Well, maybe Thursday’s blog was a mouthful.  But can you blame me?  All that time off over the holidays without an outlet for my thoughts – both about real estate, and not, and you had to know that the first blog back in January would be lengthy.

It’s blogs like these that often make me feel guilty of being unoriginal, however.

Is our market really the “same old, same old?”

Prices are rising, affordability is falling, inventory is low, bla, bla, bla.  That’s the same-old, same-old, but trust me when I say that once our market is underway in a few days, we’ll be exploring new trends, business practices, and I’ll be regaling you with stories galore!

For now, it’s the question(s) at hand.  It’s the adults in the room.  It’s the serious talk.  It’s the topics that we need to put at the forefront of all real estate discussions if we want to be informed and ahead of the curve.

So let’s pick up where we left off last week…

3) Will the rental market regain lost ground?

If real estate is a zero-sum game, then it’s hard to have a “winner” without a “loser.”

But the only true “winners” to come out of the pandemic in the Toronto real estate market were tenants.

My cynical side says it’s because many of them were allowed to get away with not paying rent, or packing up and moving out in the middle of the night, sticking their landlords with vacant properties and avoiding their contractual obligation.  But aside from the government basically telling people, “It’s okay to not pay your rent,” and scores of gainfully-employed individuals taking advantage of this, I’d say that the decline in rent rates in Toronto was truly a big “win” for renters.

For those of you who don’t know just how much rents in Toronto were affected by the pandemic, here’s a graph from my colleagues at Bullpen Research & Consulting:

The decline in rents, specifically in Toronto, cannot be understated.

The onset of the pandemic in 2020 absolutely brutalized the rental market, and the market has still not made back those gains.

However, the rental market did gain ground last year.

In Bullpen Research & Consulting’s December newsletter, we see that an overwhelming majority of the recovery happened in the summer and early fall of 2021:

The average rent for all property types in the GTA was up 4.3%, year-over-year, in November of 2021, as we don’t yet have the December data in hand.

But the above chart shows you where and when much of the ground was made up.

Perhaps the mad dash to secure rentals for September 1st, that took place in June, July, and August, can explain this.

Just look at the increase in the average price of a bachelor condo, which went from $1,454 in June to $1,547 in November.  With movement like that, it won’t be long before rental prices have exceeded pre-pandemic levels.

There are two reasons why we care about rental prices:

1) Because renting is a component of the real estate market, even if most of us only concern ourselves with sales
2) Rental prices will ultimately have an impact on resale prices, especially in world of downtown Toronto condos

I’ll be honest when I say that in 2021, most of the investors I represented look at current rents along-side pre-pandemic rents, or “future rents.”  I’ve never been a huge fan of this move, especially when you see the listing agent for a four-unit property advertising a 4.8% cap rate, only to dig into the financials and see it’s based on “estimated rents,” which are 30-50% higher than “current rents.”  If the property has a tenant who’s been there for twelve years, and clearly isn’t going anywhere, then what good is that estimate of a future/current rent?

But in the downtown Toronto condo market, there’s more turnover than ever before.  I would estimate the average length of tenancy for a 1-bedroom condo to be about 1.5 years.  If you’re a landlord, you might be concerned with the turnover cost if you’re hiring a real estate agent to secure a new tenant, but if you can lease a condo for $2,300 in 2022 that leased for $2,100 in 2021, then theoretically, you’re increasing the value of your investment.

This is all on paper, of course.

Until one chooses to sell.  And that is where I think the rental market is going to have a huge impact this year.

When we’re looking at a condo for investment, we don’t start out by looking at what the existing tenant is paying, but rather we consider Unit 2308, look up the recent leases in the building for that “08” model, and see what is the most recent.  If the last unit leased for $2,300 and the current tenant, who has been there since 2019, is paying $1,850, we pay them no mind.  That tenant will leave, and ultimately the value of this condo from an investment standpoint is going to be determined in part by that market value rent.

It only takes one recent comparable to start a trend.  I wish it weren’t so, but it is.  Like a legal precedent in a court of law, the real estate judge will simply rely on the previous ruling.

