.
I think this growth will continue. But the main interest of buyers should shift to newly built condominiums. In principle, purchasing apartments in newly built condominiums has always been a good investment, but in the last two years this segment has literally been booming, with demand increasing many times over.
Given the new mortgage rules, huge demand for rental housing, and growing need for new housing, buying an apartment in new condominiums from the developer is becoming almost the only chance for many to become homeowners. The fact is that when you buy housing from a developer at the initial stage, you take possession of the apartment only after 3-4 years. That is when you will need to take out a mortgage, and for foreigners, pay the foreign buyer tax. However, there is a high probability that in 3-4 years the foreign buyer tax will be abolished, mortgage rules will be significantly eased, and the government will generally stimulate real estate purchases. Many people understand this. Therefore, I think that the new condominium market will become the main platform for real estate transactions in the next couple of years.
As for detached houses, one should hardly expect much activity in this segment. I think, at best, sales next year will increase to the level of 2-3 years ago. Prices will rise, but at a slow pace.
At the same time, as I see it, different areas and different types of houses will behave differently, to the point that the dynamics will be completely opposite. The fact is that in such uncertain times, good real estate in good areas will continue to be in demand, while everything else that has flaws will get stuck on the market and such properties will have to be sold by lowering the price.
The whole set of factors – the prospects of a worsening economic situation in Canada, the outflow of foreign investors, the tightening of mortgage lending rules, and the completely clumsy actions of the government both in regulating the real estate market and in the economy – all this will create negative dynamics. In this situation, the government will have no choice but to start stimulating the economy, primarily the construction industry and the real estate market in general. As a result, with a very high degree of probability: Ontario will repeal all those measures that have led to the current situation in the Toronto real estate market; mortgage lending rules will be eased; Canada will be made attractive to foreign investors.
Therefore, in the next 2-3 years, I expect a market recovery. Once the market stabilizes and buyers gain confidence, then we should expect a sharp rise in prices. Practice shows that the real estate market always recovers. At least, price growth in Toronto real estate of 10-12% per year has always been there, so if we don't see it in the next year or two, it means future growth will be 20-30% per year or even higher – roughly what we are now seeing with condominium prices.
Advice
In my opinion, the next two years will be favorable for buying detached houses as investments. Since growth, if any, will be small, there is an opportunity to pick very good options that a year ago were selling off the market in a few days with a large premium. At least, now in Toronto there is a unique moment to acquire such property.
Another investment platform is new condominiums under construction. Given the shortage of rental housing in Toronto and the high demand for housing, especially in the central part of the city, apartments in such buildings will be in high demand.
I do not yet have full clarity regarding condominium apartments on the secondary market. On the one hand, their prices have already risen enough to continue growing at such a pace. Although the potential certainly remains, even considering the difficulties of obtaining a mortgage and the resulting exit of a large number of potential buyers from the market.
On the other hand, it is now profitable to buy apartments for rental, given the high rents and the shortage of rental housing observed in the city. Therefore, I think that for some time activity in the condominium market will continue, and with it price growth. Then a relative lull may set in, and after two or three years, the situation with price growth will repeat.
All this, of course, is only speculation based on an assessment of the current situation and current trends. Therefore, one must understand that any new government decisions and especially changes in the economic situation in Canada will lead to a change in this forecast. But it can be said unequivocally that through all storms and changes in direction, the Toronto real estate market has always been, is, and will remain extremely reliable for investment, with guaranteed appreciation in the coming years.