2012 IN REVIEW:
Most forecasters avoid reviewing their calls from the previous year. Not us! We called for 90,000 resales on the Toronto Real Estate Board, and we will end the year with 86,000. We forecast condo sales to be 10% higher when in actual fact they were off by 16%; with the biggest impact occurring over the latter half of the year. We expected condo prices to be flat in the $500-550/sqft range. Over the year, prices rose slightly and then declined to end the year flat to 3% lower. In the New Home or Pre- Construction Market, prices at $700-800/sqft were unsustainable as we predicted. This Market is now in the $550-650 range, depending on location. We forecast rental rates to increase by $75 across the board and that the basic one bedroom without parking would increase to $1600 – it is now closer to $1700.
In looking back, we were correct with our economic forecasts (growing employment and low interest rates) but missed the orchestrated rule changes at CMHC which impacted the market and which led to more media hype of an impending market correction. The result was that many potential buyers moved to the sidelines.
So what was 2012 – the start of a Market Correction or a Market Pause?
What do we need for a Market Correction? First we need to see a ‘price bubble’ – that is usually defined as double digit price increases in three consecutive years. Next we need to see people selling their properties at any price – because rising mortgage arrears, caused by a spike in interest rates or a jump in job losses. Finally we need to see properties located in areas where no one wants to live. Does that sound like the Downtown Toronto market?
What do we need for a Market Pause? It occurs when people become influenced by outside factors but the underlying economic fundamentals do not change. Think back to 9/11? Because terrorist planes crashed into the World Trade Centre, many believed it was not safe to live in high rises. Condo sales declined significantly for 3-4 months. Think back to the SARS epidemic? No one would visit Toronto and no one would look at any property owned by Asians. Again this sales decline lasted for several months. And finally think back to the 2008 Financial Crisis in the U.S.? If U.S. real estate could crash (it was really contained to about seven states), then Canada would follow shortly. This Pause lasted about 8 months.
UNDERSTANDING THE CONDO MARKET IN 2013:
1) We are currently in a Market Pause! Our best guess is that it will end by March. Why? Humans are very adaptable and our guess is that they will adjust to the new CMHC rules.
2) All those construction cranes are really a good thing! Many of those cranes are for new office towers. Many companies are relocating back downtown to be closer to the new work force. Young people who live in ‘416’ do not want to work in ‘905’ and smart companies get that.
3) No matter how many New Home or Pre-Construction sales take place each year, the construction industry can only deliver about 15,000 new condo units each year – a natural bottle neck for supply.
4) While condo resales were lower in 2012, there were record condo rentals which offset the decline in sales. Young and older people still want to live downtown. With rents continuing to rise, buying will soon be the preferred option again.
5) Long term, more and more people not only will want to live downtown but will have to, with a crumbling Gardiner Expressway that will be under construction for years and no rapid transit in place for years.
6) The economic fundamentals remain unchanged – interest rates will remain low with growing employment and income figures for the GTA and downtown Toronto.
7) With Governor Carney moving to England, do not expect to see more changes to CMHC rules in 2013.
2013 FORECAST BY THE NUMBERS:
1) TREB sales should match those of 2012. TREB numbers will underperform the first half of the year and outperform over the last six months. Remember the all-time record sales year was in 2007, so how can we go any lower?
2) Downtown condo sales will rebound by 15% to 2011 levels.
3) Prices will again remain flat in the condo resale market and will decrease by another $50/sqft in the New Home or Pre-Construction Market. To entice investors back into the market, developers need to keep the premium over resale prices to a maximum of $50/sqft.
4) Freehold properties downtown under one million dollars (the CMHC cap) will again attract bidding wars and those over one million will sell more slowly and will see price softening.
5) Expect condo rental prices to increase by another $75/month. At most there will be about 7500 new rental units in 2013 from new condo completions. This is not enough to keep up with increasing demand and the vacancy rate for condos will remain below 1%.