From an absolute perspective, I think rents in Toronto are ridiculously high.  A 23-year-old starting an entry-level job, making $55,000 per year at a downtown firm, can’t really “afford” to pay $2,200/month for a 1-bedroom condo, but they do.  And they will.  Once upon a time, paying 48% of your gross salary toward rent wasn’t an acceptable idea, but today, it’s the norm.

From a relative perspective, I think Toronto rents are quite reasonable.  I know people hate the New York comparison, but if the average price for a Manhattan rental is $4,140 USD, or $5,300 CAD, then the $2,167 CAD average that Torontoians are currently paying is, by the very definition, reasonable.

4) Who is actually buying pre-construction condos?

Here comes the conspiracy theory, right?

But if I’m being honest, I want to know!  I want to understand who is actually paying $2,000+ per square foot for pre-construction condos, because I don’t know a single person in the city, personally or through a colleague, that’s buying this stuff.

So if it’s not us, then who?

And here’s where the conspiracy theory comes into play, as well as the potential to be labeled xenophobic or overly nationalistic.

So I’ll risk being called a bigot to ask an important question, although I’m probably going to steer clear of specifics.

Let’s just say that it’s a well-known fact in Toronto that international investors are buying up pre-construction condos.  I do not have hard data to support this, of course.  Developers likely don’t keep this data, and if they did, they’d never, ever make it public!  But I know pre-construction sales agents, I know developers, and I know financiers.  We talk candidly about this all the time, and it’s no longer a “best-kept secret” that foreign money is buying up pre-construction condos.

Then again, what constitutes an “international investor” anyways?  Or a “foreign buyer?”  If $2,000,000 that originated overseas is used by a Canadian resident here on the ground to purchase a condo, then is the purchase made by a “foreign buyer” or not?

I can’t answer this.

But I can tell you that there are many, many clues to who’s buying these condos, and they aren’t all based on stereotypes and unruly assumptions.

But whether it’s the Middle East, Asia, or former Russian territories, we see loads of money pouring into Canadian real estate every single year, and I don’t believe for a second that your buddy Brayden from university is the one spending $2,200 per square foot on a pre-construction condo at Yonge & Delisle.

So what’s the conclusion here?

Any objection to our real estate being bought up by other countries?

Recently, I’ve been encouraging many of my clients in their 30’s and 40’s to start buying one-bedroom condos as investments for their children, currently anywhere in age from 6-months to 15-years-old.  I honestly believe that in twenty years, an overwhelming majority of our population will be renting houses and condos from landlords who, at least in part, originate overseas.

Tell me I’m hyping the market and I’ll tell you, “Just wait.”

If you have a child who’s, say, 3-years-old right now, there’s not a hope in hell that your child will be able to buy a home when he or she is 30-years-old.  No way, no how.

There’s way too much money in the world and far too many countries have deeper pockets than we do.

I see foreign money buying up swaths of farmland north of the GTA and this is one example where I do have evidence, since a family friend represents many of these farmers, some of whom have had the land in their families for a century, who are now selling to offshore trusts, controlled by other trusts, and the origin of the money is impossible to ascertain.

But as far as the downtown Toronto condo market goes, it’s probably the easiest example of the foreign money coming into our market.  And that foreign money doesn’t want a resale condo at 230 King Street East or 1 Shaw Street; it wants to be parked in a project that is five or six years from completion.  More importantly: the prices don’t matter.  Many of these people just want to get money out of their country of origin and into hard assets in an inviting country like Canada.

This is why developers can continue to charge higher prices in pre-construction and actually sell out!

To be fair, part of the reason is the increased price of land, materials, labour, fees, et al, and developers don’t work for free.  But we’re now seeing run-of-the-mill condos selling for $1,600 per square foot like it’s normal.

Indirectly, foreign capital is helping to build Toronto real estate.

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5) Will any of the governments ‘ideas’ to help housing affordability actually help?

We talked a great deal about this in 2021, both before the election, during, and after.

As a cynic, I suggested that none of the policies either implemented or being floated by the federal government were going to help buyers of any type either to make properties more affordable or to simply get into the market altogether.

But at some point, the government has to take real action.

