Before I jump right in to my 2017 forecast, lets recap 2016 and see how we ended last year.
According to Toronto Real Estate Board (TREB), the average Greater Toronto Area home price was $730,472 in December 2016, a stunning 20% higher than a year ago. The fact is that GTA real estate prices have not fallen year-over-year for a full two decades, since 1996!
Although the average GTA home price figure is the most widely published by most media and news outlets it is also one of the most misleading since it encompasses the average home price in the region for all home categories.
You should also note that this figures also lumps all the hot and not so hot Toronto city neighbourhood sales, new and resale homes, fully renovated and fixer upper homes together to come up with the “average price”.
As usual, the devil is in the detail and you should always take these published figures with a bucket rather than only a grain of salt.
“If I had a million dollars
(If I had a million dollars)
Well, I’d buy you a house
(I would buy you a house)”
– Barenaked Ladies
The Cost of Living in “The Big Smoke”
So how much house would a cool $1,000,000 really get you today in Toronto today? Unfortunately, not much.
Below is a list of the latest (December 2016) average home prices by category as indicated by Toronto Real Estate Board (TREB):
Detached houses: $1,345,962
Semi-Detached houses: $906,353
Attached Row/Townhouse: $882,591
Condo Townhouses: $571,299
Condo Apartments: $471,256
The reality is that if you really wanted to purchase a freehold home with actual land today, that is one without any condo fees, you would be looking at shelling out somewhere between $800,000 to $1.35 million.
And if you are looking to buy one of these in good condition, decent size (instead of a 500 square foot closet) and in a good area of the city, be prepared to pay even more. Much more!
For example, as indicated above the average price in November 2016 for a detached house in the Toronto was $1,345,962. Yet if you truly wanted to buy one in central Toronto than you would have actually needed to shell out over 59% more than this – a whopping $2,145,505 and very likely even more than this as 2016 came to a close!
Before I delve into my 2017 forecast, you should know that I am not an economist and these are purely my opinions based on my own real life, real time and real experience as a very active real estate agent, investor and coach combined with my extensive experience and knowledge of finance as a CA and corporate CFO.
Unlike most economists who crunch data in their offices, I have first hand and timely knowledge direct from the streets as to the state and direction of the real estate market is heading and in many instances I can see trends developing well before this “historic” data is published by the respective real estate boards and made public, sometimes months after the fact.
You should also note that unlike your typical local real estate agents and investment advisers, I am very active not only in the GTA but across the entire Golden Horseshoe area and I also practice what I preach, having personally purchased properties in 4 different municipalities spanning across the entire Golden Horseshoe in the past year alone.
So what should you expect for the GTA and indeed the entire Golden Horseshoe real estate market in 2017?
Are the insane market conditions, multiple offer situations and escalating prices going to continue?
Notwithstanding some detrimental geopolitical or economic “Black Swan” event, the answer is “yes” to all of the above.
Welcome To “The Island of GTA”
Over the next 20 years approximately 3.5 million people are expected to be added to the Greater Toronto and Hamilton Area. That’s big. How big? It’s more than Toronto’s population today! Source
This means that we will all be making many new friends.
This also means that about 175,000 people will be migrating to the region each and every year and all of them will be looking for a roof over their heads.
There’s just one little hick-up.
This thing called the Ontario Greenbelt, which is a permanently protected area of green space, farmland, forests, wetlands, and watersheds, located in Southern Ontario and At over 1.8 million acres (7,300 km²), Ontario’s Greenbelt is one of the largest in the world. Source
“The Greenbelt Act and related legislation goals is to prevent unplanned urban sprawl from the nearby GTA. This necessary, yet ominous goal, is a serious undertaking given that the Golden Horseshoe’s (the GTA) is not only the most population-dense area in Canada—but also the fastest growing.”
“Since it’s enactment of the Act, the Greenbelt’s residential, commercial and industrial use has been planned according to the act’s preservation policies—which limits and highly regulates development in the Greenbelt.“
To prevent urban sprawl in the region, the government has effectively told developers to build up instead of out, which incidentally is the key reason why condo development has skyrocketed in the region while development and availability of any new low rise houses continues to accelerate to the downside.
