UNDERSTANDING THE NEW REAL ESTATE MARKET

Recent events in financial markets have spooked people about the stock market and of course the real estate market. While everyone blames the subprime mortgage market as the primary culprit in bringing down some banks, it is surprising that economists from these same financial institutions are now considered to be the experts when it comes to real estate markets.
First of all, real estate is not all about economics as most economists would have you believe. Real estate is still about accommodation. You can get out of the oil, gold, or stock markets, but you cannot escape the need to have a roof over your head. Most sales transactions occur because of a change in family circumstances – marriage and divorce, children, and even death. So there is always going to be an active real estate market.
Secondly, the BUY versus RENT option that economists keep talking about is not an option for most of us. Already 68% of Canadians own their own home. If everyone tried to rent, how would that work? And if you see most of the rental stock, most Canadians would rather live in their car!
Thirdly, demand and supply is not the primary determinant of price. Unlike other markets, residential sellers either get their sale price or they just take their property off the market. The only time where excess supply can depress price is when properties must be sold by mortgage foreclosure and where developers have built on ‘spec’. This was the problem in many, but not all U.S. markets and is definitely not the case in Toronto!
Now that we have a better understanding of market mechanics, where is the Toronto real estate market headed? For starters, we will not experience any major price correction. We are seeing a pull back in detached housing in central Toronto and at the high end. That’s because the market experienced several years of double digit price increases and household incomes did not keep pace. Historically over the long term, real estate prices will appreciate at about 3% plus inflation. When you get several years of price increases above that level, you always experience a flattening out or a marginal decline.
In the condo market, we experienced only one year of double digit increases. The demand by young people remains strong and our real estate prices are cheap by international standards for non-resident buyers. So don’t expect any drop off in prices in the condo market segment.
This market is also a great time for ‘move up’ buyers. While prices are softening at the high end, the strongest part of the market is at the ‘entry’ or ‘first-time’ buyer level. Move up buyers have a great selection and can negotiate the price of their new property while being assured that there is demand for their current one.
While real estate has never claimed to be the absolute best investment vehicle, I don’t know another asset you can purchase, use, and have it go up in value – all at the same time! So when stock markets can drop by 5% in a single day, putting your assets in real estate that can only go up in the long term is not such bad idea.

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