Tuesday, January 10, 2012

Toronto Real Estate Predictions

Over on the right there is a tag cloud. One of those tags is Real Estate. And frankly if you click on it, there isn't much to see there. I haven't really talked much about real estate on this blog, but one of my hobbies obsessions is following the Toronto real estate market. So today i thought i'd take a break from talking about renovations to talk about Toronto real estate. And since it is the beginning of the year, i'll go ahead and make some predictions, so that i can either face palm or pat myself on the back at the end of the year. Let me just say i more than welcome comments from anyone who agrees, disagrees, or has predictions of their own. So here goes:

Prediction 1:

Lots of people think there's a RE bubble in this city and that there is a large price correction coming our way. I personally disagree, i think the market in Toronto is pretty healthy (see stats below) and demand for housing is being fuelled by a growing population of high income earners looking to live closer to the core. It's been noted in many studies that Toronto is becoming a city divided, with a large and growing population of low income earners and a large and growing population of high income earners. The middle income earners are leaving the city for the 905's. When one looks at the average income over time, there isn't much movement, because the increase in low income earners and increase in high income earners tend to wash each other out. When it comes to real estate prices however, there isn't any washing effect, because low income earners tend to rent and have little to no impact on real estate values. Whereas high earners tend to buy, so an increase in this segment of the population drives house price increases.

As income disparity widens, real estate prices rise, even as average income remains static. Over time real estate which was once affordable to the middle class eventually becomes out of reach for average income earners, which makes many of them believe there is a bubble. Rather than a bubble, in my opinion it more closely resembles the evolution most large cities go through. In fact compared to most large cities, Toronto real estate is still relatively inexpensive. Seriously, take a look at how much a 3 storey townhouse in New York cost. Over the course of 2012 i think prices in the core will continue to rise, albeit at a slower pace. And over the next decade i think we'll start to see a Manhattanization of Toronto's core.

Some stats to consider:
- Canadians with mortgages have significant equity in their home, averaging about 50 percent of the home's value - Canadian Banker's Association

- Canadian mortgage delinquencies stand at 0.47%, about the same level as when the rising prices started in 2000. This stands in stark contrast to US mortgage delinquencies which peaked at 6.89% in 2009
- Stats from a large mortgage broker (CanEquity), show that in Toronto: Average age of applicant = 37, Average household income = 125K, Average Home Loan = 262K. Certainly not red flag territory by any means.

Prediction 2:

Anyone who cruises the MLS listings enough will learn to recognize flipper houses right away. They are often unfurnished in their photos, and typically feature brand new, (but mediocre) everything. They usually have dark hardwood floors, beige painted walls, hollow-core doors, and reek of Home Depot sales items. And if those things weren't obvious enough, the exteriors usually sport, some combination of stucco, brick and mock stone. These days i see fewer and fewer of them on the market. I think the combination of the Toronto Land Transfer Tax and the increase cost to purchase the "original" homes has really put a damper on flippers' ability to find their next profitable project. Also i think that buyers are becoming increasingly design savvy and more and more are looking for higher end finishes, not just new. While other buyers are now more willing then ever before to buy unrenovated homes and make them their own. So my prediction in 2012, is that flipping in Toronto is dead.

Prediction 3:

Each year Toronto Life publishes it's "Where to Buy Now" list. I figured i'd come up with my own, focusing more on the core. I base my prediction on the housing stock, changing demographics, proximity to shopping, downtown and transportation. So here are 2 neighbourhoods that i think will see the next wave of gentrification.

1. The triangle formed by Dundas Street West , College Street and Ossington Ave: I believe this area has all the classic pre-gentrification ingredients. Many of the homes are occupied by older first generation immigrants who have raised their families in solid brick character homes over the last few decades and are now looking to downsize. The area is well served by public transportation, and is a short commute to downtown or to the Gardiner Expressway. Houses tend to be Victorian and Edwardian in style and date from the 1880's to 1940's. The homes tend to be well cared for, but not updated. Streets also tend to have mature trees and the retail strips along Dundas Street West and College Street, are being touted as the "Next Frontier". New low rise boutique condos and minimalist townhouses are starting to infiltrate this area. Along streets like Coolmine Rd, Lakeview Ave, and Churchill Ave, enormous three storey Victorians can still be purchased for under $800K, similar houses one block south in Beaconsfield Village or one block north in Dufferin Grove, would command prices over $1 million.

