Do House and Condo Prices Rise and Fall in Tandem?

I love the Olympics, and when they're on, I'll pretty much watch any thing when I have the time. I even found myself watching the women's synchronized diving this weekend where Canada snapped up their first medal.

What was so impressive about these synchronized divers are their ability to move exactly in step on the diving board, twist and turn at the same height in the air, and land at the same time with an almost equal splash. Really, I don't know how they do it. Amazing.

The whole thing has led me to think about the concept of synchronicity and timing in real estate. Often buyers and sellers of Toronto look to the media for guidance on how to enter and exit the market. Right now, the media is awash with talk of the Toronto real estate market cooling off or even crashing. Of course, for ever article or TV segment announcing a crash, there is an equalizing article the next day saying every thing is just fine and dandy. 

But I'm not here today to call out TV,  newspapers and some blogs on how they use real estate for more ratings and readers. I would, however, like to point out one assumption that gets made over and over again. And this assumption is all about synchronicity. Like the bronze medal divers, many articles and stories assume that condos and houses rise and fall in tandem, like two divers springing up and tumbling down together to the pool. But do they? Or, the bigger question, will they?

From a macro perspective, the short answer is yes. If there was a sudden rise in unemployment, for example, or a huge spike in interest rates, houses and condos would both be hit hard and would likely slow down or even fall in value.  The change in value would be different, though, depending on where you live in the city and just want kind of condo or house you live in.  To see the effects from the macro perspective, all we have to do is look south the the U.S. where the entire country lost value in their homes, albeit the effect varied widely from state to state. 

From a more local perspective, I think condos and houses do not move in tandem at all. We would certainly not receive a bronze medal for synchronicity, that's for sure. As I've mentioned in many previous blogs, there are very few homes that are currently under construction in the GTA, but our population is increasing. So, there are more homebuyers, but very few houses being built. A pretty good recipe for an increase in the value of houses over the long term based on simple supply and demand data. As for condos, there many condos being built.  And the really, there needs to be. There is a huge rental demand and a huge buyer demand. Supply is keeping up with demand, though some say exceeding it. So, on local level, houses and condos are not moving in sync at all. Houses are set up to increase more in value than condos. 

Now, this is a  HUGE generalization. There are better condos than house and better condo locations then house locations. There are certain condos that I would say are better investments than houses. But, all in all, condos do not increase in value as much as houses do across the GTA. 

Does that mean every one should rush out and buy a house? Absolutely not! Some houses require a lot of renovations off the top that could really put a dent in your budget, and houses require a lot more labour - namely shoveling snow, cutting grass and cleaning out your eavestroughs.  You really have to dig deep and figure out if you're a house person or a condo person. I mean, in the end, you have to live there or be the landlord. I would never buy a house if you're a condo person. I would be the right condo!

Phantom Bids: Just How Scary are They?

No, it's not the undead, up from the grave to make an offer on a Toronto condo, and no, it's got nothing to do with the "Phantom of the Opera" or Star War's "The Phantom Menace". But yes, the term "phantom bid" is as scary as it sounds.

Since last week, a lot more of Toronto's sellers, buyers, and real estate enthusiasts have come to learn of the term "phantom bid" because of a real-life incident that was written up in the Toronto Star's Moneyville.  (For the Moneyville article click here). In a nutshell, a buyer's agent put in an offer on a property for her clients $90,000 over the asking price.  The buyers and their agent believed they were in competition with other buyers in a bidding war. As it turns out, there were no other offers on the table. Those bids that really didn't exist are the "phantom bids". A buyer has either been lied to, mislead or misunderstood some thing.

 Since this article has come out, many people I have come across in my real estate sphere have been full of questions. The biggest one: How common is this phantom bid phenomenon?  I can say that this has never happened in any of the deals I have worked on or any other agent I know. And I do not know any of the agents referenced in the Moneyville article. According to that piece, there has only been 4 official complaints lodged with the Real Estate Council of Ontario (RECO) in the past 10 years. So officially, not very common at all.

The next biggest question: Why do phantom bids happen? Well, to be clear, it shouldn't happen. When a buyer's agent makes an offer on a house, that agent needs to know how many offers have been registered, if there are any other buyers interested. And the key word here is "registered". Many agents will tell you that they are pretty sure there is an offer coming in or they are expecting an offer to come in or they are 99.999999999% sure an offer is coming in, but if it is not registered, it is not an offer. Even if there is a registered offer, that offer can be withdrawn if the actual written offer has not reached the seller and the selling agent. And if that happens, that listing agent has to let you know that offer has been withdrawn. So, when you hand in your offer, the selling agent should let you know exactly how many offers you are working against, if any.

