Condo supplies in Toronto will help drive home prices down further
Toronto real estate prices are headed for a cliff. The condo market will drag it further down according to the Canada Mortgage and Housing Corporation (CMHC).
“Anticipated increases in the supply of condominium apartments will lead to softening prices next year,” says the CMHC in an email to NOW.
Toronto home prices hit an all time high in June. But the CMHC has been warning that those prices will begin plunging in the fall. Unemployment and low immigration due to the COVID-19 pandemic are two main factors.
According to the CMHC, the lack of demand for oil on a global scale is another factor. Restricted mobility during the pandemic is leading to falling oil prices. That will further exacerbate the impact on oil-producing provinces and Canada’s economy. Extended mortgage deferral deadlines, lower mortgage rates and government stimulus packages are all meant to soften the blow.
Increase in Toronto real estate supply
According to the Canadian Bankers Association (CBA), more than 760,000 Canadians have opted to defer their mortgages or skip payments. That’s about 16 per cent among those with mortgages in bank portfolios.
There will be an increase in Toronto real estate supply from homeowners who can no longer defer mortgages. That supply will couple with inventory from the condo market fuelled partly by short-term rental restrictions during the pandemic.
“More units could also sit on the market longer as more buyers wait on the sidelines,” the CMHC says. They attribute that decline in demand to job losses and general financial uncertainty.
“A significant number of condominium units under construction (54,000 units currently) will make its way to the resale pool and will further increase supply.”
Condo rental market
The Toronto Regional Real Estate Board (TRREB) is reporting how hard the condominium rental market got hit in the year’s second quarter. According to TREBB, GTA realtors reported 7320 apartment rentals in Q2, which is down 24.8 per cent from the same time last year. Meanwhile, the number of rental listings were up by 42 per cent from last year.
“There are two key take-aways from the Q2 2020 rental market statistics,” says TRREB president Lisa Patel in a statement. “First, COVID-19 clearly impacted the demand for rental condominium apartments, due to restrictions on showing units and job losses across many sectors of the economy. Second, we saw the continuation of the pattern experienced over the past year, with year-over-year growth in rental listings far outstripping growth in rental transactions.”
Average condo rental prices also dipped to $2,083 for a one-bedroom and $2,713 for a two-bedroom.
“Increased choice led to more negotiating power for renters, resulting in year-over-year declines in average rents in the second quarter of 2020,” says TRREB’s chief market analyst, Jason Mercer, in a statement.
Home owners can no longer use Home Equity Line Of Credits as down payments on investment properties. WE Realty broker Odeen Eccleston tells NOW that the new CMHC rule will reduce the pool of potential buyers.
Re/Max Hallmark Realty broker Meray Mansour adds that declines in condo demand will be felt more outside of the central core. She says highly saturated areas like Yonge and Eglinton are also vulnerable. Mansour adds that COVID-19 is forcing people to spend a bulk of their time indoors while trying to keep social distance, so elevators and a lack of outdoor space has made condos less appealing.
However, the average condo sale prices still managed to rise by 5.1 per cent year-over-year to $619,707 in Q2, according to TREBB. That increase occurred while listings were down 21.6 per cent and sales dropped 50.8 per cent year-over-year.
TRREB has also reported that city council has approved a plan to create more housing opportunities in Toronto. TRREB is specifically pursuing options that fall between detached and semi-detached homes and condos.
Toronto real estate right now
Odeen Eccleston has observed an exodus from the city inspired by COVID-19. People who are working from home are now swapping out their expensive Toronto real estate for cottage country.
“They can get so much more for so much less in a lot of these cottage countries,” says Eccleston.
But for now, Eccleston and Mansour say the heat is still on in the Greater Toronto real estate market.
“In the 905, especially in the below $700K price range, its still on fire,” says Eccleston.
“I’ve even sold a few condos with multiple offers in the Beaches and surrounding areas,” Mansour adds. She notes that some condos remain appealing despite the trends. “In areas like the Beach and Leslieville, or places where condos are more low-rise loft or boutique style, the demand is still there. Especially condos with really large terraces.”
