Now that bully offers and impressive home price increases are back again in Toronto like the birds returning for Spring, some are beginning to speculate whether there is a real estate downturn in sight. We may be nowhere near the price heights of cities like Vancouver, San Francisco or New York, but still some wonder if the recurring financial gains year over year for Toronto real estate could only lead to a market correction. I don’t know what’s going to happen. I’m inclined to believe that the reasons for why it won’t happen are stronger than those for why it will, but real estate is an emotional and unpredictable game. So, let’s look at the variables as to why it will correct and why it won’t to give us some perspective.
WHY IT WILL:
- Boomers All Retiring and Downsizing at the Same Time. This one is simple math. With a large demographic all exiting real estate at once, there may be a problem with many people selling their properties at once to fund their retirement. And let’s face it, boomers do have a lot of their net worth tied up in their homes. This may prove to offer the relief for which many young or first time buyers have been aching. I think the demographic move will certainly have an impact on Toronto real estate, but the severity of it is a bit of an unknown. Some speculate that boomers, like the generation that proceeds them, will hold on to their larger homes as long they can. Yes, it does not make sense for a single widow to live in a large five bedroom house, but it happens all the time. It’s often an emotional decision rather than a rational one.
- Interest Rates Will Go Up. Let’s face it. Interest rates have been rock-bottom for awhile. Every once in awhile there is discussion that rates will go up, and then they don’t. And I certainly don’t see rates going up any time soon by a significant amount. Of course if they ever did go up, a sharp increase in interest rates would put a damper on prices. Right now the cost of borrowing is cheap, and the higher prices reflect that.
- Unforeseen World Event. These are the things we cannot anticipate that would send worry and maybe even panic into our financial systems and in turn our real estate holdings. Things such as a stock market crash, a war, a recession, a natural or environmental disaster can really take the confidence out of the real estate market.
WHY IT WON’T:
- Demand for City Living. There has been a fundamental cultural shift from the way we live from thirty to forty years ago. Back then, the middle class left the city and fled to the suburbs. Cars were king and traffic was a minor slow down from the drive home from work. Cities were seen as a place of decay and muggings for many of the middle class, but also a place to be who you want to be, whether you belonged a given ethnic or sexual minority. Fast forward to now, and suburbs are not as appealing as they once were. Yes, you have the space, but there is a desire for community in Toronto. People want to belong to neighbourhoods with walkable, local coffee shops and places where you can meet your neighbour or socialize with friends. People do not want to commute long distances to work or drive everywhere. Traffic is a nightmare and there is no serious transit solutions on the horizon to get people in and out of the city more easily. The shift has gone from leaving the city to returning to the city with a vengeance.
- Immigration and Migration. Toronto is growing. The GTA grows by roughly 100,000 people/ year. That’s like the population of Thunder Bay or Saint John’s, New Brunswick being added every year. So, there will continue to be a demand on its housing stock, particularly houses of all shapes and sizes, condo townhouse and some condo apartments as well. With new people comes new demand for housing.
- Foreign Investment from Other Countries. There seems to be some concern over foreign investment from other countries beit China, the Middle East, Europe or the U.S. Some of the fear comes from the fact that Canada does not keep good records on foreign ownership. This makes people wonder if there should be better records and restrictions around foreign real estate ownership. There has been some concern that houses in Canada are being used to launder money from other countries. This may be the case, but I suspect most of the time the choice to invest here is more benign and financially strategic. In some countries, currencies are having a kind of deflationary effect. In some others, the currency is less stable. So, they look to Canada as a safe place to park their money. From the perspective of a non-Canadian, it’s a conservative investment. Of course, from a local Canadian perspective, foreign ownership can lead to real estate being used as a kind of stock. It can contribute to the higher prices. More buyers to the table will lead to more demand and higher prices overall. So, unless this changes, this will keep prices competitive.
At the end of the day, there’s no real way to tell what scenario will play out. I would always do my best to be ready for any potential future. If you wait to buy, you run the risk of prices continuing to rise and your money will not stretch as far to give you the property you want. If you buy and then the market heads south, then it’s best to wait until prices bounce back. If you wait long enough, a downtown will turn the corner and start rebounding past what you originally paid for your property.
Toronto is not going to stop being a place where people want to live. The demand to live here will continue to grow as it has in other successful urban centres. If you’re young or even middle aged, you have time to outlast any downturn. If you are concerned a downturn may happen and you need the money from your home or investment sooner rather than later, you may want to sell. If you’re going to retire soon or would like to unload some of your investments, you could cash out when the market is doing well. If the market continues to improve in the years ahead, you would lose out on some money, but likely you still would have done well if you owned your property for awhile. If there is a slip in the prices of the housing market, then you’ll have to wait it out until the market recovers. If you do wait, it may drag on into your retirement when you could use the money from your home.
Ah, the Toronto housing market, always exciting and never predictable.