The Winners and Losers of Toronto's Real Estate Future

Not very long ago, the idea of urbanization was considered a "trend".  It was like no one was really sure whether this idea of returning to the city was just a temporary lapse in judgement. It was as if there was a reluctance, a kind of sense that everyone would grow leery of this trend, and go back to the suburbs or at least not obsess on urban living so much.

The truth is, the return to Toronto, and in most cities in North America,  is not a trend. It's a complete paradigm shift. Many see the price of Toronto houses as sky high, and historically speaking, they are. They anticipate a time when the prices will come down. And they may, but only temporarily. The momentum has grown too much.

The boomers may have been a big part of the exodus to the suburbs in the 60s, but the millennials, the next largest demographic group, seem to be determined to be in the city. It's true that the priorities of the millennials will change for those of them who want to start a family. We do not yet know if they will opt for more space outside of the city or make a small space work inside the city.

In really doesn't matter though. The trends are pointing to more than just going where the big yards are. It is mostly about lifestyle. People want to live in the city. They don't want to commute long distances to work. They crave communities within the city.

Now, I don't want to suggest that Toronto is a kind of Utopia. In the future, houses in the city will come at a premium price. It won't be easy to afford. Only the wealthy will be living in big houses. Condos close to the city, ideally smaller, boutique ones, will be in demand. The pressure to live in the city will change how we live here in many ways. There will be more condos, more density, more businesses, and hopefully more transit. Still, buyers will need to be creative. I believe you will see an increase of co-ownership of homes. Two couples, for example, who may buy a duplex and live in different units. I'm already seeing this kind of arrangement popping up more and more. In the future it will be even more common.

Of course, I don't want to imply that everywhere outside of Toronto in the GTA and beyond will fail, because every one wants to move here. I will say that those areas that have suffered from sprawl of the past thirty years will likely go into decline. Already many businesses are leaving the areas of sprawl for well-planned parts of the city that are better integrated into neighbourhoods.

Other parts of the GTA and beyond will prosper, especially if they have their own downtown hubs made up of home-grown businesses and well-planned streets and transit. I can think of places like Port Credit, Peterborough, Guelph, and Hamilton.

Hamilton has been in decline for so many years it has literally bypassed the urban sprawl of the past thirty years, and now has a renaissance under way. It still has plenty of room for improvement, but with the new GO station to be built, many people will appreciate this alternative to Toronto since Toronto can be easily accessed from Hamilton, and the Hamilton downtown itself is becoming a lot more appealing.

So, for those of you waiting around for those house prices of 1995 or 2000 or even 2012, I'd say you are out of luck. Yes, real estate is cyclical. Prices do rise and fall, but over the long term, Toronto, and many small cities and communities around Toronto will continue to grow and become more attractive places to live. Some suburbs will fail. Some will not. The return to the city is happening all over the world. It's no longer a trend but a fact of life.  Accept and carry on.

No, It's Not 1989 Again

Lately, I've been seeing a lot of comparisons between now and the  late 80s. I'm not talking about the return of Dr. Pepper or that Atari is making a comeback, though I would be happy to see both of those again! No, I'm talking about how some people like to compare the real estate bubble of 1989 to now, as if we are all on the verge of falling over the edge into another abyss where prices fall for 7 years. No, there is a big difference between the 1980s real estate market and today's market that don't really make them good comparisons.

Back in the 80s, the baby boomers - you know, the largest demographic in history - were coming of age and discovering how to spend their money. So, you had a lot of people reaching the age they would like to buy a house or a condo at the same time. Also, women were entering the workforce in large numbers for the first time ever. With the usual guys buying homes, plus many more woman buying homes the numbers of buyers were big. Today, we don't have that kind of growing demographic, though we do have some of the boomer's kids buying more properties, and we do have more singles buying properties, the cultural shift is just not as sudden or as large as it was in the 80s. Initially this demand drove up prices, until they crashed.

In both the 80s and now, a lot of condos were, or are, being built. In the 80s, they were being built on spec, financed by banks and lending institutions without significant presales requirements. It took a long time to absorb all of these condos. And since the banks got burned, they changed the rules. Now, pre-sold condos need 70% or more sold before a shovel hits the ground.

