2018 Predictions for the Toronto Real Estate Market
With the multitude of government intervention that occurred in the Toronto Real Estate Marketplace last year, paired with constant hyperbole portrayed by the media, buyers and sellers alike are left standing on the front lines scratching their heads, with no apparent anticipation of which way the Market will turn as we roll into the new year. This ambiguity has everyone coming up with their own theories and speculation as to which direction Toronto’s Real Estate Market is heading. To clear the dust, I have laid out my Market Predictions based on the Market Fundamentals, Historical Trends, and the experience I have gained from working in the trenches of the fast-paced Toronto Real Estate Market, both as a broker and investor.
The First Half and the Back Half of 2018
Expect the first half of 2018 to be off to a somewhat anaemic start, which will be in direct contrast to the Market’s supersonic performance right out of the gate in early 2017. The implementation of the new stress test–which went into effect on January 1, 2018–combined with the anticipation of several rounds of interest rate hikes will create strong headwinds, causing many buyers to step back with a wait-and-see-approach. In the first few months of 2017, prices were increasing at an astounding 20-30% year-over-year pace until things cooled off with the Liberal Government’s Fair Housing Act announcement last April. As a result, the upcoming year-over-year numbers for January through to March will give many the false perception that the “sky is falling”. Perception is everything and people in Toronto are not used to hearing that prices have tumbled year-over-year, so this, in turn, will have the effect of putting an additional drag on the Market’s short-term behaviour.
While there most likely will be a softening at the start of 2018, I anticipate that the Market will ultimately re-adjust to the newest round of policy changes and interest rate hikes as it has done before in the past. Over time as the year-over-year numbers reported in the media begin to align (as a result of the slowdown in May 2017) things should start to stabilize at around the mid-mark of the year, with price appreciation and sales activity beginning to rebound in the back half of 2018.
In a recent report from Benjamin Tal, Deputy Chief Economist at CIBC, he cited that, “When the fog clears it will become evident that the long-term trajectory of the Market will show even tighter conditions and the supply issues facing centers such as Toronto and Vancouver will worsen as demand is routinely understated.”
Tal elaborates on this theory in a recent interview explaining that he anticipates the slow down to be short-lived and notes, “The problem is, the government is using demand to deal with issues that are supply-driven”. This notion is something we at Fox Marin have been saying for over a decade, and until all levels of Government begin to address affordability from a supply standpoint, there will never be an effective long-term solution to housing affordability in Toronto. Like many past government interventions, these actions will only serve as a band-aid solution induced by shortsighted political self-interest–which will invariably end up hurting the very people these policies are intended to protect.
Stress Tests and their Unintended Consequences
In Canada, 40% of homeowners are mortgage-free, and close to 58% of all Canadian households have less than $25,000 of debt, as per recent statistics put out by Dominion Lending. Furthermore, in October 2017 the CMHC released a report which indicated that the economy could handle a shock to its system of up to a 30% drop in housing prices across the country. Conversely, the two successive stress tests induced by the OSFI were aimed more at an attempt to bring affordability to the Toronto and Vancouver housing markets than to protect the liquidity of the Canadian Banking System. As noble as these intentions are, it has the unintended consequences of doing the exact opposite.
In October of 2016, the OSFI introduced a stress test for all uninsured mortgages–meaning anyone who purchased with a down payment of less than 20% had to qualify at 200 basis points above the current posted rates. This stress test primarily hit first-time buyers reducing their affordability by as much as 18%, forcing many buyers–due to affordability reasons–into the condo market and shutting out many other first-time buyers trying to enter the Market completely. In October 2016, when the first stress test came into effect due to the forced increase in demand, bidding wars became commonplace, condo prices began to soar and have never looked back (with the average condo in the GTA now selling for $533,000).
The latest stress test, effective January 1, 2018, means that those purchasing with 20% down or more will also now have to qualify at 200 basis points above the posted rate. This new qualifier will have the effect of reducing affordability for even more potential purchasers, causing an influx in demand for properties considered to be “affordable” (under $1M), which will further drive up prices for condos and townhouses. Look for these same condos and townhouses to lead the way in sales activity and price appreciation in 2018, and for even more first-time home buyers to be shut out of the Market, perhaps permanently.
The Rental Market
The other major story of 2018 will be the Toronto Rental Market. Given the current Market conditions, and the impact of the recently introduced rent control laws by the Liberal Government last year, Toronto’s rental housing Market is essentially a powder keg ready to be lit. According to Urbanation in Q4-2017, rents have risen by as much as 12.4% in downtown Toronto, with an average rental rate of $2,393 ($3.37psf).
Rising rents in conjunction with rent control are causing more tenants to stay put, further reducing already stressed available supply. In a recent report put out by Urbanation, they calculated that the average length of time between same-unit lease transactions was 22.8 months in Q4-17 (an all-time high), rising from 19.7 months in Q4-16. Expect this trend to continue with rents being pushed even higher into double-digit appreciation in 2018 due to limited supply, coupled with the increased demand of buyers turned renters caused by the newest round of stress tests.
