Deteriorating Affordability in Toronto: What to Do

The figures are out again, and one more time Toronto real estate  receives a gold star in September with houses selling over 10% higher from September 2014 to September 2015. This kind of news used to be incredibly exciting for me as a first time buyer over ten years ago. I would pull out my calculator and guesstimate just how much my current home, at the time, may have appreciated. But after getting that gold star year after year, you come to expect it, even though you know it can't last forever.

And despite all the condo crash talk of the past few years, they are also on the rise in most condo buildings. Condos are performing better than they have in years. Steady and healthy at the moment - rarely two words assigned to condos since 2010.

For sellers or those who have purchased over a year or more ago, you can breath easy. Buying is even tougher now if you're still looking.

For first time buyer or for those who are keen to buy another property, it may feel like your pace of saving cannot match the rise in prices, especially if you want the very coveted detached house, the golden standard of a dream home in this city. It may feel downright depressing to know your friend who bought three years ago lives in a neighbourhood that you could not afford to buy in now.

This whole thing really does lead to two possibilities:

1. There is a new reality in this city. We are on the cusp of affordablility for housing being completely out of reach for many first time buyers or those without a serious familial investor on their side. The new reality is that houses in the city will be for the wealthier or the second time buyer. First time buyers will be sent to the surburbs or will need to start in a condo. There is something very true about this scenario. There is a shortage of houses in this city, and the city is growing. It's an unavoidable reality.

2. There is a real estate bubble in Toronto. If this is the case, I suspect it is largely because of interest rates. Once they move, that may cool down prices. For me, however, this does not change the fact that there is an increasing demand to live in the city and the city is growing without the proper transit system to move people. So, even if there is a correction, we will return to this same situation where houses are not being built any longer, traffic is lousy, and commuter trains could be a whole lot better set up and intergrated throughout the region with more frequent GO trains that extend further out.

So, if you are planning on buying in the next few years, what would be the best approach? Here are 5 options:

 1. Wait. If you think the market is sure to correct, then wait. You may have prices come down, and you can buy when the market bottoms out before heading back up. Of course, you do run the risk of waiting and watching prices rise even more. There are many people who have been waiting five or even ten years for a price correction, and now they have been seriously left behind.

2. Buy A Condo - Condo prices have not been on a tear the same way houses have. They are affordable, and usually have predictable costs ahead of them. Condos, to a large extent, are the majority housing option in most big cities. Density and condos go hand in hand.

3. Get Out of Toronto - I don't think you should go just anywhere. Not all areas connected to Toronto by the GO Train are the same. I still believe Hamilton is Toronto-like without the same house prices. Yes, it's a long commute, but it's cheap right now. Some areas are sketchy for sure, but things are changing quickly. Did I say cheap?

4. Get Creative - I had clients recently purchase a bike shop. No they are not bike enthusiasts, but with a little renovation, they were able to change a bike shop into a four bedroom home for them and their three kids. It looks amazing. The main floor is enormous. Yes, you will need a renovation budget, but sometimes these storefront with apartment upstairs could be had for less than the houses in a given area. Compared to the houses of the area, I would estimate they paid around $200K less than an equivalent 4 bedroom house.

5. Stay A Step Ahead of the Next Emerging Neighbourhood - There are still emerging neighbourhoods in Toronto where first time buyers could by a house or a larger condo. They are not as close to downtown as the used to be, but they exist. Think neighbourhoods along the new Eglinton Crossway. Great place for appreciation. In the east, consider homes near Danforth and Vic Park or even parts of Scarborough.

The reality is that we are currently moving toward deteriorating affordability in this city. It won't always be this way, but we are also a different city than we used to be ten years ago. Neighbourhoods that were considered fringe then like Leslieville, the Junction and Mimico are rarely the terrain of first time buyers any longer. This won't change. Once neighbourhoods have all you need in walking distance, it's very unlikely they will become cheap again in your lifetime.

The Brooklyn Effect

The Brooklyn effect. It's a term I hear thrown around more and more. It seems that in this day and age the brand of "Brooklyn" really does stir up some excitement in people. In fact, there is a store now open in one of the exclusive shopping centres of Paris called, you got it, "Brooklyn". It has t-shirts, artisanal jams and wool hats - things you would apparently find in Brooklyn with ease. The funny thing is, the Brooklyn effect, whether you live in Brooklyn or not,  has become synonomous with living in a hipster neighbourhood with funky artist spaces, experimental restaurants and stylized general stores. I'm sure there are hundreds of neighbourhoods in the Western world who have taken this track. I've heard this term used to describe a number of neighbourhoods in Toronto from The Junction, the Junction Triangle, Leslieville, Kensington Market, and Trinity Bellwoods. The Brooklyn Effect encapsulates a neighbourhood that has risen from humble or scrappy beginnings to become a centre of cool with distinctive independent businesses all around. Loosely defined, you could say the Brooklyn Effect takes place anywhere there is a migration of younger to middle aged professionals priced out of other pockets of the city. It brings creative bohemians, sometimes with money, to an urban area.

