A lot of you who’ve been following me may have noticed that I keep saying the phrase “the shift to affordability” for all of 2017. It’s been 9 months now and this seems like a good time to recap and remind everybody what exactly is happening in the Toronto Real Estate Market.
This “shift to affordability” is a mindset shift for Torontonians – that is, buying something that is more affordable, more reasonable in price (i.e., condos these days instead of freehold houses). When the freehold housing market started appreciating at ridiculous rates 2 years ago, everybody tried to stretch themselves to buy an $800,000 freehold house. Good luck trying to find a decent semi or detached house at that price in Toronto now; it’s like a needle in a haystack these days! With a stretched borrowing ability, the shift to buying a condo was imminent. Factoring in all of the basic investing fundamentals (i.e., population, income, and transportation), it was very clear that Toronto was going to get increasingly less affordable.
Right now, Toronto is still a confusing city when it comes to the real estate market because it feels like there is a juxtaposition of where the market is trending. Depending on the source of media that you pay attention to, we have headlines ranging from “sales down 3 months in a row” to polar opposite headlines like “Toronto housing affordability hits worse level ever”. Media, make up your mind!
Some of you may have pieced it together already in the last few weeks, but just in case, let me just give you a clear and simple explanation of what is happening. Toronto is not actually getting any cheaper. The number of transactions are down, but the prices aren’t actually plummeting into the “affordable” segment of the market (affordable now means less than $1 mil homes). So, say hello to your new friend, Condos! The shift to affordability is real!
The segment of the housing market over $1.5 mil is the root cause of the slight decrease in average price as these are the houses that are not really moving. The market isn’t as active as it was in April (it was scorching hot then), which means in comparison, the number of transactions are obviously down relatively, but the overall market is still moving. This is good, it is just a more balanced market than it was a few months ago.
Need more proof? Keep reading.
This is the most recent headline from the Toronto Star quoting RBC, “Housing affordability in Canada hit the worst level in 27 years in the second quarter of this year”. Wasn’t that when the so called “bubble” happened in Toronto, after the foreign buyer tax and rent control rules were implemented?
The RBC housing affordability report is measured as a percentage of household income required to purchase a market value bungalow – the higher the percentage, the higher the household income needs to be in order to afford a house (not to mention, this is PRE-tax income as well). Vancouver is the least affordable at 80.7% (down 2.4%) and Toronto is right behind at 75.4% (up a staggering 12.7%). If Toronto is “supposed to be” getting cheaper, then somebody ought to tell RBC that their report is wrong.
Oh, here’s a kicker for you all which I found shockingly amusing. Back on August 30th, 2016, approximately 1 year ago, Chief economist of RBC, said “Signs of cooling resale activity have emerged in Vancouver and more tentatively in Toronto and we believe the blistering pace of property appreciation in both markets may slow by year end (2016)”. Guess what the affordability ratio was when the RBC Chief economist made that comment. It was 60.2% in Toronto. Below is their infographic from a year ago.
Remember, the RBC affordability index looks at the cost of owning a detached bungalow at market value versus average income. Unless the average income in Toronto is dropping significantly, there is no reason the affordability index is increasing that much – especially if Toronto real estate prices are “supposed to be” getting less expensive.
This week’s article is based on RBC’s report. Coincidentally, I shot this week’s video “Are we Spending too much Money on Housing?” (source based on Ratehub) before I wrote this week’s article. The results from these two sources are shockingly quite similar despite using slightly different benchmarks.
So if Toronto housing is getting more and more expensive, how are people still buying homes? Well, people have shifted their mindset and are buying homes that are more affordable, which is in the condo market. Have a look at the chart below courtesy of TREB & Better Dwelling.
The dark blue bar is the amount of detached homes sold in August 2017. The light blue bar is the number of detached homes sold in the respective price range last year in August 2016. There is clearly a significant drop in detached sales (not shocking). Now, look at the condo sector chart below that illustrates the shift to affordability.
You can see the dark blue bars being longer than the light blue bars starting right in the $400,000 price range (not so coincidentally, this is the starting price range for many condos now). So with the dreams of owning a freehold house getting out of reach, the shift to buying something more affordable has begun.
As an investor, this should serve as a pretty good indicator for where the market is heading and what you ought to be investing into. Time to go condo shopping!
Until next time,
Happy Real estate-ing,
Zhen
