A TURBULENT WORLD AND TORONTO REAL ESTATE

2016 seems to be off to a turbulent start for economies around the world. Canada is no exception. I'm sure there are empty outlet store parking lots as far as the eye can see are all over Buffalo, New York right now because of our falling dollar. China's shaky stockmarket threatens put a drag on other economies, and oil prices keep on slip sliding away. It's not a coming apocalypse, but these are some significant events to monitor.

In terms of stock investments, I'll leave that to the experts, but I will add my two cents when it comes to how this early start to 2016 could effect housing market here in Toronto. So, let's talk Chinese stock markets first. I can say wholeheartedly that I have very little insight into what may happen in China's plunging stock and how the world will be pulled in. Some have suggested that our interconnected economies will lead to an economic crisis in China that may reverberate to other countries around the world, like the U.S. housing market meltdown did in 2008.  Others say as Frankie says: Relax. 

What I can tell you, as far as Toronto real estate is concerned, the Chinese stockmarket may put more pressure on the Chinese to seek out more stable investments outside of stocks like Toronto real estate. A very similar thing happened here in Canada and the U.S. when tech stocks tanked in the early 2000's. Many people turned to real estate as a safer, long-term investment. This did not turn out so well for some Americans, but this is what people do when they are losing money in stocks. They put it somewhere else. I don't think Toronto would be the top city worldwide where the Chinese would invest, but there is a significant amount of Chinese investment here already (and Vancouver). So, chances are we could see more of it this year because of the stockmarket in China.

You know what else is going to lead to more foreign investment in Toronto and other Canadian real estate? The low Canadian dollar. And our dollar does not seem to have finished its slip. It all has happened so fast. Alberta, once the proudest bird in the chicken house is not looking so healthy these days.  Oil and other commodities are less in demand as they were in previous years. A lot of Canada's economic kick came from these sectors, especially in the Prairies and Newfoundland.  Along with the sinking oil prices goes our dollar.

Our low dollar  this year may make us think twice about visiting L.A. or Miami or Aunt Minnie's trailer home in Upper State New York because it will be expensive to travel to the United States whose economy is showing increasing strength.

On the flip side, I would suspect we will see more Americans coming here, not only to visit and dance in the streets at Caribana, but to buy property. And who can blame them?  Remember, they just received a 30% discount on our real estate from not-too-long-ago.

This may appeal more to the sellers of Toronto who will see more buyers coming from the U.S., but there may be a silver lining for buyers as well.

This slowdown in our economy will likely lead to an interest rate cut or two. This, in turn, will make rates even more appealing than they are right now for buyers. And you may qualify for an even better rate and possibly more money.

Also, it may take time, but the lower dollar could assist Ontario with its manufacturing exports once again. It doesn't seem to have happened yet, but we are a much cheaper place to manufacture things now. And hopefully we will finally learn not to depend too heavily on oil, and diversify our economy even more.

Overall,  I think Toronto real estate will have a decent year. We may see more foreign interest in our city due to our weak dollar discount.  I don't think we are going to see an overwhelming push of investment from the U.S. or the Chinese to the point where Canadian buyers should be worried en mass, but it does give us some perspective on just how many variables, even outside of the country, can influence Toronto real estate.

2016 - Should We Bother With Real Estate Predictions Anymore?

People don't like to be wrong. And when it comes to real estate predictions, wrong is what most people are. It doesn't matter if you're a crazy troll making comments on how dumb all Canadians are for buying real estate in the past ten years, or if you are from an analyst from a think tank with all the real estate data and economic algorithms at your finger tips to make predictions. It's not  an easy game.

For the 2016 real estate predictions, I think the predictors are becoming aware of how wrong they have been in the past. So, the sky-is-falling predictions seem to be less common this year. I'm seeing a lot more levelled, even non-commital predictions. CMHC, for example, says the housing market in Canada will barely keep up to inflation until 2017. This basically tells us, according to them,  that house prices will not rise by leaps and bounds like it has for the past few years, and it tells us that it won't sink either. Not too extreme one way or the other.

In 2015, no one was right on their predictions, not even the very optimistic real estate brokerages of Canada. Everyone called for less gains than 2014, and for some, there were certainties that some kind of correction would occur. Everyone complained about affordability and the number of condos in the Toronto real estate market. What really happened? A better year for price appreciation in 2015 than 2014, one of the stronger years for condos in a long time, and all of those new condo units still seem to have been absorbed in 2015.

It's not just 2015. It's 2014, 2013, 2012, 2011, 2010 and the list goes on. Each year there are predictions on where the real estate market goes, and each year, it's wrong. It's not to say there there could never be a correction or a temporary price slip. Of course there can be. When or if that will happen in 2016 cannot be guaranteed by anyone.

So, instead of offering my 2016 predictions as a whole,  let's look at what I think are important factors that could effect the real estate market in 2016.

1. House Supply I'm sure some of you are tired of hearing me say this, but I am saying it again because it is an important point: There is a limited supply of houses in Toronto. This will not change. As the city grows, very few houses are built. So, demand goes up. You are still going to see news stories about how dumpy house in an established hood sold for a million dollars this year in my opinion.

2. Condos Are The New Sponge Condos will absorb more people than ever before. I think over the past five years we are seeing more families with kids in condos. This includes families who prefer to live in condos in central neighbourhoods and those who do not like their options for houses in Toronto. We'll also see a lot more boomers selling their houses for the easier-to-maintain condo. Overall, we still see reasonable demand on condos. In turn, we'll see more demand for community centres and places that would benefit kids in condo neighbourhoods. Condos will not be for retirees, those who hate yard work and young folks exclusively. It will be for everyone.

3. Poor Economic News  This may bring some of the air out of the real estate tires as news of a poor Canadian economy over the next year will make Canadians feel less inclined to buy property. It may instill enough fear to disrupt the steam engines of Toronto and Vancouver real estate. Of course, the flip side of this: Ontario and British Columbia will benefit from the low dollar. Alberta, you may be out of luck until oil rebounds.

4. Greater Investment In Toronto Infrastructure This is a good one to look at for investors or for those who would like property with better appreciation. With Trudeau in, we should see a lot more money coming for improvement of our infrastructure. At long last! So, keep an eye out for improved transit lines or even a few new ones.

5. Size Adjustment This is a hard pill to swallow, but Torontonians will have to learn to live with less space. There are a lots of benefits to living in the city. Space is not one of them. The good news is that there will be less to clean. Living in Toronto, like many big cities in the world, will be for the spatially challenged. More so than ever.

6. More Investors Though there are much more foreign investors going to the improving U.S. market, our lower dollar sure makes our higher prices seem lower to others, particularly Americans who will start to see our property as a kind of bargain as the  Canadian dollar slips.

7. Interest Rates  They won't budge. I could be wrong here. There will be inflation, but I suspect the government won't increase interest rates if they feel the GDP won't grow all that much in 2016, and projections are on the lower side.

8. Conversions, Low Rise and Boutique Condos No matter where the market, houses will still be king. Low rise condos, conversion lofts and townhomes will also do well. This year giant condos may do well depending on their location and the fitness of their reserve fund.

I think that covers most of the broad strokes. Now if I dare to generalize a little, even though I said I wouldn't, I don't think we'll see the wild increases we saw in 2015, but that's exactly what I said after a very strong showing for real estate one year ago.  I was wrong then. Maybe I'll be wrong again.

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.