Both realtors are cautious of the impending downturn. However, they wonder if Toronto’s real estate market can whether it better than expected. For now, they’re telling sellers to be safe and act now before we reach that cliff.
Toronto suburbs boast the most overvalued real estate in all of Canada – blogTO
While people in and around Toronto have just had to accept (albeit begrudgingly) the region’s outrageous home prices for what they are, it’s downright maddening to look at what you could buy in other parts of the world for the amount it costs for even a tiny condo here.
It’s not just the downtown core, either, with peripheral markets in the province continuing to see prices skyrocket to unseen levels, and homes in even small-town Ontario now on par with L.A. and other larger and far more desirable cities.
Though it’s obvious the region’s real estate is not actually worth as much as it’s going for these days, the extent to which it is overvalued at this point is quite shocking.
Canadian real estate estimated as 38% overvalued on average. In some GTA regions, up to 60-70% overvalued. If you bought a house in the last year or two in Canada, you’re screwed.
— PattyCakesXRP (@PattyCakesXrp) May 24, 2022
New figures from BMO (via Better Dwelling) show that while Canadian homes in general are about 38 per cent overvalued, the issue is the worst in Ontario, where home prices are about 55.4 per cent overvalued as of the first few months of this year.
What’s most interesting is that in Toronto specifically, this number is lower than the province as a whole — at 41 per cent — while in the surrounding suburbs, it’s far higher.
Cottage country areas like Muskoka, the Kawarthas, and Haliburton are approximately 64 per cent overvalued, the bank says, while the suburbs just outside of the GTA have the highest levels of overvaluation.
Properties in “exurb” areas like London, Barrie, Niagara, Guelph and Kitchener-Waterloo — that is, not the suburbs directly around the city, but just beyond — are now around 74 per cent more expensive than what they’re worth.
Vancouver and Toronto housing so overvalued crash is coming https://t.co/qevtT43oDp
— Rocketred (@wildcat2013) May 8, 2022
Given how fast home prices have climbed in Toronto and, as a result, around the city, experts say we have been on the verge of bubble conditions for some time now; the city was actually just ranked the second-biggest housing bubble in the world at the end of last year due to its severe overvaluation.
This will, stakeholders seem to agree, eventually lead to a swift downtown and market correction, likely later this year due to a number of factors, even without the government intervention that so many have been demanding to quell out-of-control price acceleration.
I think a better title would have been “Here’s how unaffordable the house market is”
— TheHarshTruth (@TheHarshesTruth) May 24, 2022
While B.C., Quebec and Atlantic Canada all join Ontario in having substantially overvalued housing markets, prospective Canadian buyers can still get some bang for their buck if they’re willing to move to Alberta or Saskatchewan, which are considered undervalued.
Real Estate Has Bucked the Deglobalization Trend – MSCI
- Deglobalization has had profound implications for portfolio construction in listed assets. Conversely, with real estate, there are indications that the asset class has become more global in recent years.
- Return dispersion across national markets has decreased, while property type has become a more important return driver across all markets, suggesting stronger international alignment, as cross-border transaction volumes have remained stable.
- Institutional real estate investors could still face challenges from deglobalization, but a historical preference for more transparent and stable markets may help counterbalance some of them.
Real estate has historically exhibited a strong home bias, with investors favoring their local markets. Where investors have sought offshore exposure, they have typically favored markets that offer higher levels of transparency, better governance and stability. This is not to say that investors have not allocated to markets that are less transparent than their home markets. Nor that they have not pursued strategies higher up the risk curve when they invested in foreign markets. But in aggregate markets with higher transparency and government ESG scores have tended to attract more real estate capital.
