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Toronto real estate so good that it’s bad

In this podcast version of the condo market news this week Andrew la Fleur talks about how Toronto’s real estate market is so good, it’s bad. Also, what is the one unique factor that no economist seems to be putting in their analysis of Toronto’s real estate market? Finally, have the new mortgage rules that came into effect in October worked? Not really. Find out why in this episode.


1:35 Solving the Enigma of Canada’s Housing Bubble, from The Globe and Mail.
2:22 The real estate market is doing well for very large number of people.
3:15 Fear of missing out affects sellers.
4:49 What we’re in right now in the market is not normal.
7:17 What’s going on with this market and are we in a bubble or not?
9:15 Growth factors that we’re seeing now and continue to see in the future of this city?
10:07 Are Federal Mortgage Rules Actually Working? Not Really.
11:30 Since the mortgage rules took place, that was one trigger that set the market off.
13:58 Demand is a very hard thing to artificially stifle.

Click Here for Episode Transcript

Andrew la Fleur: The Toronto real estate market is so good that it’s bad. Find out what I mean on today’s episode.

Speaker 2: Welcome to the True Condos Podcast which Andrew la Fleur. He claims 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 for listening. I’m going to be doing the condo market news this week on this episode. Condo market news, for those of you who don’t know, is normally a video segment that I do every week, every Monday, where I talk about three or four of the articles in the media that have caught my attention this week with regards to the Toronto condo market or the real estate market in general. We look at them and analyze them from an investor perspective. Now, this week I’m going to be doing this in podcast form and we have a few great articles to talk about. The first one that I mentioned in the intro is from The Globe and Mail and it is an editorial which is one of the best editorials that I’ve seen, at least from the mainstream media, on the housing market and the real estate market in Toronto in particular, and the situation that we find ourselves in which is really unprecedented with low, low supply, high, high demand and rapidly, rapidly rising prices.

The headline is “Solving the Enigma of Canada’s Housing Bubble” and of course, all the links for all these articles you can find in the show notes for this episode at Solving the Enigma of Canada’s Housing Bubble, from The Globe and Mail. The first line is great. “If Yogi Bear were alive today, he’d probably describe the Toronto housing market like this. ‘Things are so good, they’re bad, and if they get any better, that’ll be worse.'” I just think that’s a really smart and simple way of summarizing the market right now, that we’re all complaining and wringing our hands and trying to figure out how to solve this so-called problem that we have but the reality is that it’s a good problem to have, that the market is growing, that people want to buy and people want to live here. People want to invest here.

The real estate market is doing fantastically well for a very large number of people, it’s a very good thing. Obviously if you’re trying to get into the market you might have a different perspective but if you’re already in the market, things are great and basically it talks about something that I’ve talked about a lot which is when the market is rising so quickly like this, unfortunately what it does is it paralyzes people. It has a paralyzing effect where people don’t want to move, and so that really restricts supply. He talked about it as FOMO, fear of missing out. Normally you associate FOMO with buyers, irrational behavior with buyers of just throwing money at properties because they’re afraid that prices are going to be even higher.

But he made a great point that FOMO also affects sellers, too, where nobody wants to sell their property because they are afraid that if they sell it today it’s going to be worth more tomorrow, and so it just creates this vicious cycle where nobody’s selling, everybody’s trying to buy, and the prices just keep rising and rising. Then, basically he goes through some more analysis on Toronto and Vancouver and the efforts that have been tried in Vancouver, that touches on the foreign buyer thing, and basically his conclusion is that look, like he says in the headline, it’s an enigma. We know that this is not a healthy situation, we need to get out of it, but there’s really no end in sight. Government can’t raise interest rates, the economy is not doing that well overall, to warrant that they’ve tried so many different measures to restrict supply, that doesn’t seem to be working.

It’s really a Toronto and a Vancouver problem, it’s not a national problem, so how do you address it locally? There’s a number of just interesting and difficult dilemmas that the government finds themselves in as they’re looking at this housing issue and wanting it to obviously not end badly in the form of a bubble popping or something like that. Now, again, I would just take this time to add my thoughts and that again, is something that I’ve been saying over and over to people, is what we’re in right now is not normal. Don’t get used to this, don’t think that this is what happens when you invest in property, that you purchase something and then the next day it goes up 50, 100, $200,000, you bought something two years ago and now it’s worth twice as much as it was.

This is not normal. We will return to a normal market at some point sooner rather than later. What will be the trigger that will cause that return to normal to happen, nobody knows. Nobody has a crystal ball. There’s a million theories out there and this article is alluding to some of them, but my point being as investors we need to continue to buy smart, to act rationally, to not fall into irrational behavior and just following the herd and buying properties that don’t make any sense, that don’t have underlying fundamental economic value to them, that are not providing positive cashflow, that are not under the current market values and so on. We want to stick to the fundamentals and understand that this crazy situation that we’re in right now with prices going up 20 and 30% at the current pace, it’s not normal, it will change at some point, and we want to act strategically and behave rationally as investors in the current market.

Okay, so the next article I want to talk about is actually a little vlog, a video post from a friend of mine, Graham Connaughton. Graham is a realtor with Sotheby’s Realty and I’ll include a link to his video, he posted it on Facebook there. Graham had a great point, just a quick, simple analysis, a point that I haven’t really heard anybody bring up and I thought, “Wow. That’s a new idea that I wanted to share with you,” the listener of this podcast, my clients, and future clients who are listening to me right now. I wanted to share this idea with you because I think it is an interesting idea, I think it’s worth further exploration, and it’s worth thinking about.