But to really understand this phenomenon, let's look at Brooklyn's recent history. Back in the 80s, to say you were from Brooklyn would make you cool in a kind of don't-mess-with-me Lether Tuscadero way. You might come off with a little more street cred. Then Manhattan became full. Too expensive for most New Yorkers. So, many set their eyes on Brooklyn, right across the bridge. And wow, the change was swift. So swift that Brooklyn itself may have eclipsed Manhattan as the centre of cool in New York.

Some may see this as a simple form of gentrification. And in some ways, that's all it is. Still, I think there is a certain hipster factor when people talk about the Brooklyn effect. It attracts a certain creativity, an independent spirit to form some kind of community based on experimental small businesses, galleries, and artists mixed with Yuppies. There is an open attitude here.

New York is a good reference point when talking about real estate trends.  People use New York neighbourhoods as reference points because everyone knows them, and in many cases, the trend setting starts in places like New York.

I still see the term Manhattanization thrown around a little too. This suggests something much less charming and much more wealthy. It is a high density, high demand neighbourhood. Not just some cool restaurants but a dense, human filled place. It's a much more extreme gentrification. Most of downtown Toronto could be seen as undergoing a certain Manhattanization with the density that has been building over the past twenty years.

So, what if you don't want to live in the Manhattan or Brooklyn of Toronto? What if the idea of living around too much hipness makes you roll your eyes to the back of your head. Well, there are plenty of options here in Toronto. The old suburbs of Etobicoke and Scarborough could offer more space and privacy but with more of a car culture vibe and often (but not always) not many main streets around for walkable shopping. Perhaps the established neighbourhoods of the Beach, the Annex and Leaside are your speed.

In the end, you have to pick a Toronto neighhourood based on what kind of life you want to lead. In my opinion, those Toronto neighbourhoods that do have the Brooklyn Effect will be fantastic investments.  If space is your thing, then the old inner suburbs of Toronto could be your destination.

If you think you can't afford the currently Brooklynizing hoods, then you could gamble on the next Brooklyns: The Toronto neighbourhoods of Weston, Danforth Village, Little India or parts of Hamilton like Gage Park. It's very early days for some of these Brooklyns though.

When Condos Are Better Than Houses

"Drive til you qualify." I've heard this phrase used more and more over the past year. It is currently been thrown around in North American cities where downtown prices have increased more than the suburbs and commuting is painful. Cities like Toronto. Basically, the logic of "drive til you qualify" goes something like this: If you cannot afford a house downtown, then you keep on driving until you are able to find a house in your price range. For those with more money to put down on their home or for those who qualify for mighty mortgages, they won't have to drive very far. They could land in Cabbagetown in the east, still walkable to downtown or Little Italy in the west, just a touch west of downtown with a thriving established neighbourhood. Still can't afford here? Then you keep on driving. Try the advanced emerging neigbhourhood of Leslieville in the east or The Junction in the west. Still too much? Then try an early emerging neigbhourhood like The Danforth Village in the east or Oakwood or Caledonia in the west. Thinking that will tap out more than you can afford, then you keep on driving out of town for some of the lowest prices in the GTA in Durham region or in Hamilton to the west.

I'm sure you understand my logic here. Though there are exceptions to this rule, it would largely appear that houses cost less the further you drive, for the most part.

But the thing to remember is that there are exceptions. And if you cannot afford to buy a house in High Park, then there are still choices for you. I often talk about the benefits of owning a house, but I think if you want to buck the "drive 'til you qualify" trend, your best bet is to look at a condo. Why? you ask. Well, condos have not increased in price as much as houses. So, they are much more affordable. There is a better supply chain when it comes to condos. More keep coming out to accommodate the demand. With houses, the demand is greater than the supply.

To be clear, it's not that "drive to qualify" does not effect condos at all. It is true that condos in downtown Toronto will be more expensive than ones in Hamilton, but you can still live in a central, established neighbourhood in a Toronto condo for a reasonable price. I currently have a boutique-style condo with parking and a locker in Little Italy that is 764 square feet with unobstructed south-facing views and a modern kitchen and washrooms. It is available at $489K. You would have to drive pretty far to find a house at that price, and it would not have the pizzazz of Little Italy. If 489K is too rich for your blood, there are still options for less that will keep you in a central location.

