The Future Of Toronto’s Real Estate Market: You Decide

TorontoCondoSkylineCN

I don’t usually plug other websites on TRB, but we had a gentleman from Urbanation.ca in our office last week, and he showed us some fascinating stats about the Toronto real estate market.

These are the kind of numbers that you can never find when you want them!

They’re also the kind of numbers that a lot of TRB commenters wish they had when they’re sparring back-and-forth.

So how about this, for a change: I’ll throw up the slides, and I’ll keep my mouth shut about the market.

You guys draw the conclusions about where our market is, and what the future holds…

 

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13 Comments

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  1. Kyle says:

    What these charts tell me is that supply is really tight, in fact i’d say there is a shortage of condos at the moment. And i see that situation getting far worse. In Toronto the new condo market has been the supply engine for the rental market as well as for end users. In the last few years there’s been a shift back to building purpose built rentals again. These rental projects are competing with the Developers for land and resources, which will further constrain the supply of new condos.

    I think over the next few years we’re going to see a tipping point, where Toronto becomes more like other big cities and people end up renting instead of owning. Similar to how detached houses were once the dominant form of housing and now condos are the dominant form. I see renting becoming the more dominant form of tenure over owning.

    1. crazyegg says:

      Hi,

      I would agree. Toronto is quickly becoming a world class city (if it isn’t yet already). World class cities typically are rentals only, especially in the downtown core.

      The easy money in the short and medium terms is in the RENTAL MARKET. Those who have had the good fortune of acquiring property in high demand areas 5+ years ago are in the money. The ROI (i.e. the investment being the deposit amount you paid and not the sale price of the investment), should be around 4% or so (maybe higher).

      How crazy is the rental market? There were 15 people line up for an open house for a 300SF rental bachelor apartment on my first floor of my principle residence in East Toronto. The prospective renters were all millennials and desperate for a cool pad to call home. All I wanted was $950. But the final price was an insane $1050.

      Regards,
      ed…

      1. Kramer says:

        “52% of new condo units are bought by investors” – i.e. to rent out, not to live in.

        When I first heard that statistic I felt a bit sick to my stomach, because at any point investors can “easily” dispose of their investments (i.e. “easier” than those who live in the property, as their home, and will still need a place to live after).

        When investments become overvalued, investors will sell. There is little good reason to hold a share of a Apple stock if it is 20% overvalued – the risk vs. return is not worth holding on to it when you could sell and reallocate the capital to something that is now a better investment… and at the end of the day, real estate is but one asset class of many to invest in.

        If the point comes when Toronto is without question overvalued (AND we have increasing interest rates), there could be huge selling pressure because of data related to this 52% of condos sold as investment properties, and if this selling pressure solidifies and the market flattens for a while or starts declining, no longer will 52% of every new condo be sold to investors… this could in turn throw water on the mania of any kind of buyer needing to get in to the market NOW… MEANWHILE, millennials could have gotten used to renting a condo, enjoying the flexibility of renting, and investing in other asset classes and being happy with the returns, especially as they watch all these geezers just ahead of them start to take hits on their real estate investments. Real estate could lose its “sexiness” as an investment for the common Joe Shmo like me, and something else could take its place. I recently began taking immense pleasure in adding stacks of shares of wonderful companies that I want to hold on to for 20 years… the thrill of this has replaced my thrill of owning an investment condo (which was much more work than owning shares of Berkshire Hathaway). If this can happen to me, it can happen to anyone.

        I guess what I’m trying to say is that the landscape could change drastically in a very short period of time BECAUSE 52% of all new condos are currently investments.

        Thoughts?

        1. Ralph Cramdown says:

          Some investors might sell in that situation, but others might be facing a high mortgage break fee or be confident that their unit would still cash flow and keep paying down the mortgage (and that they’d have no trouble renewing), and ride it out. But new investor demand would drop precipitously.

          1. Kramer says:

            True, at the end of the day it’s a pretty illiquid investment, relatively speaking, even if the demand is so huge.

