Toronto/GTA Market Correction - Ripple Effects

[Darren Horrocks]

Hi,

First post at BP! My wife is sick of talking to me about investing, so hopefully I can become more involved in this community, and safe my wife her sanity! hah

I read this article today (January home sales give rise to correction concerns) discussing market correction in the near future for Toronto and Vancouver, given that now even the condo market is seeing double digit growth month after month, without a shortage of supply unlike in home prices.

My question is: 

• Is there a way to estimate or calculate the ripple effect of that correction to the surrounding markets? And how far it will reach?

I look forward to any insights and discussion!

Darren

[Claude Boiron]

8 Reasons I believe the GTA (Greater Toronto Area) Real Estate Market will continue to appreciate

Introduction

Many questions are created by the media when one day it talks about stability, and prices remaining high, then the next day says we are in a Real Estate bubble and that we should all be worried about a market crash. Also, uneducated consumers and industry “professionals” tend to spread incorrect information and theories.

Using 8 points, I will provide clarity on what is truth, and what is misinterpretation by the media of industry statistics.

1 – Appreciation

Most people are obsessed with analysing average property prices, and how much they have increased – that is virtually irrelevant – the yearly appreciation is the number to watch.

In the late 80’s, appreciation was between 20% and 37%, every year, for four years in a row.

No wonder there was a Real Estate market crash in the early 90’s – that rate of appreciation is just not sustainable.

Over the last 15 years, we’ve seen, 5%, 8%, even 12% appreciation in the GTA.

This has resulted in a steady, but gentle (compared to the 80's), increase in property values.

2 – The Greenbelt effect

The Greenbelt was enshrined due to legislation passed by the Government of Ontario in 2005. Though well-intentioned, the inadvertent side-effect of this legislation was the increase of values of properties inside the Greenbelt.

3 – Intensification in Toronto

Have you ever wondered what kicked off the condo boom in Toronto?

Why are they so damn many condos still being built??

The City of Toronto Official Plan of the early 2000’s called for intensification in the downtown core, and along major arteries.

That means that if you owned a few stores along Yonge Street with some offices or apartments above, you were in luck, because the government had just declared that you could build 20, 30, or 40 stories instead of two, three, or four.

This policy was meant to discourage urban sprawl, and made it cheaper for the City of Toronto to operate, since it could use existing infrastructure (roads, sewers, public transit, etc.) to grow, rather than need to build new infrastructure.

4 – Yearly migration to the GTA

There is a greater than 100,000 person net migration to the GTA every single year. Can you try and imagine what 100,000 people looks like in a parking lot, for example? That’s a lot of people!

And they all need to live somewhere.

I don’t care if they buy or rent a house, a condo, or an apartment, but they will be impacting the GTA’s Real Estate every single day.

5 – Residential vacancy rates

Residential vacancy rates have been hovering between 1% and 2% for the past many years.

This is historically low, and as close to zero vacancy as we’re likely to ever see.

One caveat, however, is that if you have bought into a condo building pre-construction, it can take six to nine months for the market to absorb your unit for lease.

The reason is not that there are no tenants looking, but rather:

• A new building is an unknown to tenants, so there are no reviews online and the amenities are a question mark; and
• During interim occupancy, which is when most investors put their units up for lease, the common areas are not yet finished, and construction activities are still taking place in the building; and
• There is usually a flood of units hitting the market for rent in a new building, so anyone who choose some nicer upgrades or colours, or who has a better layout, will lease first.

6 - Transportation

Anyone noticed that with each year that goes by, it takes a little longer to get around the City?

Despite some efforts to alleviate congestion, and to improve public transit, there is no denying that driving or public transit are perfect options, and as such, many people who work in the City are choosing to live in the City, and even in the Downtown Core.

7 – Calgary is down; Toronto is up

Toronto has traditionally been the economic centre of Canada, but was usurped for a number of years by Calgary. With the drop in oil prices, that has changed recently, and Toronto has regained the title of economic engine for Canada. Many people who left Toronto for Calgary, are now heading back to Toronto.

8 – Foreign investment and international demand

My belief is that as things get worse in the rest of the world, Canada’s appeal will just continue to increase.

We are far from perfect, and our winters are not everyone’s favourite climate, but on an international level it is hard to beat the safety, opportunity, education, health care, natural resources, and financial stability which Canada has to offer.

Conclusion on the general Real Estate market

I’m not predicting that GTA Real Estate will increase very quickly in value (thought it may continue to do so).

However, I do believe that the eight points I covered will continue to act as supports and drivers for the value of Real Estate in the GTA.