Is the Toronto Real Estate Market Cooling and Should Investors be Worried?

Andrew la Fleur: The results are in for May 2017 for the Toronto Real Estate Board. The market is showing signs of cooling. Should you be worried? Find out on today’s episode.

Announcer: Welcome to the True Condos broadcast with Andrew la Fleur. The place to get the truth on the Toronto condo market and condo investing in Toronto.

Andrew la Fleur: Hi and welcome back to the show. Thank you so much for your time today listening to me and thank you for your support for the show. Again, on today’s episode, I want to talk about the latest numbers for the Toronto Real Estate Board, which just came out so we’re recording this early June 2017 and we’re talking about the numbers that just came out for May 2017.

So the market obviously has been red hot for a very, very long time and now we have seen the market, perhaps, start to shift, so the numbers … What do the numbers say? The numbers basically indicate that prices are slowing down. Prices are lower for the month of May then they were in the month of April. Of course, prices are still up significantly from this time last year but compared to previous months where we’ve seen price increases year over year of 20-30%, now the price increase is only about 14-15% sort of range. “Only”, of course because that’s still a very massive number but the number that a lot of people have focused on, in the media and elsewhere, is the fact that sale prices have gone down. Average sale price has gone down approximately five to six percent for May 2017 compared to April 2017, so month to month, average price has come down five or six percent. So that number obviously is what a lot of people are scratching their heads on, perhaps or thinking about or if you’re selling a detached house in Toronto right now, maybe you’re a little bit worried about that particular number. So we want to talk about what’s happening in the market on today’s episode. I’m gonna give you five thoughts. My five thoughts on the market and what’s happening right now.

First thought, most importantly is this question for you, which is … And for the media and for anybody out there who’s talking about the real estate market right now and talking about these numbers from the month of May. The big question for me that I want to pose to you is since when does one month make a trend? One month does not make a trend. We’ve just had data from one month and people are trying to draw conclusions from it. Obviously that’s the most important thing I think to remember is this is just one month. One month does not a trend make. You’ve got to look at markets over a longer periods of time. One of my clients texted me this week and they were asking me about the market and what I thought about the May numbers and how the results might compare to April and my answer to them was I don’t know and I don’t really care. I don’t look at the market from month to month to draw conclusions from it.

The other sort of part of this first point is that average prices … Another reminder for everybody is that average prices are a very questionable or volatile or not the greatest measure to sort of understand what’s happening in the market. Average prices can be very deceiving because average prices are just composed of whatever properties sold in that given month or period of time and those properties, when you are comparing it to another month or period of time, those properties are always changing so the mix of properties that are actually selling are always different from one period to the next. When you’re looking at average prices, average prices can be very volatile. If a lot of cheap properties sell in a month, they can pull average prices down. If a lot of expensive, high end properties sell in a month, they can pull average prices way up. So average price, unfortunately, is the number one thing that most media report on and put in headlines and focus on but it’s not the most reliable or useful stat to look at, unfortunately, but this is the one that everybody is fixated and focused on.

Again, prices came down a little bit month over month so a number of things could cause that. One of the most obvious things is that there are fewer homes in the higher end that sold. Or maybe there were more homes on the lower end that sold. Hmmm, think about that. Maybe, because prices have risen so much, nobody can afford very expensive homes anymore, therefore, they’re buying less expensive homes. Therefore, prices could be pulled down. I mean that’s just one example. I’m not saying that’s necessarily true but I’m just saying when you’re looking at average prices and you’re trying to draw conclusions from a single month especially, it’s very dangerous. It’s not very useful and to draw conclusions or to take action or not take action based on one month of data is really not a smart and useful thing. So we’re gonna talk about that in a little bit more detail here in today’s episode. What is smart and useful and how you need to think strategically as an investor. Again, I am speaking to you, the condo investor and I am hopefully providing you with some useful information. As you’re building your portfolio and as you are looking to generate wealth through real estate investments, specifically in the condo market.

Okay, that’s the first point. Second point is, I told you so. Second point is I told you so. If you’ve been listening regularly, listen to the podcast, watching my videos on Facebook and on my website, you know that … And reading my emails, of course, … By the way, are you getting weekly email updates? If you’re not, you are greatly missing out. You need to make sure you’re getting my weekly email updates. Sign up on truecondos.com. Put your name and email onto truecondos.com. Pretty much anywhere and that will loop you in to getting my weekly email updates and that will get you plenty of great content. More content like this that, hopefully, you will enjoy and once again, it’s all free. 