In the above map, we have Lake Ontario to the south and the green areas signifying Greenbelt to the north and in between we have the orange areas representing already built-up areas and the much, much smaller yellow areas representing actually available development land.
This means that the entire Greater Toronto Area and indeed the entire Golden Horseshoe is land locked, much like New York’s island of Manhattan.
Now you know the real reason why home prices, especially low rise homes, across the GTA and indeed the entire Golden Horseshoe have been accelerating higher and higher for over 12 years.
Despite what you may have heard in the news about foreign buyers or mortgage rules, the real reason why I expect home prices to continue on their upward trajectory in 2017 are the same as last year: Green Belt Act, 2005 along with it’s cousin the Places to Grow Act, 2005.
It really is simple economics 101: If you have massive demand for homes, yet very limit supply of those same homes, prices can only move in one direction. Up, up, up.
“Buy land, they’re not making it anymore.” – Mark Twain
So expect the already extremely low inventory of low rise new and resale homes coming to market to be just as low, and possibly even lower, in 2017.
This is not a forecast but a reality now as the total active listings in the market in December 2016 plunged 48.1% as compared to the same period last year. In fact, the number of active listings in December were at their lowest level in nearly 15 years.
At the same time, with approximately 175,000 expected to migrate into the region in 2017, expect the already high demand for these homes to get even higher.
You should also note that this figure does not even include foreign investor buyers, which you may be surprised to learn only accounted for 5% of all sales in Toronto despite what you may have been misled to believe, or international students, who will only stoke demand even higher.
This means, more competition with more people going after the same properties, more multiple offer situations and ultimately higher home and rental prices.
Golden Horseshoe Real Estate – Economics 101:
Yet areas outside, but still within commuting distance of the GTA, will continue to present better value and affordability and it is very easy to understand why.
Just the mortgage alone on that central Toronto $2,145,505 home, even with a 20% or $429,000 down payment would come in at around $7,700.
To be clear, this is only the monthly mortgage payment and does not include any of the other typical costs to carry that same house like property taxes, home insurance, utilities, repair and maintenance.
It also does not include any of those other things you may need or want like food, clothes, a car, gas and insurance for your car, public transit fees, daycare, entertainment, vacations or anything else really.
Yet to be able to afford that $7,700 monthly mortgage payment (that’s a
whopping $92,400 per year!) you would need to earn a salary of around $170,000 per year before tax! Yet the average annual salary in Ontario in 2016 was only $50,589 source and most could only dream of having access to the $429,000 down payment required to purchase a home such as this.
As GTA home prices started to become less affordable, properties in these other “commuter communities” to the GTA have become highly sought after over the past 5 years, not only by locals but also those who are no longer able to afford a home in the GTA but who still require a place to live, as well as investors, both foreign and domestic alike.
In 2016, the Ontario provincial government and Metrolinx (GO Transit) announced historic expansion plans including expanded services from the Durham Region, Hamilton, Barrie to and from Toronto.
Brand new GO Train Stations in cities that previously never had this service were also announced to be built over the next 2-5 years in places like Innifil, St. Catharines and Niagara Falls. This will only serve to further increase demand for homes located in these municipalities.
However, you should note that most of these outlying “commuter cities” currently only have populations and housing available for about 100,000-150,000 residents.
Yet with hundreds of thousands of people no longer able to afford renting let alone buying a home in the GTA it should not be surprising why demand for the more affordable homes located in these “commuter communities” has already started going parabolic and expected to continue doing so in 2017.
I the midst of all these forces, Canada remains the “economic poster child” for much of the world. Not surprisingly, Canada remains a top foreign investment destination and yes that includes real estate investments.
Now that Vancouver has imposed a foreign buyer’s tax of 15% on real estate, many of those same would be buyers are now making their way to the Golden Horseshoe instead, further driving up the already massive demand and pricing across the entire Golden Horseshoe region.
Indeed, given this massive demand, I expect home prices across the entire Golden Horseshoe to escalate at a noticeably higher rate on a percentage basis than homes directly located directly in Toronto, just like they did in 2016.
