Welcome to the August edition of our monthly income property newsletter. We’re in the middle of a very hot summer that has seen the real estate market in Toronto continue to post record numbers and remain very strong and healthy. I have commented in previous newsletters about why our market continues to sustain itself, so this month I’d like to explore these factors in a little more detail. I recently read in Macleans magazine that Toronto continues to be one of the most robust markets in North America. From an investment property point of view, quality rental properties in Toronto are still selling almost immediately, often for over list price. It seems like all the prime Toronto neighbourhoods for income properties are still on fire — and have been for the past couple of years now. Since 2001, property values in most of the city have risen anywhere from 25 to 50 per cent. Figures like these, combined with tales of fierce bidding wars, contribute to the fear that the Toronto market is on thin ice, that prices are out of line with home values and that, yes, almost the whole GTA is in the midst of a real estate bubble. Yet, despite hair-raising sticker prices, many real estate experts reject the notion of a bubble. “This has been a market that has defied all real estate fundamentals,” says Jeff Rubin, chief economist at CIBC World Markets. And the unusual conditions that are feeding it show little sign of slowing down.
The first factor is that interest rates continue to remain low and money is available for relatively little cost, relative to previous years. The market in the GTA would have run out of steam by now if factors that usually drive real estate cycles were driving this one. Normally, changes in things like the balance between buyers and sellers, or the ratio of renters to homeowners, or the amount of annual household income (itself affected by employment levels), will have a decisive impact on the rental housing market. But in today’s world, with interest rates lower than they have been since the ’60s, the only factor that counts is the record-low cost of a mortgage. A case in point is a client of ours who was lured into the income property market by the promise of money that is especially cheap. He was still hurting from his stock market woes, however his interest in the real estate market was piqued when banks recently started offering no-down-payment mortgages, and he has found one bank that gives five per cent of the purchase price back to the mortgage client (the interest rate is slightly higher than market). Thinking both about lifestyle and resale value, he is now searching for the perfect duplex or triplex in Toronto for up to $450,000. It no longer makes sense to fork over $1,200 a month to a landlord. “I’m sick of not paying myself,” he says. Even though a mortgage will jack up the monthly housing cost by at least $500, it will be worth it, he says. “Basically, it’s forced savings for me. I don’t want to wait any more.”
The second factor is that homes are cheap – relatively speaking that is. Many buyers are eager to get in before property values reach the stratosphere. Those who a couple of years ago decided to wait for the market to cool are now kicking themselves. That’s par for the course during the run-up in all real estate cycles. What’s unusual this time around is that the main concern for many purchasers is not a property’s sticker price. Rather, it’s how much house they can afford to carry through their mortgage payments.
Every three months, economist Carl Gomez prepares a revealing report on what’s called the Housing Affordability Index. If there is one statistic that explains today’s real estate market conditions, this it is. Gomez, of Royal Bank of Canada, combines various sets of data to arrive at the percentage of household income that goes toward paying for the home. In Toronto, at the height of the 1990 bubble, when mortgage rates were averaging 13.25 per cent, the cost of carrying a house was an unfathomable 71 per cent of pre-tax household income. With today’s lower rates that percentage has come down dramatically. Gomez rejects the word boom, because it suggests a subsequent bust. “I’d say this is a robust, strong housing market with some moderation ahead,” he says. “But it won’t collapse.” Does that mean it’s a good time to sell and not a good time to buy? “It’s definitely a seller’s market, but given the affordability, it’s still a good time to buy,” he says.
Rubin agrees it will be a while before this market turns sour. “It’ll continue as long as interest rates continue to be low,” he says. Contrary to popular wisdom and the bond market which expects interest rates to creep up in the near future, Rubin goes so far as to suggest there won’t be a rate increase in the U.S. (which can trigger a copycat jump in Canada) at all this year. “Never in the history of the Federal Reserve Board has it raised rates during an election year,” Rubin says. In Canada, not only are interest rates not going up, they may come down further, he predicts. “As long as interest rates stay at these levels, the housing market will continue to defy what normally are fundamental constraints.”
The third factor driving this hot market is that demographics are shifting and baby-boomers with extra cash want to retire in style. This is the generation which, just by sheer numbers, has become increasingly influential. The front end of the boom, people who are approaching 60 years of age, are downsizing as 60-year-olds tend to do. But instead of moving into more modest homes, they still want “all the bells and whistles,” says Phil Soper, president and CEO of Royal LePage. Meanwhile, the back end of the boomer generation, the 40-somethings, are in upgrade mode: if they aren’t already living in the house of their dreams, they figure now is the time to go out and find it. They are the move-up crowd, and they are putting a lot of pressure on the middle of the market. Many boomers are buying retirement properties in Florida, etc and are only here for a part of the year. For these folks who still like take advantage of our “free” medical system, an owner-occupied income property in a desirable neighbourhood makes a lot of sense.
I often tell my clients, that none of us in the real estate business has a crystal ball, so every opinion of where the market will be going is just that – an opinion. There does seem to be a general consensus though that the local market will continue to flourish. For income properties, I expect prices to remain stable and maybe even go up a little more. Remember, with a finite inventory of quality properties, and an ever-increasing number of people who understand the benefits of owning investment real estate, I think that the current prices have set a new standard that likely won’t drop off.
That’s it for this month. I hope everyone is enjoying the warm weather. If you haven’t visited the updated Plex website, please do so as I think you’ll find the upgrades very helpful insofar as staying up to date with the income property market in Toronto.
All the best,