A row of large Victorians on Coolmine Ave, just begging for a make-over:



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A row of large Victorians on Churchill Ave, if these were in Roncy there would be permits in the window and a dumpster in front of every second house:


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A row of Victorians on Lakeview Ave, can't you just imagine the potential?:

2. Chinatown/Baldwin Village: Many of the homes in this neighbourhood were converted to apartments decades ago, to take advantage of the rents that one can charge when you're walking distance to everything downtown has to offer. The homes are typically older Victorian row houses and unfortunately have not always been well maintained giving the neighbourhood a gritty feel. I think this is a big reason why this neighbourhood has resisted gentrification thus far, in spite of it's incredible location. But with the condofication and yuppification steadily moving north along Spadina, i think Chinatown's gritty days are numbered.

Houses along Baldwin Ave, mere spitting distance from the AGO and University of Toronto. If you squint hard and imagine the chain link fences and weedy gardens are gone, you can see how beautiful this street scape could be:
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15 comments:

Dylanarman said...

When it comes to actual estate prices however, there is not any washing effect, because low income earners tend to rent & have little to no impact on actual estate values.

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Meg said...

Great topic! I am no expert on the market but think about it all the time. I agree with your opinion on a "bubble" in the downtown core. When experts warn of a downturn, the worst I see here locally -if anything- is a leveling off. Never a drop in the 8 years we've lived here. I do still see flips. There are a handful happening now in the couple block radius of my house. But as you point out, they are not Home Depot. They are HIGH END. Every detail. Structural to the downstairs bathroom faucet. Hundreds of thousands of dollars poured in. But in each instance, going back to your first point about price, they make their money back and more. Bidding wars each time. It's incredible to me! My observations are really just based on my neighborhood, as I tend to stay close to home. But I love hearing about other downtown area happenings, as similar situations are popping up everywhere. I wonder what we'll see 10 or 20 years from now? Manhattanization could ring true...!!!

LifeBegins@Thirty said...

Love this post. I have been pretty interested in the market in Toronto since well before we started looking. My only concern is the high number of first time buyers who, while they make good money, are buying homes that require mortgages of WELL over the number that is quoted above. I'm talking 500K+ mortgages.

Of course, that seems to be what it costs to get into a house in Toronto, and if you work in the core, moving to the 905 doesn't always make sense.

Most first time buyers purchased based on and are continuing to rely on the insanely low interest rates. Since everyone has to renegotiate every 5 years (or less), I'm concerned that if their incomes don't continue to rise, but interest rates do, there will be a problem come renegotiation time.

Keep in mind that I'm talking about FTBers who are late 20s early 30s, usually no kids and both partners have well paying jobs (i.e. 100K each ++). If interest rates move by more than a little bit, I think a bunch of highly leveraged FTBers will be in precarious positions.

Just my thoughts of the day - not worth much :-)

Roncy Vic said...

I agree with you Janice, people are definitely getting way more comfortable with debt. I know for a lot of people, myself included the thought of borrowing HALF A MILLION, just seems crazy. But lthe numbers aren't actually that scary. Let's say the hypothetical couple makes $200,000 per year, or $12,158 per month after tax. At today's low 5-yr fixed rate of 3.45%, their monthly mortgage payment would be $2,483.17. Let's say the rate doubles to 6.9% in the next 5 years, they're monthly payment would be $3,471.26. Sure it's gone up $1K per month, but in the grand scheme our fictitious couple will still be in pretty good shape. Likely they'll just have to scale back their annual vacation or entertainment to make up for it.

The real question is whether they can maintain that income. I think young people need to ask themselves some serious questions before taking on big debt. Could a big mortgage payment every month hinder your mobility and potential opportunities in the job market? For example, could you afford to go back to school for a graduate degree? What if you had the opportunity to take a slight pay cut to move to a job that ultimately had more to offer, could you afford to do it? What if one of you lost their job could you still afford the home until the other person could find work again?

the MASH said...

Roncy Vic, I really like your post (nice work on the stats)!

I agree with you that there will be a slow down but no burst bubble.

And I like your pick of neighbourhoods but I think it will be years before they see the turn around that Roncasvalles has seen. A friend of mine bought just south of Dundas near Ossington about 10 years ago. Not much has changed. There are many young families moving in but drugs are still rampant in the alleys.

It has taken the Annex over 15 years to turn itself around from the same problem.

I agree with your choices. Just don't think it will happen overnight.

Roncy Vic said...

@ The Mash

You could be right about that. While i do think the long term trajectory of those neighbourhoods is up. It does take time, for the houses to turn over and for people to catch on.

Sometimes it happens incredibly fast, like in Roncy and Leslieville, where in the span of 5 years the demographics of the neighbourhood completely changes. Sometimes it's a slow gradual march, like in The Annex.

I do believe when gentrification happens fast, it's often aided by some enterprising savvy RE agent, who lays claim to the area, and knocks on doors and flogs the crap out of the neighbourhood. I think this is a real opportunity for some agent to become the DuWest specialist.

Kathy said...