And there were a lot of investors. 80s investors were a different animal, though, than today's investors. In my opinion, there was much more speculation going on. The focus was more on flipping condo purchases for short term profits. Today, the investors would rather rent their units or homes out than to sell them. They are less likely to dump their units for a lower price. Sellers don't have to sell and are not forced to do so. 

Today we don't have the same stressors. Yes, interest rates have crept up a little, but they didn't jump one percentage point like they did over a week in 1989. Since everyone is starting to have a more Japan-like economy where growth is slower, and inflation is low, the interest rates will probably not go up by very much.

Also in 1989, we saw a spike in unemployment. Between 1989 and 1996, we saw a decrease in prices of over 50% in Toronto.  We also saw a rise in unemployment in 2008 and the start of the recession, but prices only took a pause before rising again.

Finally, you may find today's prices high, but the pace of price escalation in the late 80s was in the double digits for several years  before the crash. From 1985 to 1989 prices increased by 113% or by an average of $240,992 in 2013 dollars. From 2012 to 2013 the increase in the price of an average home increased by roughly 5%, (Interestingly, if you take just houses and no condos, that number is around 8%).

If we could go back in time to buy a house in Toronto, I think we would want to set our time machines for 1996, the best year to buy a house in this city when the crash of '89 had fully wiped out and begin to bounce back. But since I don't have a time machine, I can only talk about the now and make some guesses about the future.

So, my future guesses would be: rates may rise a little, but they'll stay pretty low; prices in Toronto will still go up, but not by double digits; the government will make it tougher for buyers to obtain a mortgage, and 1989 won't be repeating itself any time soon.

Move over Boomers, the Echo Boomers Are Flexing Their Muscles

Demographics and real estate have a relationship you can't really ignore. The baby boomers have been given most of the spotlight (or the blame) for how the real estate market has grown. This massive bulge of a population, born after World War II up  to 1964, have been largely responsible for the rise of the suburbs in the 60s and 70s, the revitalization of city neighbourhoods in the 80s and 90s, and some believe, for driving up the cost of housing wherever  and whenever they live.  They are not know to be a thrifty lot. They love to spend and live well.  Some now wonder if this culture-transforming demographic will be responsible for a housing price slump once they retire all at once. It is as if the boomers are the only demographic influencing real estate.

Little focus has been given to another demographic: The boomer's kids, or as some call them, the Echo Boomer. This group born after 1972 to around the early 90s are often characterized as unambitious,  but they are also an influential force growing in power, especially when it comes to real estate in Toronto.

Why you ask? Well, this generation has different habits than their boomer parents. They do not like to commute. More of them prefer to live in the cities near their work, in the thick of the action, and avoid the traffic, which we all know has become a soul-crushing experience since the days when suburbs seemed a little more ideal.  And their numbers are big. They represent half of downtown Toronto (compared to a quarter of the provincial population).  They are a huge reason why so many condos are located downtown. In fact, to feed the housing hunger of these echo boomers, there have been 90,000 condo units built or approved to be built within the city as of the end of 2011, mostly in the core.

So, maybe you are already aware of this. All you have to do is walk around downtown Toronto and see that there are a lot of young people living in the core and living in condos.  Big deal.

But it is a big deal. Not only for residential real estate, but for commercial real estate and businesses looking to set up shop downtown.

In essence, these echo boomers play a big role in Toronto's flourishing business sector where there are a number of commercial businesses moving back or starting up downtown. Back in 1991 when this demographic did not have much sway, downtown Toronto's population growth slowed down to 5 per cent or less over any five-year period where the 905 region reached massive grown at 17 -18%. But since 2006, downtown Toronto's growth has shot up by 16 per cent, surpassing the 905ers who have slipped to 13.7 per cent.

And because of this, for the first time in 20 years, growth in downtown commerical real estate is outstripping growth in the rest of the GTA. Simply put, businesses want to be closer to their echo boomer workforce that prefer to live in the city. 

Sure, we can't ignore that the boomers are going to change how and where we buy real estate in the years to come, but don't count out the echo boomers, who have already showed us just how much they can effect real estate in Toronto.