What Will Happen to the Toronto Condo Market in 2016?

Welcome to the True Condos Podcast with Andrew La Fleur, the place to get the truth on the Toronto condo market and condo investing in Toronto.

Andrew la Fleur:                  Hello and welcome back to the show. Thank you for listening once again. 2016 is now upon us, 2015 is in the rear view mirror, so I thought it’d be good time to stop and just do a little bit of forecasting in true condo style in terms of what’s ahead for 2016 and recapping 2015 as well. In order to do that, I’ll give you my thoughts and my take on the market, of course, but I wanted to first take a look at what a few other people had to say about the market, namely the main organizations and groups that are tracking the market every single month and every single year. We’re going to take a look and summarize what has come out in the past couple of weeks from Altus RealNet Group, and also from Urban Nation and also from the Toronto Real Estate Board, TREB. We’ll take a look at those 3 groups, what they had to say and then I’ll give you my thoughts of where the market is at and what 2015 looked like.

Let’s start things off with Altus Group, who acquired RealNet not recently. They merged and they’re one and the same company now. Here’s what they had to say for 2015. Their final number came in for new condo sales at 21,658. From RealNet’s perspective that represented the third best year ever. 2015 being just slightly behind in numbers by their calculations from 2014 … Looks like about 5, 600 hundred less than 2014, but putting it at the third best year ever. Best year ever, of course, was 2011. 2011 was that massive breakout. Very, very unusual year really where, according to RealNet, there was about 28,000 new condos sold in 2011. Here we are 2015, it’s looking like just marginally off being the second best year, but it’s technically the third best year ever for new condos sales.

What they’re predicting in terms of year ahead, they are looking at the high rise and low rise market together, they’re talking a lot about how the low rise market, of course availability of products, inventory in the low rise market in terms of the new homes being built has been very, very low. Outstanding available inventories has been very, very low, historically, and so they’re taking the stance that they’re expecting that to change moving forward 2016. They’re essentially saying there’s going to be more land available for low rise due to a number of factors in the GTA. There’s going to be more low rise land available and more low rise housing is going to open up.

That’s good news for any first time home buyers and that looking to get into the market. They’re predicting that the prices will start to moderate essentially on low rise side of the market and that the price gap between the low rise product and the high rise product will begin to narrow because it has really expanded dramatically over the last few years. As condo sizes have continually gotten smaller, therefore the price of condos has remained relatively flat. Even though the price for per square foot is rising, the actual price has remained relatively flat. Meanwhile, the pricing for low rise housing, as everyone knows, has just been shooting up and up and up. They’re predicting that that gap between the 2 will start to decrease.

They’re also predicting that over the next couple of years there will be fewer new condos being built or being sold. That number will start to come down from the highs of the last couple of years, 22, 21,000. They’re saying it’s going to start to move more towards a more natural longer term average of around 17, 18,000 that kind of a range, which they say is more in line with demands. That is good news, of course, for condo investors if there’s less inventory out there. Then that will, of course, less inventory and assuming demand remains the same, then that will put upward pressure on prices. That’s RealNet’s take on things.

Urban Nation, let’s see what they had to say. Urban Nation, they come out with their reports and year ends. They are calculating the number of new condos sales slightly different number from RealNet, but same ballpark. They’re looking at 20,753, so about 1000 units difference between the 2. A lot of people might ask, “Why is there differences between these 2 groups and the number of new condo sales reported?” It’s not an exact science. It’s a good question, but it’s not an exact science in terms of calculating what counts as a sale and when the sales take place.

Sales for the most part in the new home market are self-reported from the builders, so it’s not an exact science. When you have 2 organizations with decades of experience and they’re coming up with numbers that are very, very similar but slightly different, you’re getting 95% of the story of what is happening and it’s not going to be an exact science in the same way that the resale market is going to be reported on TREB. They don’t have that same obligation to report as the realtors of Toronto’s have. Side note there.

They’re looking again very similar. According to their calculations Urban Nation RealNet said it was basically the third best year ever 2015 missing out just slightly just from 2014. Urban Nation, on the other hand, said it was the second best year ever with 2015 just marginally edging out 2014. Regardless, one way or the other it was a very strong year. It was one of the best years ever at over 20,000 sales. 2011, as I said, was the best year ever.

Urban Nation also tracks the resale market. In the resale market there were in terms of condos 20,700 resale condos transactions, which is an all time high, which is very interesting, all time high in the resale market. Also on the rental market, which again we talk about a lot in this Podcast. Don’t just look at the resale numbers. When you’re looking at the condo market you also have to look at the rentals. On the rental side there were 27,164 leases. Again, 20,000 sales approx, 27,000 leases approximately. Both of those numbers all time highs. Obviously, in the resale market side rental and sales all time, high best ever year, from those stats from Urban Nation.