What to Expect of the Toronto Real Estate Market Overall in 2018
All indications are that 2018 is shaping up to be another interesting year for the Toronto Real Estate Market. Condos and townhouses will lead the way in appreciation and rents are expected to continue to rise into the double digits. Freehold houses in the $1.2M – $2M range will more than likely remain flat until the latter half of the year, picking up steam as the market adjusts to the impact of the stress test and interest rate increases. I am projecting a slow start to the year with modest overall growth in the GTA market, being in the 4-6% range for 2018; however, as discussed, expect individual asset classes in specific submarkets to outperform the overall average.
Turning of the Screw
Multiple levels of government have been intervening the Toronto Housing Market with new policy changes and taxes designed to “fix” the affordability issue within the city’s Housing Market over the course of the last decade–with little to no success to show for its efforts. It seems like there is a new announcement or plan every six months, sometimes causing a flurry of activity well before a policy comes into effect; or, at other times, a brief pause while the Market adjusts to a new reality. In either case, after a short period, it’s business as usual and the Market realigns and continues on its upward trajectory. Rinse and repeat.The multiple levels of government’s focus on the Housing Market are on curtailing demand when it needs to be squarely on doing the exact opposite, opening up supply. As a result, with each turning of the screw by all three government levels, it is essentially ensuring significant future pricing appreciation in residential housing in Toronto. Let’s take a look at some of the repercussions of this activity:
- Land availability will continue to remain constricted as a result of the greenbelt enacted by the Ontario Liberals in 2005. Due to the scarcity of land, sale prices for available land has become very expensive. As a result of sky-high land prices, very few low-rise houses will be built in the future, and new condo prices will continue to rise in conjunction with increasing developer land input costs & rising municipal development levies.
- Rental housing inventory will remain constricted and more and more tenants will stay put, all in the face of increasing demand and rising rates. Many purpose-built rental projects are already being canceled, and fewer will be built as developers & pension funds are being persuaded to invest their capital elsewhere. Rent control has capped revenues but not costs, and the risks associated have become untenable for many developers.
- Similar to the net effect of rent control, the double Land Transfer Tax (Toronto is the only city in North America that has one, btw) will cause people who own houses to stay put as the “friction cost“ of moving up is very expensive and cost prohibitive, only further tightening existing supply.
- As a result of the new legislation brought in by the Liberal Government, the Local Planning Appeal Tribunal (LPAT) has replaced the OMB (Ontario Musical Board)–which was the body to decide on local appeals for development. With the turnover, the LPAT has much greater decision making power on condo development. Look for NIMBY (not in my backyard) local constituents to play a more significant role in the development approval process, further hindering condo supply at a time when we are just not building enough. Look for condo inventory to be severely hampered by this legislation with the effects to be felt in 3-4 years time once everything in the current pipeline has been built.
- Toronto is considered to be the most multicultural city in the world; and, as a result, it is a very enticing city for many immigrants to want to call Toronto home. The current immigration levels in Canada have recently been raised from 250,000 to 300,000 individuals, with close to 50% choosing to live in Toronto. To bolster our aging population, both the Federal Government’s Economic Advisory Board and the Conference Board of Canada are calling for an increase closer to 450,000 immigrants annually. If you think the current immigration levels into the GTA are significant now, once this policy increase is enacted it will be the equivalent of every man, woman, and child moving from Winnipeg to the GTA every four years.
These are just some of the top level examples of how over the next few years, we will have restricted and very limited availability of Land, rental inventory, low rise inventory (new and existing), and condo inventory for sale, all in the face of a rapidly increasing population–not to mention all of the millennials (1/3 of the population) looking to get out of their parent’s basements with a loan from the bank of mom and dad. You don’t have to be a genius to understand the long-term ramifications…..
What the Future Holds for the Toronto Real Estate Market
There is a lot of confusion, misinformation, and emotional energy surrounding the Toronto Real Estate Market, which is only to be compounded when looking at the market from a short-term (0-3 month) horizon. From this perspective, it would literally impossible to make sense of anything. However, once we can objectively step back and look at all the facts, the reality of the situation begins to emerge. Long-term prices are going to rise and rise dramatically. Barring a full-scale recession in Canada, housing in the GTA five years from now will be up by as much as 50%. When successfully looking at real estate as an investment vehicle, it is best done through long-term thinking, and I would encourage anyone trying to make sense of the Toronto Market to do the same. Once you do, things start to become a lot clearer.
Warren Buffet once wrote, “
I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years”. Anyone wise enough to apply the same investment strategy to the Toronto Housing Market will end up doing quite well.
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This article is written by Ralph Fox, Broker of Record and Managing Partner here at Fox Marin Associates. Ralph is a Torontonian native who recognized from an early age that the most successful people in life apply long-term thinking to their investments, relationships, and life goals. It’s this philosophy, along with his lifelong entrepreneurial drive and exceptional business instincts that help to establish Ralph as a top agent in the real estate market in downtown Toronto.
