January 2016 Market Forecast

In Review

Most experts got last year’s forecast for Toronto real estate correct: that there would be no slowdown in sales or prices. But we were the only one to call for a record sales year for TREB and for a growing imbalance in sales between 905 and 416 areas.

For 2016, CMHC and all the big banks are calling for lower sales and a slowing of price increases to zero or just the rate of inflation. In fact CMHC says that TREB sales will fall to 87,500 units by 2017 – a 13% decrease. The reasons advanced are that previous price increases have removed buyers from the market along with an expected increase in interest rates. In fact RBC is forecasting that the Bank of Canada five year bond yield will double to 3.3% by year end.

In contrast, our forecast focuses on demand and supply issues. While affordability issues are certainly a concern, they will have minimum impact.

The Economics of the Toronto Real Estate Market

1 Demand for Toronto real estate is still rising. The record sales in 2015 on TREB are still lower than the sale numbers per capita from ten years ago, allowing for even more sales. Plus the sinking Canadian dollar makes our real estate even more attractive for foreigners. Add a population growth of 100,000 people per year and that translates into 37,000 new units just to balance the market.

2 Supply of new housing in Toronto continues to be limited. The only area of significant growth is the high rise condo market.

3 Affordability will not be a concern. Interest rates will not rise significantly this year. Governments, even less than consumers, cannot afford rising rates to service their debt levels. The U.S. Fed rise of ¼% in December was more about posturing than a concern for inflation. Expect only one more increase of ¼% in 2016. When you look at the yield curve, the difference between 5 year and 10 years bonds does not price in any significant price increase going forward in the mortgage market and those investors are smarter than us.

Five Trends for 2016

1. The limited supply of low rise housing will continue – in Toronto proper no one is selling unless they die, divorce, or move out of town.

2. New condo sales will be less than 20,000 units. Investors are becoming smarter and more selective. They are only looking at projects from major condo developers and buying those projects where prices are at current market levels. It is easy to make the case that there will be a shortfall in housing within five years.

3. Stacked townhouses will be the hot market segment. In the fall, 35 Wabash in Roncesvalles sold out in days with prices in the $800/sf range.

4. Toronto is becoming a renters market. On TREB rentals outnumber sales 2:1. More ‘purpose built’ buildings i.e. apartments are coming to the downtown market for the first time in years which will add to the rental pool.

5. Downtown will continue to be the destination of choice. Giving up the car and lengthy commute times is an easy choice for millenials who will soon become the major buying segment.

Our Fearless Forecast For 2016

1 Prices for low rise housing in Toronto will rise by another 7%.

2 Prices for condos will rise by 3% as more buyers are priced out of the low rise market and will end up here.

3 Mortgage rates will increase by less than a ½% this year for both fixed and variable loans.

4 Prices for condos are moving to a price per square foot and not a price per bedroom model. Older buildings can still be found at $500+/sf. The new market is $600-700/sf. Bay Street and upscale buildings are $800-1,000/sf. (The average GTA condo has shrunk from 900 sf to 750sf over the past ten years).

5 Rental guarantees by developers are becoming more common for new construction. Most are at 6% which translates into a $1500 per month rental for a $300,000 purchase.

6 CMHC’s new requirement of a minimum down payment of 10% for properties costing from $500,000 to $1,000,000 will have no impact on the market. (Actually only 7.5% maximum in total – 5% on first $500,000 and 10% on the balance.) Recall that properties over $1,000,000 already require a minimum down payment of 20%.

7 When you combine sales and rental transactions on TREB, it will be another record year.

Average Toronto Home Price for 2016

This map shows the average City of Toronto sale price and number of sales for the year 2015 by municipal breakdown

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