Big Brother Is Watching You, But Who’s Watching Big Brother?
In the midst of this real estate market madness, we have all levels of our Canadian government sleeping behind the wheel. Sure government officials are attempting to save face by talking about the importance of solving Canada’s affordable housing issues and by each level pointing fingers and directing blame and accountability to the other levels.
As an example of how far back behind the 8 ball they are, in 2016 the federal government in it’s great wisdom even commissioned a multi-million dollar research project in an attempt to create a National Housing Strategy and instead implement any real solutions, instead in November 2016 they produced a report. You can learn more here.
If anyone is looking for any meaningful affordable housing solutions from any level of government in 2017 I would tell them not to hold their breath. Instead, I fully expect more useless talk for several more months if not years, followed by several more months of consultations, more research, developing plans and legislation, discussing and arguing about them with all the parties, rinse and repeat.
Finally, I would not expect any real or meaningful solutions from the government, if any, for at least another few years. In the meantime, the phrase “affordable housing” will become meaningless in the GTA.
What the politicians don’t tell you is that they actually love higher real estate prices. After all, as property prices move higher, so do the property assessment values used to calculated property taxes, which in turn are used to increase property taxes which is a major source of revenue for the government.
A hot real estate market also means lots of development and by extension lots of revenue generated by the city by charging sometimes massive development charges to developers. Yet another source of revenue.
Now ask yourself, why would the government kill this “real estate golden goose”? What incentive do they have to change anything really.
Sure their talk of change may get them elected, but ultimately what incentive do governments actually have to affect change, especially since when the development and rising real estate party eventually ends it would only bring into light how inefficient the government really is at managing our tax dollars. Inefficiencies that are currently being masked and covered up with the these revenue windfalls.
Underscoring how clueless governments can be regarding meaningful affordable housing solutions is Vancouver’s municipal government.
In its great wisdom in 2016 it decided to go a totally different route to combat foreign real estate buyers in the city by imposing a 15% tax on them and then further legislation placing additional taxes on vacant units owned by foreign buyers. This resulted in foreign buyers to go slightly further out into other areas of BC and the Golden Horseshoe where that 15% tax does not apply but at the same time had nearly zero impact in increasing the supply of affordable housing in that city.
The subsequent resulting nearly 30% home price correction has wiped out hundreds of thousands of dollars of home owners equity. As icing on the cake, the city recently sent out property value assessments to owners that theoretically will be used in calculating future property taxes.
As the final cherry on top of the icing, those values were based on July 2016 property values, before the 15% foreign buyer tax was implemented and before the subsequent nearly 30% price correction!
Living On The Edge: Is The Sky About to Fall?
Clearly no market, not the stock market, bond market or even the GTA or Golden Horseshoe real estate market can go up in a straight line indefinitely and indeed I get incredulous questions from my clients, friends and family on a daily basis that this “insanity in the market has to stop some time, right?”
Yes, I agree, eventually there will be a correction in the real estate market. It happened before and certainly will happen again. Unfortunately, no one knows when it will happen and what will ultimately cause a correction.
Historically, real estate market corrections have been caused by “the typical usual suspects”. The most common culprit being high inflation, which is typically caused by an economy firing on all cylinders combined with very low unemployment rates and rising costs. This in turn forces central bankers to raise interest rates, which in turn forces banks to raise mortgage rates, which in turn causes the costs of carrying a home to sky rocket and no longer affordable to the masses.
Demand shrinks as home buyers can no longer buy and instead have no choice but to rent, while at the same time builders have a hard time finding buyers for existing inventory and stop building. When they stop building, large scale unemployment ensues in the construction field and the many industries that support it, including banks, forestry and mining as demand for these resources required to construct homes falls.
This is what happened in the late 1980’s in the GTA.
But here’s the thing, although home prices may have skyrocketed over the past 12+ years, inflation remains at near all time historic lows. So, I do not foresee any significantly rising rates anytime soon and indeed a case may be made for why rates could even go lower! I explained why, along with what it means to both home buyers and investors in my recent articles: When Bullshit Talks and Are We Entering A New Era of Increasing Interest Rates?
