Year in Review: 2015 in Toronto Real Estate

Though not as apocalyptic as the Toronto real estate prediction of 2014, predictions at the start of 2015 were mostly on the gloomy side. Most so called experts were not very sunny with their forecasts, but some were not willing to be wrong for another year, and did not commit to a strong opinion. You see, for the past ten years or so, the real estate forecasters have started off on a gloomy note, and each time they have were off the mark.

In her book When The Bubble Bursts, Hilliard MacBeth says we were heading for trouble in 2015. She claimed there would be a real estate correction in the Canadian housing market that would correct up to 50%.  Yikes!

For those not trying to sell a book with a doomsday headline,  there were still some real estate predictions from reputable places that also called for some price dops. RBC, for example, had predicted a  tempered 15% correction in 2015.

My own prediction, completely unscientific and based on my experience, knowledge and gut feelings, was that the market would improve, but I certainly did not expect the market to improve as much as it did.

Needless to say, whether you're RBC, Hilliard MacBeth, or lil' ole me, real estate predictions for 2015 have not proved to be the terrain of those in the know. As every year passes, I become more convinced that real estate is a tough thing to predict, even among those who have amassed enough data to venture a confident prediction. There are just too many variables. And 2015, like many years before, proved that Toronto real estate has risen in value year over year more than any one had predicted.

It seems that we have experienced, once again, some very strong gains in the housing and some healthy gains in most of the condo sector as well. As the city grows and houses are no longer built, there is more and more demand placed on them. So, their value really has risen the most in 2015.  Houses were king again. Double digits in many neighbourhoods especially if you had a detached house. I found the Fall a little more tame than the Spring, but still very competitive. Many bidding wars and happy sellers. Some frustrated buyers too.

This past year, we saw more bidding wars and competition in condo townhomes, boutique condos and converted lofts. I really noticed a change in converted lofts where prices seem to have risen in the better conversions in high demand neighbourhoods. It seems we have fewer warehouses and churches to convert. So, we are seeing more competition in another part of the housing sector that has dwindling supply.

This year, real estate success has not been the same all throughout the country. Alberta's oil woes have cooled prices there, but Vancouver and Toronto keep on gaining in value. Our government has tried to temper the markets, but with a gesture that will have little impact in my opinion. Perhaps an interest rate hike would cool the market, but that didn't happen in 2015, and may not be in the cards for 2016.

For 2015, another interesting development was the success of the U.S. real estate market, which is finally rebounding from its real estate pile up of 2008. I wouldn't say every thing is coming back in all parts of the States, but there is an excitement there among investors that this is a good time to buy because it appears that they have started the upswing from the bottom of their market.

But what does the gains the U.S. mean for us in Toronto? Well, a few things, it may draw away some of the foreign investment away from Toronto to U.S. cities. This may be a way to cool some of the prices. On the other hand, I should point out that the Canadian dollar has slipped considerably this year, and this makes our real estate a little more discounted for foreign investors from the U.S.

With 2016 just around the corner, what will be expected for the Toronto real estate market? Well, this will be subject of my first blog of 2016. I can't promise I will be right in my educated guesses! As we have learned from the past years, real estate predictions is more art than science.

The Toronto Real Estate Reboot

Let me be clear: Real estate happens 24 hours a day and 365 days a week in a city like Toronto. Yes, even on Christmas, Thanksgiving and your birthday. But there are certain points throughout a calendar year that are more pivotal than others.

In my experience there are two slow down months that are followed by a reboot. Why should you find this interesting? Because during a reboot, there is a greater chance of significant change in the real estate market. There is a less predicability. The market could pick up stronger than the previous season or the market could come back with the same zeal or no zeal at all. During these two times of the year, you will see buyers and sellers alike waiting in anticipation to see how the market will start up again.

Let me explain a little more. There are two months where real estate really slows down. It doesn't completely stop, but the pace of the market is so slow, it is in a kind of dormant state. I find that August and December are those dormant months. Again, there are transactions and new listings, but far fewer than during other times of the year.

The first dormant state is quite predictable. Once Labour Day is cleared in early September, the market starts up again full swing the very next day. These listings continue to come out in larger numbers for the rest of September and October and then taper off in November before hitting the second dormant period of December.

The reboot for December is not as predictable as the Fall reboot. It could happen in January or February. Sometimes the increase in market activity is based on the weather, and sometimes it is based on other factors like buyer fatigue, lack of inventory, or a change in mortgage rates.

