Toronto Real Estate: Some Thoughts

by JDH on July 15, 2017

The price of gold continues to meander, so I’ll get back to that discussion next week.  Today, since I’m writing this after a two day two of Toronto, where I spent yesterday walking various neighborhoods, I’ll give you my “on the ground, completely unscientific” thoughts on the real estate market in Toronto.

As anyone who is not living under a rock on a distant planet will know, the real estate market in both Toronto and Vancouver has been booming for the last few years.  The average detached house in Toronto is now well over $1 million, and 20% annual price increases have existed for the last three years.  Obviously that’s unsustainable, but until it stops, it keeps going.

It appears to have stopped.

The problems with Home Capital, a large “alternative” lender, that have existed for years but became prominent in April, have made it more difficult for sub prime borrowers to leverage themselves to the hilt.  Tighter mortgage rules have also squeezed the market, and this week the Bank of Canada raised the prime lending rate, for the first time in seven years, by 25 basis points.

Why did the Bank of Canada raise interest rates, when there are no obvious signs of an economic boom, and in fact with low oil prices the opposite could be argued?


It would appear that President Trump said to Prime Minister Trudeau:

Dude, love your hair, but here’s the thing:  I need the US dollar to drop to make our exports more competitive internationally, so you need to raise the value of the Canadian dollar, and to do that you need to raise interest rates.  If you do, I’ll leave you alone.  If you don’t, I’ll re-open NAFTA, and the softwood lumber dispute, and increase border security, and make your life miserable.

So, not surprisingly, for the first time in seven years, interest rates are going up, and we haven’t heard a peep in the last few weeks from the Americans about trade disputes.  Trudeau and Vice President Pence had a meeting in Rhode Island this week, and I assume Pence said “good boy, well done”.

I expect the Bank of Canada to raise again in the Fall, and while one increase does not a crash make, successive increases will take some of the life out of the real estate market.

So what’s happening now?

There are two markets in Toronto.

Over the last ten years dozens, perhaps hundreds, of tall condo buildings have been built in the Greater Toronto Area (the GTA).  They are bought when the project is announced by individual investors, and then either flipped or rented out when they are ready for occupancy.  No rental apartments are being built; just condos.

It is the condo market that is most volatile.  That’s where a lot of the speculation exists, and that’s where prices are dropping.  Since the peak at the end of April, prices on condos are down, according to some people, by 10%.  After 100% increases over the last few years that’s not a big deal (unless you bought your condo a few months ago).

Three months ago, multiple bids were common, and condos sold for more than the asking price.  Today there are fewer bids, and you may not get your asking price.

Single family homes in newer neighborhoods are also under price pressure.  I’ve heard stories of deals that were signed in April, but when then got to the closing in July the buyers said “we’ll only close if you give us $100,000 cash back on the $1.5 million deal”.  The vendors cave in, because they know if they re-list they won’t get that $100,000 anyway.  So, the sale gets reported at $1.5 million, but it was really only $1.4 million, so prices have probably fallen more than is immediately apparent.

I did walk through some of the older areas of Toronto yesterday (around Yonge & Eglinton, and Yonge and Lawrence, to name two), and there were virtually no houses for sale.  Interesting.  That’s because these are $2 million homes, and because each home is unique, and old, they are not ripe for speculation.  They are lived in by their owners, they aren’t rented out, and many of the owners have lived in them for many years.  House prices in these areas remain stable.  There is no panic here.

What’s ahead?  I assume the real estate market will continue to soften, so if you are thinking of selling and downsizing, do it now.  If you want to buy, wait a year or three; I suspect prices will be lower.

Of course if house prices drop, people will feel poorer, and if they have no real estate profits to invest in the stock market that may drop the value of the stock market as well, but that’s a discussion for another day.

Thanks for reading.  Back to normal programming next week.  Feel free to leave your thoughts on the Buy High Sell Higher Forum.