As we welcome the new year, full of things that have never been, we glance back and see that most experts got it right last year. The Toronto real estate market saw no slowdown in sales or price momentum in 2015.
However, we were among a narrow few to predict a record sales year throughout Toronto and that a growing imbalance in sales between the 905 and 416 regions would persist.
Fast forward to present-day and we hear already the Canadian Mortgage & Housing Corporation (CMHC) calling for lower sales and a slowing of price growth for 2016. In fact, CMHC is forecasting that Toronto sales will fall to 87,500 units by 2017 – a 13% decrease.
The reasons advanced are that previous price increases have removed buyers from the market along with an expected increase in interest rates.
In contrast, our forecast is based on demand and supply issues already taking shape in the market. Of course affordability will remain a concern throughout the year, I just feel it will have only a minimum overall impact.
Now unto some of the geeky details that tell a pretty interesting tale of what’s to come…
“The Economics of Toronto’s Real Estate Market”
1. Demand for Toronto real estate is still rising. The record sales in 2015 on TREB are still lower than the sale numbers per capita from ten years ago, allowing for even more sales potential.
The sinking Canadian dollar makes our real estate even more attractive for foreigner buyers. Add to this a population growth of 100,000 people per year and that translates into 37,000 new units just to balance the market.
2. Supply of new housing in Toronto continues to be limited. The only area of significant growth is the high rise condo market.
3. Affordability will not be a concern. Interest rates will not rise significantly this year. Governments, even less than consumers, cannot afford rising rates to service their debt levels.
The U.S. Fed rise of ¼% in December was more about posturing than a concern for inflation. Expect only one more increase of ¼% in 2016.
When we observe the yield curve, the difference between 5 and 10 year bonds does not price-in any significant price increase going forward in the mortgage market and those investors are smarter than us.
“Five Trends to Watch For in 2016”
1. The limited supply of low rise housing (detached & town-homes) will continue in Toronto proper as hardly anyone one is selling outside of mortality imposed, marital break-ups, or moving out of town.
2. New condo sales will be less than 20,000 units. Investors are becoming smarter and more selective. They are only looking at projects from major condo developers and buying those projects where prices are at current market levels. It is easy to make the case that there will be a shortfall in housing within five years.
3. Stacked townhouses will be the hot market segment. In the fall, 35 Wabash in Roncesvalles sold out in days with prices in the $800/sf range.
4. Toronto is becoming a renter’s market. Throughout the Toronto Real Estate Board, rentals outnumbered sales 2:1. More ‘purpose built’ buildings i.e. apartments are coming to the downtown market for the first time in years which will add to the rental pool.
5. Downtown will continue to be the destination of choice. Giving up the car and lengthy commute times is an easy choice for millennials who will soon become the major buying segment.
“My 7 Bold 2016 Forecasts”
1. Prices for low rise housing in Toronto will rise by another 7%.
2. Prices for condos will rise by 3% as more buyers are priced out of the low rise market and will end up here.
3. Mortgage rates will increase by less than a ½% this year for both fixed and variable loans.
4. Prices for condos are moving to a price per square foot and not a price per bedroom model. Older buildings can still be found at $500+/sf. The new market is $600-700/sf. Bay Street and upscale buildings are $800-1,000/sf. (The average GTA condo has shrunk from 900 sf to 750sf over the past ten years).
5. Rental guarantees by developers are becoming more common for new construction. Most are at 6% which translates into a $1500 per month rental for a $300,000 purchase.
6. CMHC’s new requirement of a minimum down payment of 10% for properties costing from $500,000 to $1,000,000 will have no impact on the market. (Actually only 7.5% maximum in total – 5% on first $500,000 and 10% on the balance.) Recall that properties over $1,000,000 already require a minimum down payment of 20%.
7. When you combine sales and rental transactions throughout the Toronto Real Estate board, it will be another record year.