January 9, 2013
Some call him the Oracle of Condo-Land in Toronto; at the office we know him as Jamie, founder of Re/Max Condos Plus, where this real estate broker/ blogger calls home.
Jamie Johnston holds a unique space in our city’s condo dialogue. Why? Well, his batting average in predicting market outcomes have been impressive. Not one to highlight wins only, he’s also pretty open about pointing out misses as well.
In today’s blog post, Jamie shares with us some reflections about 2012-year-in-review, as well as what to look out for as we dance along into 2013. It’s a delightful read, filled with bold and daring insights, be sure to leave us a comment or two if time permits!
“Ever wondered why most forecasters tend to avoid reviewing their previous year’s prediction? Not us, we are not afraid to call a spade a spade.”
- In 2012, we called for 90,000 Resale units on the Toronto Real Estate Board, and we ended the year with 86,000.
- We forecasted that condo sales would be 10% higher when in actual fact they were off by 16%; with the biggest impact occurring over the latter half of the year.
- We expected condo prices to be flat in the $500-550 per square foot range. The result, prices rose slightly during the year and then declined by year end, flattening out around 3% lower.
- In the New Home or Pre- Construction Market, we lamented that prices in the $700-800 square foot range, were unsustainable. This Market is now in the $550-650 range, depending on location.
- We forecasted rental rates to increase by $75 across the board and that the basic one bedroom without parking would increase to $1600 – it is now closer to $1700.
Looking back, we were correct with our economic forecasts (growing employment and low interest rates) but missed the orchestrated rule changes at CMHC which impacted the market, leading to more media hype of an impending market correction. The result was that many potential buyers moved to the sidelines.
“So here’s the million dollar question: Was 2012 – the start of a Market Correction or a Market Pause?”
- Well for starters, what do we need for a Market Correction? First we need to see a ‘price bubble’ –usually defined as double digit price increases in three consecutive years.
- Next we need to see people selling their properties at any price – because rising mortgage arrears, caused by a spike in interest rates or a jump in job losses. Finally we need to see properties located in areas where no one wants to live.
- Does that sound like the Downtown Toronto market? Here’s a hint: Nope.
“It occurs when people become influenced by outside factors while the underlying economic fundamentals remain unchanged. Think back to 9/11? Because terrorist planes crashed into the World Trade Centre, many believed it was not safe to live in high rises. Condo sales declined significantly for 3-4 months.”
- Think back to the SARS epidemic? Visitors thought twice about buying a plane ticket to Toronto. Showings of homes in certain ethnic demographic communities plummeted. Again this sales decline lasted for several months.
- Finally think back to the 2008 Financial Crisis in the U.S.? The argument which became gospel was: If U.S. real estate could crash (even though it was really contained to about seven states), then Canada would follow shortly. What happened here? This Pause lasted about 8 months.
“My feeling is that we are currently experiencing a Market Pause. Our best guess is that it will end by March. Why? Well, humans are very adaptable and our guess is that they will adjust to the new CMHC rules.”
- Yup, all those construction cranes are really a good thing. Unbeknownst to some, many of those cranes are in fact for new office towers. Companies are relocating back downtown to be closer to the new work force. Young talents who reside in the ‘416’ do not want to work in the ‘905’ and smart companies get that.
“No matter how many New Home or Pre-Construction sales take place each year, the construction industry can only deliver about 15,000 new condo units per year – this is simply a natural bottle neck for supply.”
- While condo resales were lower in 2012, we saw record condo rentals which worked to offset the decline in sales. Young and older people still want to live downtown. With rents continuing to rise, buying will soon be the preferred option again.
- Long term, not only will more people want to live downtown but in all practicality they will have to. Just observe a crumbling Gardiner Expressway that will be under construction for years to come and no rapid transit system in place for, yes, years to come.
- The economic fundamentals remain unchanged – interest rates will remain low with growing employment and income figures for the GTA and downtown Toronto.
- With Governor Carney moving to England, do not expect to see more changes to CMHC rules in 2013.
“TREB sales should match those of 2012. TREB numbers will underperform the first half of the year and outperform over the last six months. Remember the all-time record sales year was in 2007, so how can we go any lower?”
- Downtown condo sales will rebound by 15% to 2011 levels.
- Prices will again remain flat in the condo resale market and will decrease by another $50/sqft in the New Home or Pre-Construction Market. To entice investors back into the market, developers need to keep the premium over resale prices to a maximum of $50/sqft.
- Freehold properties downtown under one million dollars (the CMHC cap) will again attract bidding wars and those over one million will sell more slowly and will see price softening.
- Expect condo rental prices to increase by another $75/month. At most there will be about 7500 new rental units in 2013 from new condo completions. This is not enough to keep up with increasing demand and the vacancy rate for condos will remain below 1%.
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