Again, I am not saying you should not buy or sell a property in August or December. If there's no inventory and buyers are active, it could be an opportune time to list. There may be far fewer buyers, but there is also far less competition with other sellers. I have had some of my busiest open houses in January when buyers are done with the Holidays and ready to get out there and look again.

The two reboot periods can be exciting times of the years for real estate enthusiasts with big stakes. For sellers, it can be a bit of a nail biter since you do not know if you will have the same interest or more interest as before the reboot. For buyers, it's the same thing. You may come back stronger than ever, or have even more competition in the new year.

You rarely see a market shift outside of these reboot periods unless there is some external factor that would significantly influence the market - a stock market crash, lowering of interest rates, or shocking job reports. For the most part, however, if you have a strong April, you will like have a strong May. Alternatively, if you have a weak September, October will likely be another version of September. There is more predictability there.

Our next reboot will take place in January and February of 2016. Coming up to that point in time, there will be some real estate changes under way from the Federal Government. As of February 2016, the Feds will require a minimum 10 % down payment of any purchase above $500,000. So, a buyer could pay 5% under $500,000, but once that buyer clears the $500 000 mark, they must pay a minimum of 10% on the portion above $500,000. As before, anything above one million will require 20% down since it does not qualify for CMHC insurance.

Personally, I think this will have little impact on the real estate market, and it feels like a gesture from the government to address the robust real estate market in Vancouver and Toronto. Bigger influencers are still in place. Demand for houses and converted lofts will likely be very strong because both are in limited supply in a growing city with a diversified economy.

So,  I would say the reboot for early 2016 will look a lot like the reboot to the Fall of 2015 -  strong demand with little effect from the Federal changes to mortgage qualification. Like 2015, we will should start with many transactions and more price appreciation.

WHY THE FEDS WON'T RAISE INTEREST RATES

Let's face it. Interest rates have a lot to do with the cost of homes right now, in Toronto and most of the country. We live in the golden age of low interest rates. Ask anyone who owned a house in the 1980s, and they will not hesitate to remind you that interest rates were once in the double digits. This story will often be told as a cautionary tale warning today's homeowners that interest rates can rise again.

...And I'm sure they will some day. I doubt we will see double digits any time soon or a great number of people would lose their homes, and the economy would be in a whole lot of trouble. Not a great move by the government.

Still, I don't need to remind most people that these low interest rates have never been so low. Buyers often qualify for larger mortgages at a lower interest rates. Because of that, they are able to spend more money on a new property,  and there is more competition at higher price points.

Recently, the Federal government has been under some pressure to tame the stubbornly buoyant Toronto and Vancouver housing markets. If the markets in these cities won't cool themselves, then the Federal government believes it should step in and help, or as some people see it, interfere.

For many of the past five years, condos in Toronto and Vancouver used to be the housing villain. They were the poster boys of a housing market on the brink of a collapse. Constant fodder for real estate doomsayers and cranky anonymous blog commenters. They were apparently in oversupply and at risk of taking the Canadian economy south - and I don't mean for a nice winter vacation.

These days, condos don't seem to be the bad guys any more. They have had reasonable gains in Toronto and Vancouver. The new villains seem to be detached houses that have been on a tear for the past decade often rising in the double digits each year. Right now, the average detached Toronto home is at roughly a million dollars. In Vancouver, it is closer to $1.6 million. So, we're not seeing a lot of starter homes here.

Some see this as a new reality in these cities, which have become international cities, and for better or for worse, have had much more investment from overseas that may have contributed to the higher prices, particularly in Vancouver.

An easy way for governments to control the housing market would be to raise interest rates. Of course, interest rates are not just here to influence the housing sector, but the entire Canadian economy. So, the government has to take into account if a higher interest rate would positively influence the oil sector, or the manufacturing sector or exports in general. There is a lot to consider beside the real estate market.  With oil prices falling, the government may be inclined to lower interest rates again, even into negative territory, to prop up the economy.

Also, the housing market is not exactly performing the same all over the country. In fact, property prices are dropping in Calgary and Edmonton, and flatlining in many other cities. So, an interest rate hike may send prices even further down in these cities adding stress to an already lacklustre or faltering local economy.

Yes, it appears that the rising home prices and high cost of living in Toronto and Vancouver have led to a dilemma for the Federal Government. Raising interest rates to tame the markets in Toronto and Vancouver would certainly not benefit the country as a whole.