Globalized real estate drivers in a deglobalizing world
The demand for international real estate is driven by the world’s largest institutional investors, many of whom have explicit global real estate investment mandates. Surveys of investor intentions show continued strong demand for cross-border investments among this group.1 Despite this sentiment, the share of the volume of cross-border transactions, as tracked by MSCI Real Capital Analytics, has remained relatively stable over the last decade, ranging between 19% and 26% of total quarterly transaction volumes.2
Even with relatively stable flows across borders, there is evidence that real estate may have become more global based on return behavior. There has been a notable decline of total-return dispersion across national markets in the MSCI Global Annual Property Index since 2008. At the same time, the spread of returns across property types has increased across all markets as technology changes (like the rise of e-commerce) and the pandemic have disrupted real estate markets, causing headwinds for sectors like retail and office but boosting other sectors like industrial. These trends point to potentially stronger international alignment in the asset class: Unlike in much of the previous two decades, since 2019 there was a greater opportunity for outperformance from allocation decisions based on property type, rather than country.
Return dispersion decreased across national markets but increased across property types
Source: MSCI Global Annual Property Index
Could deglobalization affect real estate?
Political populism, the COVID-19 pandemic and increased geopolitical tensions have all contributed to concerns about deglobalization. Business cycles may become desynchronized, leading to wider variations in the performance of equity and bond markets across countries, lower correlations and higher volatilities. The investment impact of this trend emerged in recent years: In equities, correlations between countries and regional blocs have declined.
Going forward, global investors in bonds and equities may respond by taking a more nuanced approach to asset allocation — for example, by considering new, more focused country allocations for broad allocation decisions (geopolitical blocs, energy importers versus exporters or autocracies versus democracies) and placing greater emphasis on risk factors exposed by the war in Ukraine, such as sanctions risk, reputational considerations and currency convertibility. While it is possible that similar deglobalization headwinds may emerge for real estate investors, there are several factors that could mitigate this.
One example is that, as mentioned earlier, transparency, governance and stability have always been important considerations for global real estate investors, as it is an opaque and illiquid asset class, where asset-investment life cycles are typically measured in years (the median holding period for assets in the MSCI Global Annual Property Index has been six years). The result is that markets with higher transparency, better governance scores and stronger institutions represent the lion’s share of the opportunity set and transaction volumes.
Transparency, governance and stability have mattered in real estate
Where available, market-size estimates are sourced from MSCI’s Real Estate Market Size Report 20/21. For the remaining countries, market size is assumed to be 10% of GDP. Source: JLL, Our World in Data, MSCI
Institutional real estate investors may therefore have less exposure to countries significantly exposed to decoupling risk due to deglobalization. Of the approximately USD 2.3 trillion of assets that MSCI tracks in the MSCI Global Annual Property Index and MSCI Asia Annual Property Index, over 91% of the capital value was invested in liberal democracies with real estate markets rated as transparent or highly transparent by JLL.
Nevertheless, deglobalization could have knock-on effects that impact real estate. For instance, increased political polarization and pandemic-induced supply-chain disruption could drive “nearshoring” and changes to international trade patterns.3 These changes could in turn affect the volume, nature and location of real estate demand. For example, a move from just-in-time to just-in-case logistics could increase demand for industrial-warehouse space and see some of that demand shift away from markets that are further afield and more vulnerable to potential trade disruption.
While deglobalization could result in profound consequences in asset allocation and portfolio construction, different asset classes may be affected in different ways. The distinct features of the real estate investment process, as opposed to that for listed equities and bonds, as well as the nature of the opportunity set typically available to global real estate investors, may mean that real estate could be less directly exposed to the effects of this investment megatrend.
The authors thank Alexis Maltin for her contributions to this post.
1For example, see: “2021 Institutional Real Estate Allocations Monitor.” Hodes Weill & Associates and Cornell Baker Program in Real Estate, Nov. 10, 2021.
2It should be noted that purchases made by third-party managers on behalf of offshore investors will count toward domestic volumes rather than cross-border volumes and thus may underestimate total cross-border capital flows.