That is, he basically says with respect to all the analysis and meeting of the minds that are going on at all levels of government, and in the industry of real estate right now, what’s going on with this market and are we in a bubble or not, and all this analysis that’s happening and chatter in the media, one thing that he says, nobody’s really talking about a factor that is hard for an economist for quantify is the fact that Toronto is unique. It’s a unique city in the world stage in that it is a city of immigrants, more so than any other city on the planet. We have, I think been verified by the UN or one of these types of bodies, as being the most international city on the planet by a measure of more than 50% of people are born somewhere else, not born in Canada.

I’m sure many of you listening are in that situation, or if you’re not yourself, probably very, very high chance that your parents were not born in Canada. Myself, my father was an immigrant from Holland, and so this is normal, but if you go to most other cities around the world, that is not normal. This is a unique feature of Toronto, and basically Graham’s point was the immigrant mentality is you want to get ahead, you want to do well, you want to have a successful business, and a big part of it for many immigrants, regardless of where you come from around the globe, when you come Toronto is you do want to own a home. That is a big part of the dream of when you come to Canada and when you come to the GTA. A big part of that is you do want to own a home, or you want to own real estate.

Depending on where you’re coming from, what culture, it’s stronger than others, but it is a universal trait amongst immigrants that are coming here, is owning a home is a very high value that many of them are trying to achieve. He’s basically saying how do you quantify that in terms of Toronto and how that factors into the growth that we’re seeing now and the growth that we’ll continue to see in the future in this city? Just the different mindset, the different mentality of the Toronto population and the GTA population. Interesting food for thought. Again, his point is you can’t really quantify that as an economist or put that into your schedule and your spreadsheet, but it is a reality, is a factor, and is something that makes Toronto unique on the world stage as a city. Very interesting point. I’d like to see what you think about that, hear what you think about that.

The next article is from Global News and the headline is “Are Federal Mortgage Rules Actually Working? Not Really.” Question asked and answered in the headline, so again, the background to catch you up to speed, the federal government introduced new mortgage rules in October, 2016. They were attempting to, again, reduce demand for real estate by essentially making it harder to get a mortgage, tightening the mortgage rules, and that did happen and it is harder now for some people to get mortgage financing, especially those people who are putting less than 20% down. They now have to qualify to a higher mortgage rate than the rate they’re actually paying, the posted rate versus the actual rate they’re paying.

This was supposed to cool the market down and slow things down. Did it work? No, not at all. Again, this is something I’ve been talking about a lot lately, and when the rules came out my analysis at the time, you can go back and check the tape, so to speak, was basically that this is great for investors, it’s going to benefit investors and people who have money the most, so this is the classic case of the rich will get richer, and that’s exactly what has happened. Since the mortgage rules took place, I would say that was the one trigger that really set the market off and set it on its current trajectory to the moon. Things were hot before, now things are multiplied by two or three times the heat on the market.

Again, the case of the rich getting richer, where if you’ve got 20% down, you’re doing even better. The properties are appreciating even more, they’ve become even more of a precious commodity, even less people are wanting to move now than before, supply is restricted even more. If you’re in the condo segment, which of course, that’s what our focus is at True Condos, if you’re an investor in that segment you’ve done amazingly well since October if you own anything. Prices have shot up probably 15% on an average condo, just since October. Because you have all these new condo buyers who weren’t there before, they can’t afford to house anymore, so now you have this whole new segment of condo buyers that came up and also on the rental market, all these people who were just about to be able to afford to buy something, now they’re knocked down and they have become renters once more, or still staying as renters.

The rental market, the condo rental market is absolutely soaring right now and prices are soaring there. Again, the government had good intentions with this but has it worked at all? No. It’s actually been probably created the opposite effect of what they wanted it to create. I can’t really think of anything positive, any positive outcome that it has, other than just again, for those putting less than 20% down, those are more secure mortgages now, and less likely to default because they are qualifying at a higher rate, so there’s more insurance, more security built into the whole system as a whole, but other than that, I mean, what positive outcome in terms of the government’s objective of doing has happened? I can’t really see any right now.

Like I said, it’s been great if you’re an investor, it’s been great if you’re already in the market, just boosted the value of all assets everywhere. I think the big lesson here is that it really shows that demand is a very hard thing to artificially stifle, so if you are trying to look at the demand supply of the equation, supply and demand, and you’re trying to say, “How can we reduce demand?” It’s very hard to account for human behavior, the human desire of wanting to buy something. You tell someone you can’t have it, they want it even more. We talked about in the last article, the immigrant mentality of the city of Toronto. People want what they want, and they will figure out how to get it. If you tell them, “You can’t get it,” or you tell them, “No, you have to jump through this extra hoop to get it,” people if they really want it, they figure out how to do it.

They get through those hoops and they get it done. They beg, borrow, and steal to make home ownership happen, and thank goodness we do have very strict mortgage rules in place. We are not in a situation like the US in 2006 where they were just handing out mortgages to anybody who could fog a mirror, literally, without any income verification or anything. No job, no income, no assets, “Here you go, here’s a mortgage.” Six months later you want to refinance and buy a Ferrari? No problem. That is not happening at all in Toronto, in Canada, and so we do have a rapidly rising housing market that does have a solid foundation. Where this ends we don’t know, but again, the story here, the take home here continues to be for me, the main thing I want to break through to you as a condo investor, is just remember that this is not normal.

It’s not a normal situation. We will revert back to a normal market at some point. Prices rising in the long-term at approximately 5%, 5-6% per year is what you can expect over any 10 year period, so if prices are going up 25-30% right now, then over a 10 year period there will be some years where it will be 0, 1-2% some years, or it might go down 5 or 10%, but over a 10 year period you can expect about a 5% annual growth rate on real estate in Toronto. Okay, that’s enough for today. I hope you enjoyed this episode of the podcast, and of the condo market news this week. Once again, check out all the links to the articles I referenced here at, and until next time, I hope you’re having a great week.

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