Toronto Area Move Smartly Real Estate Market Report: October 2021

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Many housing analysts and economists have long argued that the current price acceleration trends that we are seeing in the Toronto area housing market are entirely due to a “lack of supply” and that the cause of this. lack of supply is municipal and provincial constraints on zoning (see my discussion on this earlier in this report) and the “red tape” that slows the construction of new housing.

While more can be done to remove some constraints on the supply side (as noted above), blaming the supply tends to be a sustainable one-size-fits-all solution.

A recent trend in the data illustrates why this one-note explanation risks us missing other – equally remarkable – explanations of what is happening in the market.

The first problem is a tendency to ignore explanations on the demand side.

Under the current Liberal government, which first came to power in 2015, Canada has seen an overloaded number of immigrants and non-permanent residents settling in Canada, rising from an estimated 300,000 per year to 500,000 just before the Covid-19 pandemic (which caused those numbers to drop sharply due to international travel and border restrictions).

In light of this, economist Mike Moffatt recently asked an intriguing question on Twitter:

14_Moffatt

The short answer to his question is that municipalities do not change their official plans in response to demand shocks like this – at least not immediately – these plans are generally long-term in nature, revised and updated every day. 5 to 10 years.

So when our federal government accelerates our population growth and local authorities and market players such as municipalities and builders do not respond quickly enough to meet this new demand – the resulting spike in house prices is overwhelming. roughly economic 101 because demand quickly exceeds supply. under The Trudeau government.

Another problem is confusing long term trends with short term ones and we are currently seeing some interesting things with regard to the latter.

One of the main drivers of the rapid appreciation of home prices in Toronto over the past month has been the rapid decline in the number of homes available for sale. Last month there were only 4,607 homes available for sale (“active listings”), well below the 10-year average of 11,368 for September.

22_House_ActiveListings

When we look at the volume of new listings in the market in the first three quarters of 2021 compared to the 10-year average for those quarters, we find that new listings are 3% ahead of the 10-year average. years. This suggests that “new signup” levels are not a key factor in the currently low number of “active signups” we say, as many have suggested on social media and in the media.

11_NewListingsQ1toQ3

If we look at the number of sales over the same period, the first three quarters of this year, compared to the 10-year average for the same period, we find that sales this year are 26% above the 10-year average. In terms of actual home sales, 12,366 more homes were sold this year than the 10-year average.

12_SalesQ1ToQ3

This jump in sales figures suggests that particularly strong demand has been the main driver of this current trend. Given the unprecedented impact of the Covid-19 pandemic, which has seen many people seek more spacious housing, coupled with the significant monetary and fiscal stimulus introduced to reduce the economic fallout, it is reasonable to assume that these factors may have contributed to a sudden increase in demand. for homes in the Greater Toronto Area.

It is this sudden increase in demand that has resulted in a record number of “active listings” available. While the number of “new listings” was in line with historical trends, the 12,366 additional sales this year, driven by this demand, resulted in a decrease in the number of homes available for sale at any given time.

Getting back to the offering, it’s surprising to see that while sales this year are up 26% from the 10-year trend, new listings are only up 3% over the same time periods, because an increase in sales would normally result in an increase in the number of new Ads.

A significant number of home buyers today (who contribute to the high number of sales) are also home owners and normally when these homeowners expand or downsize into a new home they are selling their current property – ie. This is why we expect to see new announcements higher than what we are currently seeing.

One of the reasons that new listings have not accelerated much is that many homeowners who are expanding (say from a condo to a house) or downsizing try to keep their current home as an investment property rather than to sell it.

Recent research published by the Equifax rating agency found that the number of people adding a fourth or more mortgages (i.e. investors with more than four properties, etc.) has increased twice as fast as the number of first-time borrowers. A recent report by the Canadian Housing Statistics Program also found that a sharp increase in the number of buyers search for investment properties in Canada.

“The people who cram the fastest in Canada’s scorching housing market already own one house – or in some cases three or four. “

– Bloomberg, September 29, 2021

We can also see this trend by looking at the evolution of new rental listings over time.

The graph below shows the number of homes for rent in the first three quarters of each year in the city of Toronto. Unlike the condominium market, where the rise in rental listings is largely the product of the completion of new condominiums and units, the same is not true for the low-rise home market. Not only is the rate of construction of new low-rise homes much lower, they are not popular with traditional real estate investors as an investment like condos are.

15_New rental announcements

Of any region in the Greater Toronto Area, the City of Toronto has seen the most dramatic increase in rental listings between the pre-COVID year of 2019 and the current year, an increase of 46%. This is probably due in part to the trend of Covid-induced urban exodus over the past year, which has seen many people abandon city life in favor of more rural properties. Many of these homeowners who moved appear to have kept their existing homes and simply rented them out rather than selling them.

Of course, an increase in the number of new listings does not necessarily mean that this is the result of the relocation of the people who are renting them. It may be just the product of the high turnover of existing rentals as more tenants move out of town.

To determine if this is the case, we looked at all new rental listings in a given year and looked back to see if the last transaction on the same property was a lease or a sale. If the last transaction was a lease, we considered this property to be part of the current rental pool (for example, an existing owner appears to be renting their house because their current tenants are moving out); however, if the last transaction was a sale, we classified it as new upcoming rental stock on the market (for example, because these homes were either previously owner-occupied or newly purchased and are newly rented).

What we found is that almost all of the growth in new rental listings in 2021 was the result of properties that had not been previously rented. This lends weight to the explanation that new rentals, and not just the high turnover of existing rentals, are a key part of the story and that part of it concerns owners holding onto their properties and praise them when they buy other ones. As an anecdote, in my own brokerage, Realosophy Realty, clients looking to buy a new home often ask us if we can help them “work the numbers” to see if they can keep their existing homes as. as rental investments.

Getting back to the issue of housing affordability, I often hear economists argue that strong investor demand is a good thing for our housing market as these investors add to the rental supply and thus make the rental more affordable.

But as house rents rise at a rate slightly above the rate of inflation, house prices have jumped 134% in ten years – I think policymakers should be a little more concerned about how investors might look. contribute to the rapid acceleration of prices.

16_PriceRentGrowth

One political solution would be to see our government put regular homebuyers ahead of high net worth investors by tightening mortgage criteria for investors buying multiple properties, presumably both by increasing the supply as fewer homeowners would be able to to keep their existing home after buying another and reduce demand, which is not a bad thing in a market like Toronto where nearly one in four homes is bought by investors (according to a study by the Bank from Canada).

However, this is not one of the policy proposals put forward by the Liberals in their recent re-election campaign, which, like that of other parties, was largely focused on the need to build more new housing – which is true. occurs when one only sees “long-term supply” issues, regardless of what the data actually says.


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