We can take a look at … That’s RealNet … We talked about Urban Nation, now let’s take a look … Actually just before we move to the next … Another stat from Urban Nation is that 19,700 units were completed in 2015, so new units coming on stream, which is actually down almost 10% from the number of units that were completed in 2014. Again, very interesting there. We’ll talk a little bit more about what that might mean in a minute.

Finally we’re looking at Toronto Real Estate Board, TREB. What did they have to say about the market? They just came out with their Q4 stats for 2015 on the sales and also on the rental side. Similar numbers in terms of reporting, but the high points there were demand remains high, listings remain low, and when you put those 2 things together prices keep increasing. They’re predicting continued strong rental growth and strong price growth in the condo market for 2016.

That’s the summary there. What do I take out of this and what can you is a condo investor take out of these kind of takes on the market and where the market is that? Number one, I think there’s no condo glut. Once again, it sounds like a broken record. We talk about this seemingly every week on the podcast, but it’s very important I think to keep this point at the forefront. The number one thing that I hear that I encounter every day that you probably do to if you’re condo investor and you’re talking to your friends and family about it is it’s that constant refrain of, “Aren’t they building too many condos. I can’t believe it. There’s just too many condos going up in this city. Oh, it’s a condo bubble. Oh, it’s going to be a glut of condos. Look at all these condos coming online. Look at the cranes everywhere. Too many condos.”

Once again, more evidence just continues to pour in month after month after month that this is completely untrue. We are not in a situation of building too many called condos. In fact, it is a contrary; we are not building enough condos. How do we know that? Quite simple, supply and demand. Economics 101 teaches us that if prices are going up there is either a surplus of demand or a shortage of supply. Again, just like TREB is reporting, we are seeing prices continue to go up. The great thing about it for us as condo investors is we’re not seeing unsustainable levels of price growth, we’re not seeing double digits or anything that would … In the short term is exciting and fun, but in the long term we know there’s going to be some pain associated with that because things cannot keep at that pace forever.

Again, we are seeing moderate price growth on the rental side, which is number one for us as investors, but also on the pricing side as well we continue to see price growth. We continue to see more and more evidence … You can look at the trend numbers you see specifically they’re talking about the rental market, for example, and on how, yes, we have a large number of units coming online, new units hitting the market that were not there before. The growth rate there is less than the growth rate of the number of units that are being rented out. Again, demand is growing at a greater pace, greater rate than the supply is growing. That is what is pushing prices continually up. We do not have a condo glut. I’ll just keeping pounding that one all the way home every episode here if I need to, but that’s very important to understand.

Number 2 point that I’m taking from this to share with you is 2016 what’s looking ahead for this year. We’re looking at more price growth and more rent growth. Quite simply more price growth and more rent growth to come. We’re not seeing anything that would indicate that this trend is going to stop. Again, the demand is there, the supply is also there, but it’s not keeping up with demand. All signs are pointing to continued price growth and continued rent growth as well.

The third thing I want to take from this is that sort of implied by everything and taking a step back a bit, interest rates. Everybody wants to talk about interest rates. I believe that interest rates in 2016 will most likely be more fuel to the fire. That will continue actually … Fuel is fire and continue to grow the market even more. I believe that interest rates will probably be coming down again this year. The overall economy is still growing at a very sluggish pace, oil prices being extremely low. United States, obviously, the stock market is in a lot of turmoil right now. Stock markets around the world are in turmoil. China is not doing great.

All signs to me are pointing towards lower interest rates and obviously a lot of economists would agree that, and they’re betting on, that the Bank of Canada will lower interest rates this year. Right now we are early February, but a month or 4 to 6 weeks from now is the spring market, the traditional spring market hits. You’re going to really start to see a lot of press and a lot of the banks are going to be fighting for mortgage dollars. They’re going to come out with these crazy teaser rates and very attractive mortgage rates to draw in new business. Even though rates, you might think, could they even get any lower? Yes, they actually could get lower. If you look at Japan, Japan just lowered their National Bank rates to 0 for the time ever. Bank of Canada, of course, has alluded just a few months ago that if the situation warrants they would even be willing to go into negative interest rates, which is a very interesting thing to consider as an investor. We won’t get into that too much right now.

All signs are, in my mind, pointing to lower interest rates this year due to those factors. If that happens, and I think you’re going to start to see a lot in the next few weeks as I said as the spring market hits, you are going to see more and more buyers coming out of the woodwork, more and more interest in purchasing real estate and that will continue to just add more fuel to the fire and continue to grow the market in 2016.

Okay. There you have it. There’s a summary of 2015 and looking ahead to 2016. Hope you found that useful. Hope you found this Podcast viable to you and if you did hope you can go ahead and share this with somebody that you know, somebody who’s interested in investing in the market. Of course, we’ve got over 70 episodes now in this Podcast. We can go and encourage you to check out all the archives and many great interviews. Lots of great information. It’s all free available to you. If you are thinking about investing in the condo market it’s all there for you. Thank you very much for listening and have a great week. Talk to you next time.

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