How do we make sense of current R.E market ?

July 27, 2017 - Updated: July 27, 2017
Dear All,
 

Many of you have asked for my opinion on foreseeable impact of recent announcement by the provincial government, primarily 15% tax on foreign buyers and some other measures to slow down the GGH (Greater Golden Horseshoe) market. So here is my take:

 

I think the answer lies in the question as to what factors caused the surge in demand for single family homes and consequently run up in home prices, in the first place?

 

It has been a gradual built up of demand since 2015, here are some of the contributing factors, so let’s have some perspective first and then we assess the impact of this recent announcement:

 

Weaker Canadian Dollar:                                                                                             

Oil is our largest export, therefore Canadian dollar pretty much follows the oil price trend .Oil prices came crashing down in 2015, CAD followed, it was down by +30% at one point and it has been trending low since then. Buyers who had funds in USD (including first time buyers and substantial number of non-resident Canadians) saw cheaper CAD as an opportunity to invest in GTA’s residential real estate market, to them “properties became 20-30 % cheaper!” And yes, we did notice keen interest from mainly buyers of Chinese origin. That was the first trigger! And this factor holds ground even now.

 

Trudeau Phenomenon:

Trudeau came to power in Oct 2015 with a strong progressive agenda, his economic policies resonated with people both locally and abroad ($120 B investment in infrastructure over 10 years, all aimed at accelerated GDP growth and creating jobs for Canadians, etc.). In addition, his emphatic initiative to bring-in over 25 K Syrian refugees with a commitment to ramp up current immigration level to 320K for 2017 took brand “Canada” to new highs. Most People felt confident about the future economic growth. We have noticed renewed buyer interest from 2016 in the GTA real estate primarily immigrants of Chinese, South Asian and Arab origin whose first priority is to own a home and who are keen to buy it for investment as well.

 

Continued Improvement of the GTA Economy:

Since Trudeau/ Liberal took over there are clear signs of increased economic activity across most sectors like construction, real estate, financials, manufacturing, information technology, logistics & transportation which continues to bring down the unemployment rate, giving confidence to both residents and investors that a much prosperous future is ahead.

 

Low lending rates:

This is perhaps one of the key reasons for stronger demand for residential properties which are relatively easier to afford due to perhaps one of the lowest mortgage rates in the developing world, ranging 2 % - 2.60 %

 

Buy Now Before its tool late Phenomenon!

Since early 2016 we have seen a frantic rush to “buy now” by mostly first time buyers as they rightly felt that they will be priced out of the market. (That’s why spring market has preponed, it has been a hot winter market for past two years). The run up in prices also motivated small Investors with disposable savings of $80-$100K, but they could only afford to buy condo apartments as other formats (Town homes, Semi and Detach) have gone beyond their reach and as a result condo apartment demand/ prices shot up to over 20% during 2017 which were at 5-7% growth level until mid-2016.

 

 

Limited Supply of Development Land in Desired Cities & Communities:

This is the core issue. There is a shortage of development land at sought after locations. Newer communities are far and lack efficient infrastructure like Highway and GO access, good schools etc. (barring Oakville and Milton where builders are asking exuberant prices). This has placed an upward pressure on demand for resale homes in sought after GTA communities and consequently resulted in the price surge.

Municipal, provincial and federal governments are considering and planning several initiatives to solve the supply problem of single family homes including highways and GO train extension into the outskirts of the GTA, potential rezoning of commercial land, freeing up some government land etc. However, there seems no quick fix. We expect that it will take several years to effectively address the supply problem

​of ​new single family freehold housingTighter supply of primarily freehold single family dwellings is expected to continue.

 

 

Therefore, only weaker demand can cool down the market and bring prices down, is it possible?

We believe major economic slowdown (like what happened in Alberta), significant rise in borrowing cost, or some other fundamental adverse shift in underlying factors can curb demand for housing significantly but there seems no indication of such an outcome at present.

 

Now, let’s come back to the original question; Can recent forced Government measures slowdown the demand and bring down house prices?

 

Not in the long run, though it does seem to have a psychological impact in the short run on buyers and sellers. TREB data shows that foreign buyers account for mere 3-5% and based on our understanding most of them buy new condo apartments and some opt for new single family dwellings from developers directly. Only a small number of foreign buyers buy resale home.

 

Then what is the reason for apparent slow down after April 20 announcement?

 

Significant increase in supply (as per TREB April stats, supply of homes went up by 33% in April 2017 compared with the same period last year) But why?

 I believe that a large majority of sellers/ investors who have been witnessing crazy run up in prices got motivated to sell so as to book profits and yes they thought “to get in and get out” quicker prior to April 27 budget announcement. They are in addition to those sellers who have already bought their home and were planning to sell in coming months but got in the market as well before any potential “slowdown” occurs. They all landed in April. No wonder, inventory shot up in just a span of few weeks by over 30% in April. Suddenly, buyers have too many choices. And what buyers do in such situations, yes, they take a step back, take their time while they “look for deals” (especially in communities where inventory has substantially increased), we are in that phase at present.

 

 

So, what can be expected next?

Sellers who have already bought their next home may not have a choice except to sell lower than the projected market price (5-10% correction in prices is anticipated in some locations), this may give an impression that market prices are eroding and can result in further slowdown. However, sellers and small investors who basically listed their property to reap substantial profits may not be motivated to sell below their “expected” price point and would terminate listings. This whole cycle may take 3-6 months and we will be back to the same old situation of low supply and higher demand based on rationales explained above.

 

We believe this is a great window of opportunity for buyers and it may not last long!

 

In conclusion, we see no evidence or any emerging trend that would inhibit demand for housing in the GTA, in the long run (just to accommodate new immigrants we need approximately 7-10 K additional units per year) on the other hand supply of freehold homes is expected to stay tight, however, price growth would perhaps be more realistic (say  8-10% range) as buyers are expected to be more cautious and with more regulatory control in place on real estate trade which will be good for a healthy real estate market.

 

Questions and comments are welcome!

 

Written By Riaz Ghani 

May 23, 2017

 

 

Regards

 


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