As I noted above, I really, truly believe in my heart that in three decades, an overwhelming majority of Torontonians will rent simply because of how much real estate is being bought by investors, both foreign or domestic.

Is the government going to stand by and watch this happen?

I recall an article from last fall in the Globe & Mail.  Let me see if I can dig it up…

Ah, here:

“Canada Bet Big On Real Estate.  Now, It’s An Economic Drag”

From the article:

Before the COVID-19 health crisis, residential investment routinely amounted to 7 per cent of nominal gross domestic product. More recently, that’s surged to more than 10 per cent – or roughly double the equivalent rate in the United States. Stuck at home in the pandemic, people spent big on new properties and renovations, with help from rock-bottom interest rates that were critical to the crisis response.

Can the government actually do anything about this?

The idea of “slowing down” the real estate market, real estate investing, or the role that real estate plays in GDP would send shockwaves through the Canadian economy.

Just look at this chart from the Globe & Mail article above:

I honestly can’t opine on what a “healthy” level of residential investment looks like, and likely neither can you.

But show me any chart that looks like this, especially when juxtaposed to that of the United States, and I think we’ll both agree that this could be problematic.

The issue, of course, is that so much economic output is derived from the real estate market.   We could probably play a game: go around in a circle and each one of us names an occupation that is tied to the construction, renovation, sale, or existence of real estate, and I think the game would last for hours.

But do the figures above account for, say, an administrative assistant in a condominium developer’s office?  Or a residential window-washing company?

The government has two concurrent problems on their hands:

1) The cost of home ownership is unaffordable for many Canadians and prices will not stop increasing
2) Far too much of our economic output is tied, directly or indirectly, to real estate

Do those two problems make it impossible to cure one without exacerbating the other?

Not only that, as we’ve noted before many times, the tax revenue derived from real estate construction, renovation, and sales, is something that the three levels of government desperately need and I don’t believe they’re in any position to see a reduction in any of these revenues.

So what will the governments; federal, provincial, and municipal, do in 2022 to “help” with housing affordability?

Not much, in my humble opinion.

But we’ll surely be talking about this at year’s end once again.

6) Will buying equities or crypto become sexier than real estate?

Do any of you personally know an individual that made a “killing” in Bitcoin?

We know these people exist, and we know they love sponsored ads on social media touting their brilliance and foresight, and offering us coaching and mentorship in their new business for a nominal fee, but do any of you know a person who invested at the onset and never sold during the downturn?

Bitcoin was trading at $1,000 to start January of 2017, and by December of 2017, it was at $25,000.

Do you know somebody who sold for that 25x profit?

More to the point, if you know somebody who bought at $13,000 in November of 2017, who saw the first peak at $25,000 in December of 2017, do you know if they held on for the three years it took for the price to get back above $25,000 in November of 2020?

Bitcoin is now at $53,000, down from over $80,000 in November.

There is no more volatile investment than crypto-currency, and there is no investment that produces more bullshit, nonsense talk from frat boys, wanna-be-bankers, and anonymous online peanut galleries.

Why is that?

Well, because it’s the sexiest investment out there!

Forget the fact that, in my opinion, 80% of people who invest in crypto-currencies end up losing money.  Maybe more.  Maybe almost all.  I’m not convinced that amateur investors can hang on during tough times.  Most sell, as evidenced by those who saw the peak in 2017 and didn’t hold on until 2020.

But crypto is cool!  It’s technologically advanced.  It’s 2022.  It’s going to appeal to the next generation far more than “buying stocks,” right?

How about buying real estate then?  That used to be so cool!

There’s an argument to be made that if buying real estate over buying equities was the 2012 version of cool, then buying crypto is the coolest in 2022.

We’ve talked ad nauseam on TRB about “real estate versus equities” and I could make an argument either way, if I were so inclined.

You could have bought shares of TD Bank in January of 2021 for $75.00.  One year later, they’re trading at $100.00.  That’s a 33% profit, not to mention the 4% dividend, but nobody cares about 4% these days.  Only the smart investors, institutional investors, pension funds, et al…

So a 37% return, you say?

Fair game?

Talk to me about diversification, fine.  Buy each of the five major bank stocks.  Or buy an ETF.