 My point here is that if you are one of those downtown Toronto folks who needs to be in the city, you can find a property downtown to live in. You have to choose your condo carefully. Not all condos are created equal, but you can afford to be in the centre of it all and you don't have to drive til you qualify.

Suffering from Affordability Angst? Here's What to Do

London is pretty great, right? I think so! But I wonder if it is possible to be too great. Recently, I read an interesting piece on how Londoners are suffering affordability angst (click here for article). Many middle-class, working Londoners are concerned they cannot live in London because real estate prices have climbed so high due to the demand to live there. Of course, London is likely the most coveted city in which to live on this planet. New York come close, but London just has a little more history to it.

Toronto is no London or New York, but I have seen a similar kind of angst developing in Toronto. But should the buyers of Toronto have affordability angst?

I guess the short answer is: It depends. I have many clients who buy houses and big condos in Toronto all the time. Their Toronto jobs often reflect a good salary after years of doing their time. Some have made great investments, and they built equity in their property when they purchased at a less expensive time years ago.  If you have never purchased property and grew up in a big house with a yard and basement rec room on a quiet street, and you would like to duplicate that experience here in Toronto today, you may find that hard to do without a million dollars in some neighbourhoods close to downtown. What looked like a middle class experience in your childhood could now be considered a wealthy one.  House prices, even since the beginning of 2015, have been on a tear. Once again, we are seeing great demand on the limited supply of houses we have in established and many emerging neighbourhoods.

So, what is a Torontonian to do if the are suffering from affordability angst?

1. BUY A CONDO

Sometimes the focus of discussions on Toronto condos has mostly to do with supply. Unlike houses, there are many condos that have recently been built or are being built in Toronto right now. There has been a lot of discussion that the condo market in Toronto is saturated. This has been stressed year after year, and yet the condo market does not crash. This mostly has to do with the limited rental stock and the limited houses. Those who want to rent turn more and more to condos since the city builds a lot fewer rental apartments these days, though there have been some new ones built recently. Those who don't want to compete with others for houses will find condos less competitive. The condo prices have not skyrocketed. Increases have humble in most condos. In some, there have been no increases in the past three to four years. There will be those who say that they want to live downtown, and condos downtown are too expensive. I have a condo coming out shortly at Queen's Quay and Spadina. I think it is priced well in the context of the rest of the Toronto condo market. It's central, and it has all of those things you like to have near you: nice parks, coffee shops, decent square footage and galleries.  You can still buy here in Toronto at affordable prices.

2. BUCK UP

Still want the house in the established neighbourbhood? It's competitive out there. If you want to win the bidding war, you need to be prepared to go into battle. So, have a plan, know your limit, and see if you are in a position to give a competitive offer. If you are, do it! Houses, in my opinion, are golden tickets in this city for the long term.

3. LOOK IN EARLY EMERGING NEIGHBOURHOODS

Would you prefer to buy a starter home? Well, put on your potential goggles, and let's go look for a house in Toronto. It's still doable.  Now the kind of neighbourhoood you want to live in will depend on your budget. If you are under $500K you will have a hard time close to the city finding a house, though a condo townhouse could be an option. Still, there is renewed interest under way in parts of Scarborough and Etobicoke. I love the housing stock up in Weston too. Beautiful neighbourhood. Some of thehouses look like those in the Annex, but not as central and without the walkable main street. Still, the neighbourhood has great parks and a GO station to connect to downtown. In the east, I think the Danforth Village is still a great option for first-time buyers.

4. RENT

I'm not a big fan of this option for obvious reasons, but if you do not want to spend money on Toronto real estate, then you can rent. Just make sure you invest your money elsewhere. And remember, rents will go up. They have increased along with the prices of homes and condo in Toronto.

5. LEAVE THE CITY

This sounds like a reasonable option. The city is too expensive. You are on a budget, but you want space and an big, nice house or condo. So, just leave the city and commute in if you need. But be careful. Not all communities outside of the city are built the same. Some are city planning nightmares. Some are poor investments with poor future prospects. Some are ripe for a renaissance. Hamilton is the place I go on about frequently. There is something in the air in the city, and the momentum is only going to keep building.

With all that said, you can still buy property in or near Toronto in many price ranges depending on where you are. We are not London. We are not there. For now, we seem to be heading in that direction, but we are not there yet.

Your Future Awaits! Sorting Out The Real Estate Predictions of 2015

By nature, predictions are whimsical. That's why many of them are wrong. The real estate predictions of 2015 that I have come across are often a mix of doomsday scenarios and rosy outlooks, like every year for the past decade. So, let me filter these predictions, analyze them for you and offer a few thoughts of my own for Toronto real estate in 2015.

