JANUARY 2014 - MARKET FORECAST
Every year we like to review our last year's forecast (unlike those who keep calling for a market correction). Just recall the McLeans Magazine Cover and the words "Inside the Great Real Estate Crash of 2013". In contrast we predicted only a 'market pause' with a return to a more normal market, and with 2013 outpacing 2012 in the latter half of the year. So why are we able to do a better job of forecasting? The answer is that we live and work in this market. It is not just numbers but also people and we take the pulse of our agents and their clients. If you live outside of Toronto, you really don't know the Toronto market. You will note that we never make forecasts about the Canadian Real Estate Market (there is no such thing) or any other real estate market in Canada.
The starting point for us is to identify any major changes to the Toronto economy (major job losses or a spike in interest rates) that would force people to postpone their move or to sell at a loss. The Toronto economy, based on financial services, high tech, research, and higher educational institutions continues to strengthen and we know interest rates will be stable in 2014. But the key component is always population growth. More and more people want to live in Toronto and in particular downtown Toronto. The only fly in the ointment would be if mortgage lenders (and particularly banks) refuse to finance rental condos in 2014 for buyers who previously bought new from developers and who may be forced to sell into the market.
Keep in mind that eighty percent of all real estate transactions are not driven by economics but by need. When an Estate Executor phones to say that Grandma has passed away, they never talk about renting out the property until the market improves, or renovating and flipping it. They just want the property sold, now. Similarly when a young couple, living in studio, are expecting their first born; they are moving now - not if and when the market changes.
So let's get down to our Market Numbers for 2014:
1) Overall sales on the Toronto Real Estate Board will hit a record in 2014. That was an easy call. The record year for sales was back in 2007 - when we had a population of about 750,000 less people. Sales will hit 95,000 units this year. Clients are telling us that they have rented or postponed buying because the experts told them it was not a good time for the last two years. They are tired of waiting, don't believe the experts anymore, and want to act in 2014.
2) The hottest market will be freehold properties under a million dollars in the 416 area code. There will be lots of multiple offers on these properties. Prices will rise by 10%.
3) To understand the condo market, you need to realize that it consists of three submarkets. First is the resale market for condos under a half million which is very strong, with prices averaging $500-600 per sf, depending on the building location and finishes. For the past two years, rentals have outpaced sales but expect this to reverse this year. Last year we advised our investors who were closing with developers to rent out their units for at least a year rather than trying to flip them. Now we are seeing these investors starting to sell into the market. Downtown freeholds are also too expensive, not just in terms of overall price but also on a price per sf basis. We are seeing unfinished freeholds in 416 selling for more than $500 per sf. This is a support level which will ensure that condo prices in this market will continue to appreciate by 3-4% per year.
4) The second condo submarket involves luxury condos which are experiencing a price compression. Units that once sold for over $1,000 per sf are dropping in price and the floor price is approaching $700 per sf. There are two reasons for fewer buyers for these types of properties: first baby boomers continue to stay in their houses longer than the experts predicted, and secondly, banks do not want to finance condos attached to hotels which again reduces the pool of buyers.
5) The third submarket is the new condo market. People always confuse sales with construction and completions. Sales today will not impact the market for 3-4 years. Given the population growth of the GTA, we need a minimum of 35,000 new units each year, with over 60% coming from high rise condos. GTA condo sales peaked at 28,000 in 2011 but in 2013 we will be lucky to hit 10,000. Due to construction delays, we have never been able to deliver/complete more than 13,000 units a year and in 2013 we will deliver just 12,000 units. Some believe that 20,000 condo units will be delivered in 2014 but not us. Going forward, developers have slowed the launch of new condo projects but we still expect sales to increase by 15% to 11,500 units in 2014. Developers have also reduced sale prices to the $550-600 per sf range in order to be more competitive with the resale market.
6) Assignment sales disappeared in 2013 due in part to Revenue Canada's stance that these sales were income and not capital gains based. We expect a rebound in Assignment sales both from a financing issue (see above) and because non- resident investors want to take profits earlier.
7) With the switch back to buying in 2014, we expect rents to level off with only modest increases to reflect rising operating costs. Studios will again average $1400 per month. The entry level for one bedroom units will start at $1600 and for two bedrooms it will be at $2200. While rents won't decline, we expect that there will be less multiple offer scenarios for rentals. Vacancy rates will remain at 1%.
In summary, look for a strong Toronto real estate market in 2014. It will favour sellers in most market segments. Again our forecasts are never sexy; we just try to provide the best insights.