The Dow Jones went from 31,000 to 37,000 last year; a gain of 19%.

So why do we recommend investing in real estate, then?

Well, I would argue that real estate is a leveraged investment, and any gain is 5x.  I know that you can open a margin account and trade with leverage, but few do, and I would argue that any amateur investor using 5x leverage is simply going to lose five times as much.  Maybe not you smart TRB readers, trading in your online accounts, but the 22-year-old hot-head out of university who is individually picking stocks isn’t going to benefit from that leverage in the same way that any buyer of a downtown Toronto condo would.

If the condo you purchased goes up 3% in value in one year, you’re up 15%, based on your 20% down payment, not to mention the principal repayment on your mortgage.  I know the proponents of equities investing will have a problem with this, but I believe there’s a 5x profit baked into any real estate investment in Toronto, in a market that’s gone up every year for over two decades, and that the same is simply not true of the equities market.

However, why stop at 5x when you can look for 10x, 20x, or 100x in crypto!

Ethereum, Litecoin, Zcash, Stellar Lumen – my God, we’re all going to get rich!

Why buy real estate when we can buy crypto and fly our private jets to our luxury yachts by this time next year?

I’m very curious to see where the money flows in 2022.

While I recognize that the pandemic has caused financial hardship to many, it’s also left many others unaffected, or even been a boom.  There’s so much money in this city and it all must find a place to land.

Is that money going to land in real estate, equities, or crypto in 2022?

With constant chatter of the government inventing new taxes on “investors,” perhaps this is the year that some take their money and look to the safe-haven of the DOW, or gold, or maybe take on the associated risk to gain the potential upside of crypto.

Or maybe none of that happens. Maybe Toronto real estate sees even more investment dollars in 2022 than ever before.

Either way, this topic really piques my interest and I’ll be monitoring it very closely this year!

7) Will we see a continued trend with respect to the securitization and financialization of real estate?

One of the themes I spent considerable time on in 2021 was the “securitization” of real estate.

Whether it’s buying a condo through Key Living to reside in, with a modest 2.5% down payment rather than the government-mandated 5%, or whether it’s buying “shares” in a condo through Addy or Buy Properly, we saw new business models spring up last year all throughout the real estate landscape.

I mentioned last year that of the kids I use to coach on the baseball diamond more than a decade ago called me up and pitched me an idea very similar to that of Key Living, and they have major financial backing.

That’s only one competitor to Key LIving that we know of.  How many others are being worked on right now?

Last week, this article appeared in the Globe & Mail:

“We’re Going To Hear A Lot More About The Financialization Of Housing This Year”

It’s a spectacular read, but in case you don’t have time or if it’s behind a paywall, here’s the best excerpt:

It’s useful to think of a residence as providing two types of value: use and exchange. Use value, as the name implies, refers to the shelter and locational attributes of a structure to its occupants, whereas exchange value refers to the market value of said structures. These two attributes of housing have always existed in an uneasy relationship and pose a key question to Canadian federal public policy: If a roof over our heads is necessary for survival, shouldn’t these roofs be publicly distributed on the basis of need rather than left to the vagaries of a private market?

Go back to my Burning Question #4, and read it again.

Foreign money is being pumped into our country’s real estate as easily as water flows from a bathroom faucet.  Financialization of Toronto real estate isn’t new; it’s just being talked about now because we’re in awe and disbelief about where our market has gone.  As is usually the case with real estate, the media and the government are always late to the party and always reacting to something from yesteryear.

Toward the end of 2021, we were inundated with this idea that “investors” were to blame for our skyrocketing real estate prices.

Is this going to continue in 2022?

Will the government take note of, let alone, aim new policies at the securitization of real estate and foreign or domestic private market money buying up real estate in swaths?

This might be the last Burning Question on my list, but it was certainly not the least-asked question over my holiday break…

Alright, folks, that’s it for my look ahead into 2022.

Sure there, are other topics to discuss, questions to raise, and concerns to be looking out for, but these are truly the points that stuck out the most in my mind heading into this year.

On Wednesday, I’ll take a look at the December TRREB stats and while this is likely the most historically volatile month of the year, I think there are some projections to be made.