So anyways, lets go back to point number two, so I told you so. If you’ve been listening to the podcast regularly, you know that as the market has been going nuts for the past six to 12ish months, I’ve been tell you don’t get used to this. Don’t get used it. I’ve been saying over and over and over again, as investors, we don’t want to get used to or make decisions on what to buy or not to buy based on prices going up at 20-30% per year. That is not normal. That is not sustainable. As we’ve said so many times, that things would revert back to normal. What is normal for Toronto real estate? Well if you look at the past 50 or 60 years, which again, there’s a good period of time to look at to establish a trend. When you’re talking about real estate investing, 50 or 60 years as opposed to one month. When you look back 50-60 years over in Toronto real estate, it’s about five to six percent is what the appreciation rate is typically averaging out to. Some years, it’s zero. Some years its two-three percent. Some years it goes down five or 10%. Some years, like we just experienced, it goes up 20-30%. These years are extremely rare but occasionally it does happen and it just did.

It looks like those days are probably gone for the next while. We probably won’t see these 20-30% increases on an annualized basis for a while again but that’s okay. Again, if you look at year over year right now, we’re down to about 15%. If this trend sort of continues, then again, that will get knocked to 10, eight, seven percent over the next five, six, seven months as we adjust to the new sort of reality and the new cycle that we’re in. And that’s okay. That’s perfectly fine. We can make fantastic returns as investors with an average long term appreciation rate of five-six percent over say a 10 year period of a typical investment. You can make absolutely fantastic double digit returns on your investment if that’s what you’re looking at. And that is most likely what we are going to be looking at over the next 10 years because that’s what we’ve seen over the last 50 and that’s probably going to continue.

So that’s the second point. The third point that I want to bring up is lets, hypothetically say, the market is slowing down which, lets sort of hope that it is because we don’t want things to continue at a crazy pace of 20-30%, year over year. Insane bidding wars everywhere. It’s just not sustainable so let’s assume the market is slowing down, going back to more normal levels. Or even the market is in some kind of a cooling phase right now. Once, as my friend Roy likes to say, once everyone realizes they still need a place to live, then things are gonna return to normal. Right now people are sort of taking a wait and see approach. A lot of people are sort of looking at how the new rules put on by the provincial government are gonna affect the market and what’s happening here. A lot of people sort of standing back and kind of waiting and looking around. But here’s the thing, once everyone realizes that they still need a place to live, that things are gonna return back to normal.

That guy living in the basement apartment who says … In a month or two or three months, he says, “You know what? I don’t wanna live in this basement apartment anymore. I need to move.” For the young couple who’s having their first child, “You know what, this studio, this 400 square foot one bedroom, it’s not going to cut it. We need to move.” The person who’s been relocated for their work, “We need to move.” The 85 year old who needs to downsize, “We need to move.” Again, people will always need a place to live and people will always need to move. Things will return to normal. People are taking a temporary pause but nothing changes the fact that people still need to move. Nothing has changed in that regard. So once people realize this, again, the market will pick up again and things will return to normal. Prices will continue to rise. Hopefully they don’t rise at 20-30% year over year but if they’re rising at, again, five to 10%, then as investors we are very, very happy with those kind of numbers and we can make excellent, excellent returns. Will they go back to 12, 15, 18%? I don’t know. I do not know. But again, over the next 10 years, if prices average five percent appreciation year over year over the next decade, then I wouldn’t be a genius to call that because that’s exactly what’s happened over the last 50 years.

So, that’s the third point. Point number four is a question and the question is, since the new rules have been put in place, in April 21st with Kathleen Wynne and the provincial government, rent control, informed buyer tax and these announcements, what has changed since then? That’s a question for you. What has changed since then? My answer to that question is really, absolutely nothing. Nothing has fundamentally changed with the economy, with the housing market. Nothing has fundamentally changed. The only thing that’s changed is people’s perceptions. People’s perceptions have changed. People’s psychological state has changed and thus, we have different behaviors in the market place. As I said, a lot of people just sort of taking a wait and see, stand on the sidelines sort of approach. Let’s see how long you can stay on the sidelines without taking action.

