January 3, 2019 | 2019
Every year I offer a number of educated guesses on how the Toronto real estate market will roll out in a given year. And for the most part, my predictions have been roughly 80% on point. Not all of them, I’m not a medium or a time traveller, but I do have a pretty good sense.
Despite my decent record of real estate predictions over the years, let’s not kid ourselves. Real estate prediction is a concoction of on-the-ground real estate knowledge and dumb luck. There are just too many variables that could happen over the course of a year. Even the most careful and researched real estate know-it-alls can’t nail it. Still, if I can keep my past record of 80%, then this may be worth a read.
So, let’s look at the big items (according to me) that will be swaying real estate values and prices and culture in 2019. To make this a little more fun, I’ve attached green arrows facing up to indicate those forces that may push up values, and red arrows facing down to indicate those forces that may push values down. Here’s what I think…
One of the biggest drivers of growth in Toronto comes from immigration in almost any year. And while Canada is letting in more immigrants now to stave off a future labour shortage, many immigrants who have once considered the U.S. as a country of choice are coming to Canada instead. Toronto is particularly appealing since many new immigrants will very likely have a community already set up here in Toronto to make the transition easier to their new Canadian life. The foods, friends/family, and language of back home are already set up for them here.
A good example of this flight from the U.S. can be seen in the change in university enrollment. The University of Toronto, one of Canada’s top-ranked universities, has seen interest rising sharply last year, including a 57% increase in applications from India. This trend will likely continue in 2019.
In addition, the tech sector, one of Toronto’s fastest growing sectors, and a well-known real estate disruptor in cities like San Francisco, Seattle and Boston, is pulling in talent from the United States and abroad. We are becoming one of the world’s top tech sector destinations. I’m not going to throw around terms like “the next Silicon Valley.” We’re nowhere near that size, but we are one of the fastest growing tech centres. With tech sector growth often comes well-paying jobs, and more pressure on real estate. Aside from the tech sector and the boost in university students, the GTA, on average, pulls in about 100,000 new immigrants each year. And 100,000 people will be looking for housing of all shapes and sizes.
INTEREST RATES WILL LIKELY GO UP ⇓
Over 2017 and 2018, interest rates have gone up 5 times. The government would like to continue this in 2019 as long as inflation is going up too. There has been robust job growth and unemployment is at a 50 year low, around 3.7%. Feds hint they will likely continue their interest rate hikes in 2019. And if that is the case, the higher interest rates will lead to a bigger cost to carry a mortgage.
Not everyone agrees interest rates are heading up. Some real estate trackers and opinion-makers believe our economy may be moving into recession territory. And if that’s the case, the raising of interest rates will come to a halt. If a recession or a slow down of the economy is near, policymakers are well aware of the potential dangers of interest rate hikes to highly indebted households in Toronto.
Of course, even if we have a slow down to the economy or a mild recession, it would likely put downward pressure on home prices.
MILLENNIALS WANT DOWNTOWN ⇑
According the the Ontario Real Estate Association, there will be 700,000 new Millennials in the market for a home in the next decade for the GTA.
I have heard the term, Hipsterbia being tossed around lately. This is a term coined to describe the Millennials who are heading out the the suburbs where there is more affordability and more space. But my experience tells me differently. This past year, I have had listings in the suburbs and the city, and I can tell you the Millennials prefer the city. Not all of them, but a great number of them. Plus, this article on the cost of commuting put together by the Canadian Mortgage and Housing Association suggests the drive to the burbs may not be worth with all costs factored in.
Millennials I have come across want city living with a walkable main street, less driving, community-oriented neighbourhoods, close to artisanal-loving, charcoal-ice-cream-eating other Millennials.
RENTS WILL GO UP ⇑
Renters have had a tough time in 2018 with price increasing in the double digits year over year. And 2019 will likely prove to put more upward pressure on rents. I don’t think it will be as robust as 2018 though. Many believe we are reaching the upward limits of affordability for rent.
Still, as pricey as Toronto and Vancouver have become, they don’t hold a candle to the U.S.’s most expensive rental markets. According to padmapper (see details here), an average one-bedroom rented for $2,140 this past August in Toronto, and for $2,000 in Vancouver. Compare that to some American cities and neighbhourhoods ($4,119 in Manhattan, $3,590 in San Francisco, $3,379 in Boston and $2,801 in Brooklyn), Toronto doesn’t seem so bad.
What could increased rent mean to home values and prices? Well, it means there will be more incentive to buy rather than rent. It also means there is more desire for people to buy investment properties, though the cost of buying right now still often leaves you in the red, even if you rent out the property you purchased.
CONSTRUCTION COSTS ⇑
It is widely assumed out there that developers are making a lot of money off their developments. And they are certainly profiting. But I think the profits margins are tighter than many people believe. Rising construction costs are a real thing. Not only has land become more scarce and more expensive in Toronto, but the assembly of land is more difficult than it used to be. Only 15 years ago, a developer could buy up a parking lot downtown from one seller and build a condo. Now, they often need to buy an assembly of houses and/or commercial buildings from different sellers, which is much more expensive. In addition, there are more fees and rules around how development can be done. This will, in turn, make development more expensive downtown, and put more pressure on the inner suburbs to densify, where there is cheaper and ample space to develop.
Not only is there an increased cost tied to land availability, but the cost of development has gone up around the cost of labour, and rise of material costs like lumber and steel. Margins may be squeezed in 2019, and some increases will be passed on the the consumer.
2018 CONTINUED ⇓⇑
When we hit January 1, 2019, we were not suddenly in a new real estate market that is a complete departure from 2018. In many ways, we are carrying out some of the trends of last year. So, from 2018, condo sales will still be strong in Toronto. Houses in in-demand neighbourhoods will sell well, but not all neighbourhoods. The suburbs were not as strong last year, particularly in the luxury house department, where prices have still not recovered from the peak of 2017. Some of these area will still be in recovery mode over 2019. I think the dampening effect of 2018 in the suburbs will continue to recover.
With all that said, my prediction for the year will seem rather modest. Prices overall will inch up between 1-3%, but less so in the suburbs where they will continue to recover. Condos will continue to outpace houses, but will not have the incredibly strong year it had last year, but still up. Condos in the more affordable price ranges will be the most competitive, since that is the price range many Torontonians can afford. Houses and condos will do better in Toronto than the rest of the GTA.
It will be a rather dull year in real estate. The razzle and dazzle we have seen between 2010 and 2017 will not inspire real estate to be the topic of discussion at the water cooler. It won’t have the terror of years like 1989 or even 2008. Simply put, real estate won’t be the headliner of 2019. It will have simple and moderate growth, provided there are no unusual and unexpected events to throw us off this course.