I live around the DuWest area (closer to Queen and Dovercourt) and although there are some nicely maintained Victorians (that are snapped up very quickly), there are also many, many older homes that were completely stripped of their Victorian character. Think wrought iron fences, lots of concrete pavement, two tone brick exteriors and more of an 1980s versus 1880s facade. These tend to linger just a little longer on the market and are a touch more affordable giving young families and couples the opportunity to move into this desirable neighbourhood. Luckily, these buyers are also the ones willing to slowly bring back the original charm and character of these lovely homes.

Kathy said...

And also one comment on an earlier comment. I've never seen any rampant drug usage in any alley around Dundas and Ossington. I certainly feel safer in my neighbourhood than certain parts of Leslieville. But, I suppose no matter where you live there is always going to be some level undesirable activity

Roncy Vic said...

"Think wrought iron fences, lots of concrete pavement, two tone brick exteriors and more of an 1980s versus 1880s facade."

I know exactly what you're talking about, those houses are in every neighbourhood in Toronto. It's funny there's actually a name for that architectural style it's called the "Toronto Special", i've actually seen some pretty amazing things done to "Toronto Specials". Check out:

http://www.theglobeandmail.com/life/home-and-garden/real-estate/article1747885.ece

http://www.theglobeandmail.com/life/home-and-garden/architecture/dave-leblanc/taking-in-the-view-from-a-rejigged-toronto-special/article2158026/

http://www.arrenwilliams.com/arren-williams-design-lab/2010/6/25/finished-out-front.html

Joe Q. said...

Nice post with some interesting predictions. I think we have discussed the over-valuation issue on David Fleming's blog before and I appreciate your arguments about how income disparity affects real estate prices, but would add a few comments:

(1) I'm not sure that it's meaningful to compare Toronto RE prices to a Manhattan townhouse. Income differences aside, Toronto's home-ownership rate is in the 50-60% range while NYC as a whole is around 30%, less in Manhattan. Only a small number of families would even think of buying a property like the one you linked to.

(2) I agree with you that mortgage delinquencies are low in Canada, but comparing our current rate to the USA post-crash is also IMO not that meaningful.

(3) The CanEquity numbers are very interesting, but the CMHC indicates that the average down-payment among first-time buyers is about 7%. Not sure how to reconcile these two bits of info.

(4) I like your neighbourhood predictions -- one factor that may slow down gentrification is school quality (real or perceived). There is huge variability between public schools in the downtown core, and often being on the wrong side of the street can move you from an excellent school district to a mediocre one. Buyers are conscious of this, I think.

Joe Q. said...

"Let's say the hypothetical couple makes $200,000 per year, or $12,158 per month after tax. At today's low 5-yr fixed rate of 3.45%, their monthly mortgage payment would be $2,483.17. Let's say the rate doubles to 6.9% in the next 5 years, they're monthly payment would be $3,471.26. Sure it's gone up $1K per month, but in the grand scheme our fictitious couple will still be in pretty good shape. Likely they'll just have to scale back their annual vacation or entertainment to make up for it."

This will have a cascade effect on the rest of the economy, though, if there are a lot of people in the same boat (and I think there will be).

"The real question is whether they can maintain that income. ... For example, could you afford to go back to school for a graduate degree? What if you had the opportunity to take a slight pay cut to move to a job that ultimately had more to offer ... "

Forget about graduate school or job loss -- simply having kids might be enough to throw a wrench into their plans. What if the hypothetical $200k/yr couple you discuss above has a baby just before their mortgage is renewed? The spouse who stays home would take a large pay cut (EI maternity leave benefits max out at about $20k per year, though generous employers would top this up for a few months). After going back to work, you're looking at about $1.2k+ per month for full-time day-care in Toronto. A nanny runs around $2k per month. All the other costs associated with starting a family really add up too, and combined with larger mortgage payments, might put them under considerable strain -- and this for a family that would easily be in the 90th percentile of household income...

Ultimately, the fact that so many young couples are getting into debt that requires two very generous (and uninterrupted) salaries to service, probably indicates that these buyers are NOT asking themselves the questions you mention.

My $0.02.

Toronto Real Estate said...

I understand that it makes for a better story to leave out that the buyer of this property

valuehomes.ca said...

Nice blog..I had read all predictions..It is good..These tend to linger just a little longer on the market and are a touch more affordable giving young families and couples the opportunity to move into this desirable neighbourhood.

Real Estate Investment said...

Successful real estate investors understand that you make your most money the day you buy an investment property, not the day you sell it.

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Phoenix Design said...

I’ve never been fearful for any long term real estate bubble. Resale prices in classic Toronto neighborhoods will always be strong, like in areas like Roncesvalles. There will always be so much appeal for either traditional homes like a classic Victorian with a wrought iron fence, or a renovation or tear down.