Again, nothing’s fundamentally changed. We didn’t suddenly get a new injection of thousands of new homes into the market place. New properties were suddenly built. Five new condo buildings with a thousand units each suddenly opened their doors. Entire subdivisions across the GTA, where the ribbons were cut and those properties were made available. No. We haven’t had any massive injection of new supply into the existing stock of homes. We didn’t get some horrible economic news. There’s not some recession or something. People aren’t losing their jobs. Jobs are not leaving Toronto. Toronto wasn’t hit with some kind of disaster, a flood or a terrorist attack or Canadian dollar has not changed. It’s still very cheap in the global stage compared to the U.S. dollar and other currencies. Again, fundamentally, looking at the economics, looking at population, people are still moving to Toronto, looking at our job market. Nothing has changed. Fundamentally, everything is still the same. And again, once people realize that and once people realize they still need a place to live, then the engine is gonna start up again and things will return back to normal.

My final point that I want to make on this topic and on this episode is point number five, look at Vancouver, look at what’s happening in Vancouver right now. There’s some great articles out there in the Star and elsewhere that is sort of highlighting this for us here in Toronto. If you’re listening in Vancouver, you already know all this about what’s happening in Vancouver. They’re about eight months ahead of us. They had a very similar sort of foreign buyer tax and other things dropped in place about eight months before we did. After their market was going at a break neck all time pace, and things slowed down after that was put into place. Well, what’s happening there now … Just eight months, not even a year, just eight months’ time after this happened. Well, for their stats for the month of May, look at this, condo prices are up. Condo prices in Vancouver are up 17% from 2016. 17%! That’s insane! That’s about three times our typical long term average for appreciation in Toronto. Three times the typical long term average.

Prices are up about three percent. If you want to talk about month over month, which again, I don’t recommend, but if you want to get into that, prices are up three percent in one month, from April to May, for condos. If you look at my favorite stat, which is the sales to listing ratio, which really tells you a lot about the sort of direction and pace of the market, sales to listing ratio for condos in Vancouver was 94%, which is absolutely off the charts red hot. 94%. 94% of all condos essentially listed for sale are selling within the same month. That’s insane. That’s deep, deep, deep into seller market territory. You have to be down to less than 40% to be in a buyer’s market. You’re at 94%. If you look at townhouses, it drops down to about 76%. If you look at detached houses, it drops down way down to 31%. So, the condo market clearly is red hot but interestingly, the detached housing market in Vancouver is a buyer’s market. It is very slow. So again, what is happening there?

We see similar numbers in Toronto where the detached market has slowed down much more than the condo market. Way more. The condo market, in fact downtown you still see listings every day, are selling for over asking, way over asking. Still getting six, eight, 10 offers on condos downtown. So what’s happening here? Well, it’s the inevitable, which is a flight to affordability. People are looking for affordable options. Again, going back to one of my previous points, everyone needs a place to live. Not everyone has millions of dollars to buy very expensive real estate but everyone still needs a place to live. When you’re investing in condos and you’re investing in the most affordable product type in the market, then you’re always … The more the market rises up, the more attractive your product becomes compared to everything else because it’s the cheapest on the market so we’re seeing that at Vancouver. We’re seeing that in Toronto. As these cities mature and as these markets mature, more and more people are looking at condos as not just their preferred option but their only option because it’s just impossible to afford a house and so we are seeing that across the board in our big cities. Especially in Toronto and Vancouver. So again, good news for you if you’re a condo investor. 

Many years ago, there was a strong sentiment that “Don’t invest in condos, they’re just not a good investment. There’s too many of them. Who’s gonna buy these things from you in the future?” But there’s a strong case to be made here that condos have a very bright future. Brighter than ever before. Again simply due to affordability and the fact that nobody can afford a house anymore. There’s so much room for condo prices to continue to grow. House prices have shot up so much over the past couple of years. In particular, condo prices remained relatively flat up until about six months ago. Over the past few years, relative to house prices, they have gone up but compared to house prices how much they have gone up, they’re relatively flat in comparison and now over the past six months, and I believe continue ahead over the next few years, condo prices are just catching up to where house prices already are. So there’s still a lot of room to grow in condo prices and we certainly are not in any kind of an over supply. The market is certainly still dramatically under supplied overall and we need a lot more condos to be put into the market before we ever see prices slowing down. We know that that’s not going to happen any time soon because we simply cannot build them fast enough.

We are done. We have reached the end of the episode. I thank you very much again for listening. I hope you enjoyed this. I hope you got something useful from it and if you did, please go ahead and share this with somebody who could benefit from it. Somebody else who might find this useful. Somebody who’s thinking about investing in condos or somebody who already is. And once again, make sure you’re a subscriber. Sign up at truecondos.com and until next time, have a great weekend. We’ll talk to you soon.

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