3Nearshoring is the practice of transferring a business operation to a nearby country, especially in preference to a more distant one.
With housing top-of-mind for Ontarians as election looms — Windsor's real estate market cools – CBC.ca
With the Ontario election less than one week away and interest rates rising, the real estate market in Windsor-Essex is experiencing a cool down.
However, the price of a home is still significant, leaving many constituents feeling left out of the market, yet hopeful that the election might bring with it some improvements.
“Optimism and hope is always there because that’s all we have, right?” said Shanike Gordon, a single mom with two kids renting an apartment in Windsor.
Gordon hopes to get into the housing market soon.
“That’s the goal at the end of the day — you have somewhere for you and your kids to be able to call home,” she said.
The latest numbers indicate a shift in the local real estate climate, with buyers taking a more conservative approach, and sellers not seeing as much competition for their houses as before, according to Windsor realtor Abe Alhakim.
“We’ve noticed a slowdown in the market over the past few months,” explained Alhakim, who works with LC Platinum Realty.
“We’ve noticed buyers have put their plans on hold, especially with the increase in interest rates from the Bank of Canada, which has already had one interest rate increase and more is planned over the next few months. And also there’s an Ontario election coming up, so people want to kind of see how things work out over the next few months.”
After months of prices climbing, the average price of a home in Windsor-Essex dipped to $692,759 in April. It was the first decline in the average sale price of a home since September 2021. At its peak, the average price of a home reached $723,739 in March.
The number of sales also dipped by 16 per cent in April compared to the month prior. Sales also dropped by nearly 19 per cent compared to April 2021.
Alhakim describes it as a “mixed market” where some homes are still selling significantly over asking price with multiple offers and bidding wars, while other houses aren’t seeing the same kind of demand.
As for what’s anticipated for the coming months, Alhakim noted, “that’s the golden question.”
“I anticipate the market will stay stabilized and balanced over the next few months, but it remains to be seen how expected interest rate increases are going to affect the market — and also the Ontario elections.”
He noted that the decline has some feeling “fearful” while others are jumping at the opportunity to buy a home at a cheaper price point.
Housing key election issue
Housing costs are a key issue for voters across Ontario, with bidding wars and low supply having driven prices up in recent years. To address the issue, the PC Party, NDP and Liberal Party leaders have all pledged to build 1.5 million homes if elected.
For Leamington’s Terry Maiuri, it’s particularly concerning as he considers the impact the soaring prices are having on his son.
“It’s just getting ridiculous for the younger generation, I’d say, to afford housing,” Maiuri said.
His 20-year-old son is close to completing his university studies, and Maiuri is concerned about what comes next.
“I told my wife the other day, with the price of houses, I said, ‘My God, he’s going to be living with us until he’s 40.’ Like, how does someone starting out as an adult afford housing, let alone apartment rentals?” he asked.
“It just seems a little ridiculous.”
He added that while politicians say they realize there’s a problem, he doesn’t think any party is doing enough to address the issue.
Windsor voter Lisa Lum says affordable housing is key for her this election. She said, after living in her Walkerville home for eight years, she was recently evicted after her landlord sold the duplex she was renting.
Now, she’s in a new home in the same neighbourhood, but it’s significantly smaller, paying $500 more in rent.
As for whether she might want to buy down the road, she doesn’t believe that to be realistic given the state of the market.
“I wouldn’t be able to with the bidding wars that are here,” she said.
“I mean, how do you even get the down payment when homes that were bought, you know, five years ago for $120,000, and now they’re going for five and $600,000?”
While she’s optimistic more can be done by political leaders to address rent control, she doesn’t have confidence much will change when it comes to real estate.
As for Gordon, she’s not sure she’ll be voting at all in the provincial election, but explained stronger action on housing could sway her.
“Anything that caters for housing, families, single families especially, I’m all for it,” she said.
Meanwhile, Alhakim continues to monitor the market, adding that he doesn’t expect a major correction in the market, but envisions the market settling into a plateau this year.
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