Of course, that doesn't stop the government from creating other obstacles for buyers in an attempt to tame the wild beasts of Toronto and Vancouver. Right now, they are considering raising the minimum down payment on insured mortgages from 5% to 10 %. Personally, I don't think this will change much in the Toronto and Vancouver markets, but at least the government could say they are doing something.

Some other countries like New Zealand are going much further to contain their runaway real estate prices. Their government has proposed a 30% minimum down payment only for the city of Aukland and only on properties that are investments. The New Zealand governor who has forwarded this idea states; ""The objective of this policy is to promote financial stability by reducing the rate of increase in Auckland house prices, and to improve the resilience of the banking system to a potential downturn in the Auckland housing market."

It's an interesting idea. Instead of focusing on the country as a whole, New Zealand is proposing tougher mortgage qualifications for one major city, not the entire country. Furthermore, it only targets investors. Unlike Canada, New Zealand keeps track of overseas investors, and according to their statistics, there are many overseas investors who buy up properties in Auckland because it is a stable economy and sound investment. Unfortunately, this means more competition and higher prices.  So, the government is trying to target investors, domestic and foreign alike, to keep prices more reasonable.

I'm not saying I agree with such a proposal or that the government should get involved with the housing market, but I do think there is something smart here. It may be wise to create policies specific to certain cities or local economies. Real estate at a national level is very hard to navigate. One policy could possibly tame the property process for boom towns while really causing damages in more vulnerable markets.

The Three Kinds of Real Estate Agents

Real estate salespeople may seem all the same to some, but in my experience, we are not all made equal. It's one job where your skills, knowledge and abilities can vary so widely. It can be a little surprising. This may be true for other career choices as well - lawyers, doctors, waiters, and über car drivers all become more skilled with experience. As a real estate salesperson, I have come across some very impressive salespersons who have clever market strategies, thorough knowledge of a given neighbourhood, and good results for their clients. Then there are those who are slippery as a wet banana, out-of-touch or have lack in experience, and put their clients best interests at risk.

Over years of working in real estate, I often place my fellow colleagues into three categories. There may be many more ways to do this, but I thought I would make it simple. In the world according to me, the three kinds of real estate salespeople are the non-transactional agent,  the transactional agent and the referral agent. Let me tell you a little about each and which one would be your best bet.

1. TRANSACTIONAL AGENT

 The title for these agents sounds impressive - transactional agents! And often their experience at turning over transactions make them very skilled at the rules and regulations. They often try to turn over as many transactions as possible. Many work in teams because it is tough for one person to turn over the number of transactions required to be the top producer at the end of the year. This creates a lot of .01% agents who do a lot of marketing with tens of thousands of mailouts. Their goal is to turn around as many transactions as he/she/they can. The reason?  It's good for them: They make a lot of money quickly. The reason that's bad: They don't necessarily build relationships and show their worth. So they rely on a constant stream of  new clients. The focus is on making money, turning transactions quickly and finding new clients. 

2. THE NON-TRANSACTIONAL AGENT

The landscape of real estate agents has changed remarkably over the past five years in Toronto. For starters, there are A LOT of real estate agents in this city. Now to be fair, every one has to start somewhere and learn their business. I admire those who are taking a stab at working as a salesperson in real estate. It's a competitive market, especially in Toronto and Vancouver. In Toronto, for example, 70% of new agents will drop out in the first two years. Many will not make a sale at all. Then there are the part-timers - the firemen, the nurses, and teachers who try to do real estate on the side. The thing is when you turn over one or two transactions a year (or less), you really don't have a chance to hone in on the important skills like pricing a property correctly, developing marketing strategies and negotiating. Even something as basic as filling out an offer are full of problems because the person has so little experience. As I said, everyone has to start somewhere, and deserve to learn, but as a consumer, do you want to be the test pilot for an inexperienced agent or one that has worked five years in the business, but have only sold or bought five to ten properties?

REFERRAL AGENT

This is the kind of agent you want to have. These agents have experience and focus on doing a great job so that clients will recommend them to their friends and family. Through their results, these agents create raving fans, and subsequently grow their business. It's not that they are selfless angles  who want to make their clients happy. They work hard and making their clients happy because they make more money from it. Both sides win. For the real estate salesperson, it can take more time to cultivate these kind of relationships, but they do pay off in the long run.

It's like many other professions. If I want a good massage therapist, you often ask a friend for a good referral. Same goes for a good restaurant, a good dentist, a good cleaning person and a good dog walker. The good ones are worth finding.