What a roller coaster month it has been for our real estate market! The ongoing buyer frenzy continued through early April, delivering ever-higher record “sold” prices. However, with 28 years of experience monitoring the pulse of the market, we began to see a subtle shift in mid-March; a pickup of homes coming on the market and our intuition, honed over 28 years, told us that a market shift may be in the air. The number of showings on our listings was declining noticeably and buyers were more reluctant to come to the table on offer night. Were buyers noticing the increased supply as well? Was buyer exhaustion setting in or were they waiting for the Wynne government to announce measures to cool the housing market?
My opinion is that it was a combination of the three. As we suspected, the Toronto Real Estate Board reported inventory was up 33.3% in April. As buyers became aware of the increasing inventory they became more reluctant to compete for houses, however the sellers’ inflated expectations hadn’t changed. What resulted is that some sellers who did not get the price they expected increased their asking price after offer night came and went; some took their houses off the market; and some sold for less than they originally expected.
Did this affect final selling prices? Yes it did. In central Toronto, properties that sold above the list price dropped from about 90% on average to about 70% on average in April, “bully” offers decreased as well, and some properties did not receive offers at all on offer night. This is only a slight improvement for buyers – 70% of houses selling above list still makes this very much a seller's market, but at the same time “sold" prices have moderated somewhat from the peak.
Does this change point to a longer term trajectory? Will the month of May favour the buyer or the seller? I think it will continue to be a seller's market - without the frenzy, but I believe there will be lots of opportunity for buyers in the coming months as well.
Will buyers take advantage of this opportunity? If history repeats itself, they won’t.
As buyers begin to sense a market shift to the downside, history tells us they typically continue to wait, hoping there will be a more significant slowdown in the near future.
But here’s the reality:
In 2008 when the financial crisis took hold and prices were down almost 20% - buyers waited for a crash which never materialized.
In 2010 when the 13% HST was introduced, the market took a breather - but buyers waited for a crash.
In 2012 when the government introduced mortgage rule changes to cool the market, it brought the market to a dead halt – but of course, buyers waited for a crash.
In 2017 with the Wynne Government's announcement of the Fair Housing Plan – will history repeat itself? I hope buyers WON’T miss out again by waiting for a crash that, in my opinion, will not be coming any time soon.
I have reviewed the government’s 16 point Fair Housing Plan (FHP) and have concluded there are only three points that will have any impact on the real estate market BUT they will not necessarily lower prices over the long term as intended.
15% foreign buyer tax - according to an informal poll of realtors, TREB statistics show 5% of sales are to foreign buyers. You might think this is not significant enough to make a difference, but I disagree. In the first four months of 2017, $6.685 billion dollars of real estate traded in central Toronto; 5% to foreign buyers represents $334 million dollars in just 4 months; an amount certainly significant enough to make a difference. Furthermore, foreign buyers armed with strong currencies, are willing to pay much higher prices than locals.
But there are a few reasons why this tax won't have a lasting negative effect:
- Unlike the Vancouver tax, the Ontario foreign buyer tax has too many exceptions which will reduce the number of foreign buyers who will actually pay the tax. Read the long list of exemptions here.
- At some point, maybe sooner rather than later, foreign buyers will adjust to the 15% tax and eventually return to the market as they have in Vancouver because their primary objective is to invest capital in a stable and tangible asset that will appreciate over the long term.
So, although this tax could have made a difference, the myriad of exceptions significantly reduces the impact and, frankly, will do little to cool the housing market.
Rent control - the Fair Housing Plan will now extend rent control to buildings built after 1991. This will not only result in fewer rental apartments being built but it will also have a chilling effect on individual condominium investors who buy to rent out. If an owner can’t get market rent, why bother?
In addition to these factors that reduce the supply of rentals, there is also the myriad of rental units that have been converted to Airbnb. Yet the demand on housing from increased immigration and migration will continue to swell in the next decade and it will make today's conditions look like a walk in the park.
Instead of lowering prices, this latest iteration of rent controls will actually increase house prices; because of the shortage of rental housing, people who want to live in the city will be forced to buy their accommodations. They will buy condos, co-purchase with friends and family to qualify financially or ultimately buy in the outskirts and commute every day.
Reviewing the Real Estate and Business Brokers Act (REBBA 2002) - if the government can actually zero in on the truly important issues in the legislation that can affect reform and change they could potentially have a lowering effect on real estate prices.
The government specifically mentioned in the FHP they would review and potentially eliminate double ending (the same agent represents both buyer and seller). First of all, this representation has nothing to do with "cooling the market." Regardless, it is a short-sighted idea with a gaping loophole; unethical agents can easily find another willing agent in their office to present their buyer's offer - solving nothing.
In my opinion, the government should put standardized procedures in place to eliminate endless rounds of bidding. The current system allows a seller to go back to the buyer endless times for more money "just because". This very concept drives up prices more than any other one thing.
Last and probably most important, if regulators want to effect real change they should eliminate blind bidding. I have written many times about the blind bidding process Ontario has in place and its impact on prices. Suffice it to say; when we have multiple offers, it’s quite often that the winning bid is literally hundreds of thousands of dollars higher than the next highest offer. If the system were more transparent this wouldn't happen and, if it did, then at the very least, buyers will pay the price with the full knowledge of what they are doing.
If you want to know what is needed to bring some normalcy to the process of buying and selling real estate in Toronto, read this article.
The government missed an opportunity to slap a tax on short term, usually high leveraged, speculators keen on flipping a property which adds volatility to the market. When everyone, regardless of their income level, talk about buying a property to flip, you know there's trouble brewing. Considering that TREB statistics show that 7% of homes that sold turned over again within a 12 month period, it's clear that many of these sales involve short term speculators who are taking away inventory from people who actually want to buy and live in a home. The Wynne government surely missed the mark on this one.
My overall conclusion is that the Fair Housing Plan merely spooked buyers into a wait and see mode. It did not address the important issue of supply for both owners and renters, it did not curtail demand from speculators and it fell woefully short in making us feel confident they know what they're doing.
In the meantime, while buyers and sellers try to figure out how to navigate this uncertain time, there will be buying opportunities in the coming months and buyers should take advantage of this possibility. Since nothing has changed the fundamentals that drive our market, Toronto residential real estate will continue its upward trajectory. Interest in living in our fair city will not wane; here’s why:
- Toronto offers world renowned educational institutions, a medical system that works, a trusted financial banking system, a city with strong job growth, and diversity where people of all cultures, religions, and sexual orientation live amongst each other peacefully.
- Purchases by foreign buyers will continue because
- They hold strong currencies relative to the Canadian dollar
- There are too many exceptions to the FHP's 15% tax for it to make a difference
- Foreign buyers will continue to come to Toronto, by-passing the USA thanks to President's Trump unwelcoming immigration policies.
- There is growing fear in the financial markets and that will make people want to buy an asset that they can see and touch.
- Massive immigration and migration to southern Ontario
- Low interest rate environment is expected to continue
- Toronto property prices are still well below other international cities. I was reminded of this just last weekend. Our 36 year old son just got a job at Stanford University (we're so proud of him) and a 700 square foot condominium in Palo Alto (Silicon Valley) California costs on average, 1.3 million US dollars. So why do people think this can't possibly happen here?
I will leave you with a video discussion with Peter Norman, Chief Economist at The Altus Group, whom I admire and whose opinion I respect. He believes that, although the real estate market will take a breather in the short term, our fundamentals haven't changed therefore we will still see double digit price increases a year from now.
Please, Join us May 17th, 6:00 - 8:00 pm at 738 St. Clair West for an
Open Discussion on the #TorontoRealEstate Market!
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