Let me start by saying what is a little different in the predictions for this year. Generally, they are fewer of them that are alarmist than in the past. Yes, we are hearing that prices can fall by 15% according to RBC, and yes we have someone named Hilliard MacBeth, an Albertan based porfilio manager who wrote a book entitled When the Bubble Bursts: Surviving the Canadian Real Estate Crash, calling for a nasty downturn in Canadian real estate. She predicts that house prices will fall 50%. Ouch. This may sound scary, but keep in mind that a book like this comes out almost every year. Why? Because these books sell! Think of Garth Turner in 2008 who wrote The Greater Fool: The Troubled Future of Real Estate calling for a 30% drop in Canadian real estate that year and more to follow in the subsequent years.

Even though we have some negative predictions this year, there are  fewer doomsday predictions than in previous years. I have a feeling that the public may be suffering from what I call "CLF" or Chicken Little Fatigue after years of hearing the sky is falling in real estate.  I suppose at some point, someone will be right. Some Canadian cities will have a slip in real estate prices, but not this year in Toronto.

All in all, I find all predictions a little more cautious for 2015. There will be smaller gains, but gains nonetheless. That seems to be the general consensus. Price appreciation but not as much as 2014.

The focus of the 2015 predictions has been largely around interest rates. As the American economy improves, many believe the Americans will start raising their interest rates, and in turn, Canada will raise their rates as well. Most predictions I have read point to the forth quarter for such things to happen. Some worry that the rise in interest rates will effect the housing market. I agree, it will slow it down. Others, however, think the interest rate hike will be the straw that broke the camel's back for the indebted Canadian, leading to a downturn in the real estate market. I don't believe it will cause the real estate market to crash, but it may put the breaks on some very big price increases that have happened over the past few years. I imagine if the rising interest rates start to effect the housing market too negatively, the government will put the breaks on the increases or even reverse them. Housing has become too big of an industry to just let slip.

From a more localized,  more Toronto-centric perspective, some of the trends that have been happening the past few years will become more pronounced in 2015. The low supply of houses and townhomes will remain in great demand since very few of them are built any longer, and the demand continues to increase as the city and region grows. Houses will increase in value at a much faster pace than condos.  Small boutique style condos in improving or established areas will generally perform better than giant condos. The dream of owning a house will still be affordable for some first-time buyers in the right emerging neighbourhood, though condos will increasingly be the terrain of first time buyers were the prices are more reasonable and the supply of new condos keep growing as the city grows.

For those who want a house with a smaller price tag, house hunters will turn to second tier cities like Hamilton where detached houses with a yard are comparable to the price of a one bedroom and even a bachelor condo in Toronto. Access from Hamilton to Toronto will continue to improve. Hamilton will be a good choice for many who love the urban lifestyle. It is still a city of 500, 000 people. Unlike Mississauga or Brampton or Oshawa or any other Toronto suburb, Hamilton does not suffer from suburban sprawl or a dominant suburban culture. Its downtown is coming back after decades of decline. This phenomenon is not exclusive to Toronto. Such migration to second tier cities is happening all over North American. In San Francisco, many house hunters head toward Oakland. Expensive cities like New York or Chicago have triggered some middle class folk who want more space to head to Austin, Denver, Nashville or Charlotte. The thing about Hamilton is that it is close to Toronto and the new GO station will link up quite nicely. So, you can have your Toronto job or social life, and live in Hamilton. Commuting time is required though.

In terms of Toronto neighbourhoods, we will continue to see some of the advanced emerging neighbourhoods steal some of the sparkle from the more estalblished neighbourhoods. The general shift of wealth from duller north Toronto to the more vibrant south destinations will continue. The cool quarters will continue to attract more demand. Roncesvalles, the Junction, Leslieville, West Queen West and Brockton will continue their quick ascent. Danforth Village will continue to draw in many first time buyers, though not all houses will be in the first-time buyer price range in this neighbourhood in 2015. Areas along the Eglinton Crossway that is currently under construction will be a good bet for a long term investment. This includes Mount Dennis, a neighbourhood with some of the lowest prices in Toronto. Mount Dennis even has its own indie coffee shop opened in 2014! And that's always a good sign for a burgeoning community hub. Like last year, bargain hunters will see the western flank of Scarborough that borders Toronto begin to take off.  Corktown and the Distillery District will really start to shine as all the construction wraps up and the Pan Am Games begin. This may be one of the top spots to buy a condo this year and next. It is a well planned area with a lot of amenities near by. High Park, Leslieville and the Junction Triangle are all places where condos have not been overbuilt and fit in nicely with the neighbourhood.

All in all, it appears it will be a tame year. Of course, anything can happen! No one called for the price appreciation we saw in Toronto houses and a healthy condo market in 2014. 2015 could be just as surprising.