January 10, 2019 | Toronto Housing Market
I was originally going to title this: “Let’s Look at the Dark Side: What Forces Could Bring Down Toronto Real Estate Market?” Not only was it too long, but as soon as I wrote it down, it became clear to me that someone’s dark side may be someone’s else’s dream come true. If prices were to go down in Toronto, property owners would take a financial hit, but buyers/investors may be on the relieved/giddy side of things to see that change.
The subject of Toronto taking a downward real estate turn came to my attention after reading the Facebook comment section from my last blog about where I thought the real estate market would go in 2019. There were some insightful, albeit contrary, comments (instead of the ones that tell me I’m dumb or want to sell me Viagara).
Most of us know there is sea of Garth Turners out there, informed or otherwise, who believe that this is the year of the great Toronto real estate crash, even if this has been their belief every year, for the past 15 years. So, to be clear, I stick to my 2019 predictions. Toronto real estate values will rise modestly in 2019.
Still, as a real estate salesperson, my real estate blogging brethren and I have been accused of offering more rosy forecasts of the future. The real estate industry does tend to favour a rosy outlook, that’s for sure. I don’t think I’m one of those. I do try to be as transparent as possible, and have, in the past, underestimated the Toronto price increases for some years. So, even though I don’t believe these downward pressure forces will sink the Toronto real estate market in 2019, I’m going to discuss the kinds of things that may apply downward pressure to Toronto’s real estate values. We’re just discussing those things that may push prices down, even though there are things that apply upward pressure as well.
Here’s what I think are the potential downward pushers of Toronto real estate prices right now:
- GLOBAL CITY HABITS Toronto functions much more like a global city now than it ever has. We have become the world class city we had aspired to be in the 90s, for better or for worse. This is why I am often frustrated by chatter and commentary about the Canadian real estate market. The market functions quite differently in Calgary than it does in Toronto. In fact, Toronto may have more in common with cities like Sydney, Australia, thousands of kilometres away, than it does with Ottawa in the same province. Why? Well, Toronto and Sydney and New York, Hong Kong, Singapore, London and Amsterdam (to name a few) function more like global cities. These cities share a lot more of the benefits and downsides of globalization. They have much more overseas investment, and they benefit a lot more from the movement of global capital. They have generated a lot more wealth. They have also had governments step in to regulate and tame their real estate industry in the past few years. And it seems to be working. Collectively, there has been a slow down and even a drop in real estate prices as of late for global cities. If Toronto functions like a global city, it may have prices slip like they have in Sydney or Singapore over the past year. In fact, all of these cities are taking a bit of a pause on real estate prices, particularly when it comes to luxury real estate.
- HIGH DEBT LEVELS It is a fact that Canadians have racked up a lot of debt through mortgages, credit cards and car loans. Canadian debt levels are higher than even our big-spending American neighbours. Though they have levelled off in 2018, the quickly rising interest rates could make this debt bigger than it previously was. With debt levels high, Canadians cannot be stretched to take on more debt and may be at risk of covering their current debt. If there are a lot of defaults, then we could see things take a nosedive like they did in the U.S., though subprime mortgages won’t be to blame this time.
- BOOMERS GO BUST One comment from my last blog pointed to how many Boomers are downsizing and heading out of Toronto. This fellow Boomer felt that this huge demographic would, and is, selling-off their real estate en masse this year before retiring. This in turn, would leave a flood of property for sale and overflowing the supply side of the supply and demand axis. I do agree it could happen, but it has not happened yet, and these Boomers will still need to buy somewhere. I don’t believe most, or all, are going to start renting. And I can tell you that most folks want to stay in their current homes as long as possible. Still, it has been labelled a “demographic time bomb”, so I put it on this list.
- TRADE WAR Let’s be honest with ourselves: Canada is not a major player on the world stage, but it certainly is affected by those players. As China’s economy is affected by the trade war with the U.S., the capital outflow has become more difficult. This may weaken the demand somewhat in cities like Toronto, though much more in cities like Sydney and Vancouver, whose businesses and real estate are more closely tied to Chinese wealth and markets. If the trade tensions between the U.S. and China continue, economies around the world will slow.
- RISING INTEREST RATES AND VOLATILE STOCKS As I have mentioned in the past, rising interest rates will put downward pressure on the real estate market in Toronto. If the Canadian government continue to raise rates to battle inflation and to stay in step with the U.S., borrowed money will become more expensive. Along with rising interest rates, the volatile stock market of 2018 has collectively made many Canadians feel poorer. And when people are feeling poorer, they are less likely to spend money on anything, including real estate. Some believe we may enter a mild recession at the end of 2019. Some also believe governments are pushing up rates now so they could drop them again to encourage spending during this possible recession.
There is a good chance that some property owners who are reading this are wondering if they should start to panic after reading these five points. So, now would be a good reminder that I am only talking about the factors that could put downward pressure on the market. No discussion of upward pressure is happening here. Thought a housing downturn is possible in most years, I still believe it’s a relatively unlikely event this year, in Toronto.
We hit the pause button in the Spring of 2017. And in some parts of the GTA, price are not recovered from those highs of 2017. In much of the old city of Toronto, we may have fewer listings coming out, but prices are generally moving up. Not overwhelming rushing ahead in all sectors, but not in free-fall by any stretch. It feels, dare I say, a little healthy, even though increases in the entry condo market grew in price in the double digits over the past year. What should be carefully noted though: Prices will vary from neighbhourhood to neighbhourhood and will really depend on price point. The more affordable price points will see the most competition, especially in the old city limits, pre-amalgamation. The luxury price points may see more downward pressure.