City of Toronto Housing - Part 4 - The Conclusion

In case you are just tuning in to my blog on the City of Toronto Housing, you can get caught up by clicking in the following links in order:

highrockcapital.ca/pauls-blog/city-of-toronto-housing-introduction-and-part-1-of-a-4-part-series

highrockcapital.ca/pauls-blog/city-of-toronto-housing-part-2-the-negatives-if-you-own-a-house-that-is
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highrockcapital.ca/pauls-blog/city-of-toronto-housing-part-3-the-positives-if-you-own-a-house

​Today is the conclusion, which will be substantially shorter.  

As I mentioned in the Introduction/Part 1, like any other asset, I do not think there is a "one-size-fits-all" solution on the decision to buy or sell a house.  Some of the line items that might matter to an owner or prospective owner are:

• Your age and ability to withstand another real estate cycle
• Your stability of income and ability to financially service the house/debt
• Your ability to maintain the house
• The time you plan on spending in the house
• Family/children/pets

And I am sure there  are a few hundred more but, given even these few, perhaps the best way of giving you my conclusion on the City of Toronto housing market is to do so on a timeline basis - short, medium and long term.  Then I can easily put folks into categories after that.

Short Term (1-12 months)

As I showed in Part 2, there are quite a few negatives we can derive from TREB data. The simple fact of the matter is that the three largest Canadian cities have gone through/are going through a massive catch-up to other international cities on a pure value basis (house price to income ratio).  The result was sharp increases in prices to the point where some (government officials, most notably) described it as a bubble.  I am not sure I would describe it as a bubble but I would be onside with describing it as "overdone" in the short term.  Just like any other market, it just went up too far, too fast.

The result of prices going up so quickly is that it finally dragged in some reticent sellers, as can be seen in New and Active Listings increasing rather dramatically in the month of May alone.  Remember, June's numbers will likely be out later this week, so we shall  see what they bring but I suggest it will be much the same - Active Listings up, Sales down and Prices down sequentially again.  

There is really not much more to add other than to say that, in the short term, prices are likely to come off a fair bit and until the market reaches more of an equilibrium.  Think about it, the market went from being "super tight" on the supply front (Listings at all-time lows) and, what in the money management business we call "bid without" (no offers around and lots of bids) to the exact opposite - flooded with supply (New Listings) and now "offered without" (lots of offers and no bids)....all in one month!   

And so, with a gun to my head, you probably want to ask me "how much is the market going to come off in price?"   Not really my wheelhouse but I am pretty confident prices will come off just given the imbalance in the market right now.  My best guess? - I bet prices, which peaked in April (Detached homes) come off about 20% by the time they find equilibrium and base out.  The last time we saw a period of Sales to Active Listings ratio around this level through 2011 through 2013 and those were years when prices were basically increasing at a rate of only about 1-2% on a yoy basis.  This seems a fair bit more severe to me so the market will have to see lower prices to drag in buyers.  Remember, the object of any market (the St Lawrence Market, the Stock Market, the Housing Market) is to match buyer and seller.  If prices are too high and transactions stop occurring, then prices need to come off to find an equilibrium where buyers and sellers transact.  

The biggest risk to this -20% scenario is that, in the short-term, and given the public policy we have seen, that the market falls even more.  My biggest concern is that buyers get completely spooked by the Province's measures and the housing market turns into a complete vacuum and prices fall 30-50%.  Don't forget, the housing market is not normally a liquid asset.  What we have seen the past year is not "normal".  

The one positive that could help the market stabilize is the Bank of Canada (BoC). The BoC  has been talking recently about raising interest rates and the government bond curve has risen in yield in response.  Mortgage rates will follow and it is these expectations that mortgage rates may increase that may drag in some buyers at new, lower house prices.  

Medium-Term (1-3 years) 

My best guess here is that prices will stabilize in about a year.  It will then take them another 2 years or so to start recouping those losses and to get back to where they were in April 2017 (the peak).  

Variables would include: BoC interest rate policy, Federal/Provincial public policy, immigration, C$, etc.

Bottom-line, I think it will take about 1-3 years just to find equilibrium at the base and then work on a very slow basis to the point where the market can start recouping the losses.

Longer-Term (4+ years)

Over the longer-term, I am quite positive on the housing market in Toronto. This view is largely based on immigration, the population growth in the city and, most importantly, the public policy that was put in place in 2005.  The Province (and the City) want the core of the City to grow, not the suburbs.  

And my bullish stance is especially true for Detached houses.   The premium of Detached house prices over condos will continue to widen substantially.  Intensification of densification being the primary reason.  Land will trade at a substantial premium. In fact, according to Census data, the City lost 5,335 Detached houses between 2011 and 2016 (torn down and turned into townhouses?) and lost 1,180 Semi-detached houses over the same period.  Not only will there not be any new stock of detached and semi-detached in the city, they are actually tearing them down and putting up multi-units!  

I am of the view that the City of Toronto housing market got a fair bit carried away the past year but it was driven by capital flows that quite simply forced prices up to start the process of playing catch-up to other major international cities.  We still have a ways to go but it will take more time, as it should.  

Investor/Homeowner Decisions

As I mentioned earlier, making buy/sell decisions on the housing market should be a personal one, not a one-size-fits-all.  

For example, if you are 65+ years old, retired or planning on retiring in the next year or so, you might want to think about selling now and taking some money off the table.  If I am wrong, and the market sells off substantially more (50%)  and that would wipe out your retirement plans, then you need to really think about that type of downside.  As we now know, public policy can alter prices substantially (in both directions).  If you are 65+ years old, and I am wrong about prices stabilizing over the next few years, then it might be tough to withstand a typical, full-cycle real estate correction/recovery which are more like 20 years long.  I am not of the view that this is a typical cycle due to the public policy put in place in 2005 but it is a risk, nonetheless.

If you are 65+ years old and do not need to worry about capital to fund your retirement and love your current house...don't sell.  You probably have worked hard all of your life and saved appropriately and deserve to live where you want to live.  Good for you.  

If you are  younger (25-40 years old) and can afford a detached or semi-detached house, you would be wise to start looking now and use this coming correction in the market to buy.  I would focus on being as close to downtown and public transportation as you can afford, along with as big a lot size as you can manage...you may see a fancy, modern house you fall in love with but don't forget, all those finishings depreciate...the land doesn't.  Location and size are key under this new public policy.

If you are 25-40 years old and cannot afford a ground-level dwelling, then maybe a condo makes sense but do not forget that condo supply will continue to grow as the city densifies substantially.  Don't expect prices to rise much, if at all.

Conclusion (of the Conclusion)

We are going to see City of Toronto house prices come off over the next few months (at a minimum) and year but over the longer term, detached (and semis, to a lesser degree) will keep increasing due to the change in public policy from 12 years ago. Understanding this change in public policy (both the Greenbelt and Places to Grow Acts 2005 and the Immigration policy) is key.  

If you want an opinion, please feel free to reach out to Scott or I.  As mentioned, for each of our clients we perform a Wealth Forecast when they start with us and then every six months after.  Home ownership is a big part of the Wealth Forecast so we are very comfortable modeling that asset into our overall analysis.  


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