It is up to the selling agent to be very clear about how many offers are being presented to the buyer,  especially since that can affect the offer price. If a seller agent misleads a buyer agent into thinking there have been more bids than are being offered, they could lose their license. Though there are some very responsible and professional agents out there, there are a few that are not as keen to stick to the rules or who are just not as familiar with the rules as they should be.

Many real estate salespersons have asked to have clearer rules set up around phantom bids, and I think the day is coming when we will see it. Until then, I don't think every day is going to feel like Halloween in the real estate world. Yes, phantom bids do exist, but they are in direct violation of the rules and regulations set up by the Real Estate Council of Ontario.

Are All Heritage Homes Worth Preserving?

Toronto likes to take pride in its historical heritage. Cabbagetown, for example, boasts "the largest continuous area of preserved Victorian housing in all of North America". The Distillery District takes the claim of "the largest collection of Victorian architecture in North America." 

So, you would think that Toronto's preservation efforts have been a smashing success.  But the truth is heritage preservation is a relatively new thing for this city. And really, no one really started caring about preserving much in Toronto until about the 1970s. Before then, it was out with the old and in with the new. Highways ruled supreme and no one had any idea who Jane Jacobs was.  Cabbagetown and the Distillery District were largely feral before the 1970s. So, they were just flat-out ignored. And strangely, that may have been the recipe to their current success. 

Nowadays, things are very different. Cabbagetown has one of the most notorious and rabid heritage preservation group in the city. This group deservers their credit. I mean, Cabbagetown homes are a joy to look at. Of course, this group has also been known to be on fussy side. I have heard they (and the City) blocked some pretty exciting modern-design ideas because they didn't look like the Victorian houses around them. 

One of the latest Cabbagetown crusades has to do with the Toronto Community Housing Corp (TCHC) and all of the public housing they own in Cabbagetown. Before Cabbagetown transformed into its bastion of Victorian preservation, it was not exactly the best part of town. The city owned a great deal of the houses as public housing. Nowadays, this collection of City-owned houses, sprinkled in between all the reno'd Victorians, do stand out because they are essentially falling apart inside and out. And to fix them, especially to blend in nicely with their tarted-up Victorian counter-parts, would require a substantial pile of cash.  And we all know that the City does not have any money to fix them. Still, the locals are leaning on them to make sure that fixing them is a priority. Even without local pressure, it sure seems that these homes are in need of some attention if they are going to remain upright. 

What surprises me is that the focus seems to be around the City providing an influx of money to upgrade these houses that are verging on substandard or have already passed that point. But I have a better idea. Sell em! Now, I know that doesn't sound terribly surprising coming from a real estate salesperson, but I think doing so would benefit everyone. The buyers would likely be some one who wants in Cabbagetown to renovate and upgrade a house to their own liking, making the heritage group happy. The City saves money. In fact, it would make money off the sale of the house. Because there is a public housing shortage, the City can use this money to build more high-density or mixed-use housing for those who need public housing. A low-density house in Cabbagetown, or any where else for that matter,  is not exactly a cost-effective way to provide public housing, especially in a bastion of historic preservation. Let's face it, preservation looks great, but it ain't cheap. 

The Manhattanization of Toronto: A good thing?

Have you noticed the term "Manhattanization" being thrown around a lot these days? Well I have, especially when it has to do with Toronto.  Not only in last week's Huffington Post, but even in real life, when I'm out at a restaurant or overhearing idle chit chat in line at Loblaws. And for the most part, I think Torontonians like this term because it aligns them with New York. Ever since Peter Ustinov famously said that "Toronto is New York run by the Swiss", we have had a fascination with being New York or at least we like the comparison.

But despite its New York sounding name, Manhattanization is not really about New York at all. The term itself actually has a pretty negative beginning. It was used to describe all the skyscrapers invading the San Francisco skyline, blocking the view to the bay in the 60s and 70s. It was no compliment.