        2. Kyle says:

          I think their definition of Local Investor will make a big difference to the risk assessment. If it is people buying to speculate (i.e. people buying pre-con, hoping to sell for more at completion) than i’d agree that’s probably building up risk in the system. If it is people buying to rent out, i don’t see any issues. If anything there is a shortage of rental condos available. And unless there is a reversal of population trends or job growth, i just don’t see that shortage going away. There simply isn’t any relief on the supply side and the demand side keeps growing.

  2. Libertarian says:

    I’m not surprised by the charts at all. Our country is obsessed with real estate ownership. Everyone and their grandmother wants to buy, buy, buy, and buy some more. Buy your primary residence, then buy condos as investments, then buy apartment buildings, then buy cottages, etc. Leverage yourself as much as EFFing possible! Make 15% per year, it’s easier than stealing candy from a baby.

    As for the future, will anything happen in the short-term to change that obsession? It seems to have happened in Vancouver with the foreign tax. We will have to see what the federal government’s changes will do, if anything. Of course, our socialist Premier wants to bribe some voters, so she will undo what the federal government did, by enacting pro-ownership rules here in Ontario. But, apparently, only for first-time home buyers. CPP changes come into effect soon, which will lower everyone’s take-home pay. Maybe Trump’s victory will cause interest rates to increase, which will eventually lead to higher mortgages. But Trump is unpredictable at this point.

    I’m not a gambling man, but I’m guessing that the next 10 years won’t be as frothy as the last 10.

  3. Gord McCormick says:

    Could you translate the chart titled “% of units sold to local investors” Does this say that 52% (average/median) of units sold in Q3 were to local investors vs buyers who plan to live in the property? Or does it say that 52% of investor sales were to locals and 48% (on average) were to non-local investors?
    This chart is a good example why data is most times only as good as the interpretation..

    1. crazyegg says:

      Hi,

      This chart is confusing as hell to me too and I am a market researcher by trade…

      How I interpret this chart is that Domestic Investors tend to favour larger projects (with more units) moreso than smaller projects.

      The 52% is an average line (of best fit) for the percentage of total projects that are owned by Domestic Investors.

      Regards,
      ed…

  4. Kyle says:

    Sort of…

    I am not a Developer, but based on what i hear from Developers the issue is this: Supply is not a rheostat, there is a long delay between when a project is planned and when units are sold. And demand changes over that time period. If demand increases the way it has, there is a long lag before Developers can respond with more supply. That’s IF they can even respond with more supply. Right now you need to assemble lots in order to launch a new project. This takes time and adds to the lag. Then you have design, zoning changes and approvals which could take up to 2 years before you can launch. At launch, they need to pre-sell enough units to get financing, at the going $/sq ft. Then comes construction, which is currently being constrained by lack of crews and cranes. After construction they may sell then sell the remaining inventory at the new higher going $/Sq ft. So you’re right they’re leave money on the table by pre-selling more units at the lower $/sq ft and not holding on to more units to sell at the higher completion $/sq ft. And from what i hear, Developers recently are now holding more units until completion and then either renting them out or selling them at the higher completed price.

  5. Ralph Cramdown says:

    If supply is the lowest in ten years and absorption is the highest, does that not mean that developers have been leaving money on the table, in an effort to sell units more quickly rather than for higher prices? Also, was Urbancorp big enough that its spectacular implosion would have significantly affected these numbers? Honest questions not intended to be rhetorical, both of them.

    1. Appraiser says:

      @Ralph Cramdown:

      The condo market is highly competitive in Toronto such that it would not be difficult to conclude that market forces are determining prices. As for leaving “money on the table” it is well to remember that demand is difficult if not impossible to predict and time is money. Whether or not more profit could have been realized in retrospect is purely theoretical. Hindsight is always 20-20.

      As for Urbancorp, I think you already know the answer. Not only were they but one of scores of developers in the city, but their bankruptcy did little to limit supply. There were only six projects affected, most of which were low rise and all of which were snatched up by other developers including Fernbrook and Mattamy Homes after 76 formal bids for the properties were received, according to court-appointed monitor, KSV Advisory.

      http://www.theglobeandmail.com/report-on-business/urbancorp-home-buyers-lose-fight-to-complete-their-purchases/article31935772/

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