So this leaves possible domestic political, economic or geopolitical, geo economic risk on the table as to what could possibly cause a correction here in the Golden Horseshoe area.
A Trumped Up Future: R.I.P Free Trade?
Indeed, many geopolitical surprises occurred in 2016 whose affects we have yet to fully comprehend and feel. These include Britain’s BREXIT decision to exist the European Union and more recently Donald Trump’s winning the US presidency race.
The Donald will be inaugurated in only a few short weeks to officially become the next President of the United States, but has already started to stir up the geopolitical hornets nest by stating his desire to undertake more protectionist policies, which could very well impact us Canadians since the US remains our largest trading partner with well over 70% of our exports going there.
Yet Donald Trump has also decided to take a page out of our Prime Minister Justin Trudeau’s play book by announcing his intent to infuse billions of dollars into US infrastructure. This bodes well for Canada and our economy, given our abundance of the raw material natural resources that both countries will undoubtedly require for these endeavors.
In the meantime North America’s economies remain fragile, despite trillions of dollars infused into the monetary system, in a largely failed attempt to drive economic growth and inflation, since the Financial Crisis.
On the other side of the Atlantic the story is not getting any better either. European economies are still struggling with ridiculously high unemployment rates that in some countries like Greece and Spain are well above 20%!
Indeed, in 2017 we could very well learn that BREXIT was only the start of a much larger EU unwinding and a further and more acute continuation of no longer just a European but a now global economic protectionist movement politicians around the globe all promise making their countries “great again”.
Then there’s China which is also struggling to find it’s footing as it’s own economic growth rates have had come down considerably over the past few years. As inflation in China continues to rise, the country will need to transition its economy from that of an exporter and low cost producer of goods to one that, like the US, starts to depend more on it’s own domestic population and economy to drive future long term growth.
Back To The Future
To recap, for 2017 I expect:
- Higher prices across the entire Golden Horseshoe Area as demand continues to escalate while inventory of homes, both new and old, will continue to dwindle.
- Condo prices, which did barely budged in price since 2011 due to oversupply, have finally started to increase in 2016 given dwindling supply of low rise homes on the market and alternative affordable housing. I expect GTA condo prices to continue moving higher in 2017, but at a lower rate than their low rise cousins, which are much more in demand.
- Despite many calling for a GTA real estate corrections starting in 2004 (boy they must really feel silly now!), notwithstanding a “Black Swan” type of an event, such as another world financial crises or extreme US protectionist policies I see little to suggest that a real estate market correction will occur in 2017.
- That said, if a market correction were to occur I would expect that both GTA condos and high end low rise home prices to suffer the most losses, thereby making these real estate sub-classes comparatively more risky overall.
- Expect prices for starter, first time buyer homes in good areas across the entire Golden Horseshoe to increase the most on a percentage basis in 2017 as demand for these properties continues to escalate while supplies for these same properties continue to dwindle. This includes smaller freehold fully detached homes along with semi-detached homes and townhomes.
- Regionally, I believe that GTA properties with their stratospheric prices to be the most at risk of substantial losses when compared to other municipalities across the Golden Horseshoe if a correction were to occur today. “The higher you rise, the harder you fall”
- The above market forces are expected to continue being challenging for both first-time buyers and investors, both domestic and foreign, focused on cash flow positive properties as they, along with those looking to downsize continue to target the exact same properties.
- In light of this, I fully expect competition for good low rise homes located in nice areas across the entire Golden Horseshoe to be even more fierce than 2016.
What all this means is that in 2017, more than ever before, you absolutely must have a real estate specialist who fully represents your best interest as a buyer rather than simply viewing their clients as a pay cheque.
A specialist who has a deep routed understanding of the local market.
A specialist who has the expertise to source your perfect dream home or investment property.
A specialist capable of determining the true market value of the property instead of some meaningless and arbitrary asking price on an ad.
A specialist who can successfully negotiate the best possible price for the property you are targeting.
If your are looking for all of the above along with true value and exceptional service then what are you waiting for? I look forward to making your dream of home ownership in 2017 a reality.