Nowadays, it feels a little more positive. It's like bragging about the skyline of your city, though the benefits of it depends whether you own property or not. Vancouver is actually a great example of Manhattanization. Like Manhattan, Vancouver's downtown became landlocked with the help of the mountains and the ocean. Buildings became higher when there was not a lot less space left to expand out. In Toronto, it's the green-belt policy that is causing this Manhattanization effect. You cannot build outside of the GTA on protected forests and farmland. 

So now, there's simply no denying it. Toronto really does have a full love-on for skyscrapers. In fact, for buildings over 100m, Toronto ranks 14th in the world for the number of high rises it has. That's ahead of cities with five times the population like London and Mexico City. And a lot of these new skyscrapers are recent additions or still in the works. In fact the tallest condo in Toronto, the Ritz Carlton is a relatively new addition. And the second largest, Aura, is still under construction. In fact, out of the top 10 condos in terms of height, 9 out of the 10 Toronto condos have been constructed in the last two year or are still under construction. So there's no doubt Toronto is quickly becoming much more of a vertical city, definitely compared to other same sized cities in the world. But what does this mean? 

Well,  condo towers will continue to blossom, taking on a much bigger role than it does now. Some say the increase in the value of houses will rise 30 - 50% in the next decade making houses only accessible to the wealthy. So, that puts pressure on the condo market to pick up that middle class slack. As families are no longer able to afford a house, they will start looking to buy a condo instead. Interestingly, right now, bigger, family sized condos are the last to sell, but in the future, they may be much more in demand.  And since rental apartment buildings are rarely built these days, condos will have to take up the slack in that sector as well. So, love em or hate em, condos will continue to gobble up parking lots  and become a bigger portion of the homes available in the future. 

Can the Feds Really Tame Housing Market?

I really do have to scratch my head when I see the Canadian government in action trying to control the housing market. And right now, the Feds are pretty keen to cool it down, particular, according to them, when it comes to Toronto condos. The assumption, and it's mostly a false one, is that the government controls the housing market and can change it's course as they wish by making sweeping, one-size-fits-all changes to a large number of complex housing markets that exist across the country.

Their intentions are good: They would like us fellow Canadians to bypass a housing crash,  and keep our debt levels in check, especially since we had front row seats to the action-packed American crash for the past several years.

One of the reasons the Feds believe the housing prices are higher in Canada has to do with the low interest rates, rates that Mark Carney will not change soon.  Even though record low interest rates in the U.S. has not pulled their housing market up, it has allowed many more Canadian to afford bigger mortgages at lower rates. But since the rates aren't going up to cool off the housing market, the government feels it's just gotta do something.

 So on July 9th of this year,  there will be more restrictions to qualifying for a mortgage, and this in turn, should cool off the market -according to government thinking.  One of the changes is pretty significant, especially if you're a first-time buyer. That is, the Feds will be bringing down the amortization from 30 years to 25 years.  The other changes, however,  won't have much of an impact. Like a comet the size of a coconut hitting the earth. Nonetheless, these changes include: No high ratio mortgages over a million dollars. I imagine most people who are spending over a million are probably on their second home and will likely have the home equity to bypass the high ratio mortgage category here in Toronto. So, no big worry there. Next, you can borrow equity against your home  at less than 80% instead of 85%. Again, I shrug.

Most importantly is what's not changing: the minimum down payment is still staying at 5%. If they changed that, then the impact would have been bigger than a coconut.

But enough of the coconut talk. The truth is, we won't really know if these changes will make much of an impact until after they come into effect. And if the market happens to cool, would it really be because of these changes?

History can give us an idea of what to expect. You see, this is the 4th time in 4 years that the government has stepped in and tried to tinker with the housing market to cool it down. Clearly, it hasn't worked yet, and I'm not convinced it's going to work this time.

I do think it's interesting that the Feds have purposely targeting the Toronto condo market as a thing that needs cooling. In my experience, some great condos have led to bidding wars, but I find the condo market to be quite balanced at the moment, and the increases, year over year, have been good, but much less compared to houses in Toronto. Houses have been on a tear. Though not as many bidding wars as we've seen in the early Spring, the housing market is really where the market may need some taming.  But I'm not sure the Feds can do much about it. As far as I'm concerned it's simple economics: Lots of condos are being built. So the demand is being met (even exceeded in some locations). Very few new houses are being built in the GTA, but demand is increasing. So condos appear more balanced and houses continue to rise in price.