What to Expect in 2019 - Executive Summary
- A recent study found that 10% of Toronto condo buyers are foreign.
- Canadian household debt is at approximately 170% of disposable income.
- Mortgage rates have been on the rise but they are still at historically low levels and will continue to be so in the considerable future.
- The Greater Toronto Area (GTA) is projected to continue to have the greatest population growth within Ontario for the foreseeable future with its population increasing by 2.8 million, or 40.8%, to reach almost 9.7 million by 2041.
- Halton region to record the highest percentage increase of 56.2% in population by 2041 in the GTA.
- The B20 stress test and The Non-Resident Speculation Tax (NRST) have been able to cool off the real estate market to a certain degree.
- Canada's overall unemployment rate was down to 5.6%, the lowest level since Statistics Canada started measuring data.
- A record amount of condo units will be released in 2019, followed by a softening in years ahead.
- Studio condo pricing increased the highest over the last 12 months in comparison with 1, 2 and 3 bedroom units
- Toronto area rental vacancy of 0.7% is at record low levels.
- Bottom line, a more balanced 2019 is expected with slight price appreciation in the Toronto condo market.
A Deeper Analysis
At InstaCondo we take a very pragmatic approach in analyzing current macro and micro economic indicators to determine and project future Toronto pre-construction condo market trends. We leave speculation aside and focus strictly on the analysis of hard verifiable facts to arm us with knowledge that will best guide us in answering the question on every condo buyers mind, “Is it the right time to buy a Toronto pre-construction condo?”
But before we delve into trying to answer this question and determine the future potential and where the condo market is heading let us take a few step back and look back at the turbulent real estate market as a whole to set the stage for our analysis.
The Aftermath of the Financial Crisis
Fueled by rock bottom interest rates which were intended to stimulate the economy after the financial crisis in 2008 the real estate market went into overdrive posting massive price appreciation across all real estate asset classes. Cheap money allowed speculators, investors and home buyers alike to borrow excessively and use leverage to amass massive gains on their properties in a very short period of time.
Some of the price appreciation during this time was also largely attributed to the aggressive inflow of foreign investment capital. While this is a widely debated topic when looking at all market forces at play foreign speculation has had an impact undoubtedly but it was just one of the many factors that contributed to the real estate boom. Non-residents own approximately 3% of all residential real estate properties in Toronto (In York region 7% of all residential homes are owned by foreigners) and approximately 5% in Vancouver. When analyzing condo units alone, foreign ownership across 17 major metropolitan areas in Canada amounted to only approximately 1% according to Canada Mortgage and Housing Corp. and Statistics Canada. Focusing strictly on Toronto a study released by consulting group Urbanation and CIBC found that 10% of Toronto condo buyers were foreign.
A recent study found that 10% of Toronto condo buyers are foreign.
Fast forward to today and the continual and steady appreciation of real estate has triggered a response from the government. Cooling off the red-hot real estate market was a necessary precautionary measure largely due to the fact that Canadian household debt is at approximately 170% of disposable income. In other words, the average Canadian owes an all time record high of about $1.70 for every dollar of income they earn per year, after taxes, according to statistics from the Bank of Canada. This figure is up from about 100% 20 years ago. Interestingly enough there are other 1st world economies with even higher ratios such as Sweden, Norway and Australia.
The average Canadian owes an all time record high of about $1.70 for every dollar of income they earn per year.
Enter the B20 Stress Test
The Office of the Superintendent of Financial Institutions (OSFI) which is Canada's banking regulatory body released its set of guidelines referred to as B20 in order to address the rising household indebtedness. The B20 is essentially a stress test to determine if the borrower is capable of meeting their debt obligations at a higher rate than they are being offered by the lending institution. The stress test rate is determined by the greater of the following; the qualifying rate of the contractual mortgage rate plus 2% or the 5-year benchmark rate published by the Bank of Canada.
As an simple example, the stress test would mean that a potential buyer of a $1 million home with 20% down would see their borrowing amount reduced by approximately 15% due to having to stress test at a higher mortgage rate than what they are being offered. The ultimate aim of this stress test is to determine if the buyer would be able to pay their mortgage should interest rates rise (which they are and will). This is a way to ensure those who cannot meet their obligations at the higher rate are not given the mortgage so that they are not foreclosed in the future.
The B20 stress test has been able to cool off the real estate market to a certain degree by preventing borrowers from qualifying for mortgages that they may not be able to pay off with the continuing rise in interest rates.
The Non-Resident Speculation Tax (NRST)
In order to further cool the real estate market and specifically foreign investment, the Ministry of Finance in Ontario introduced the The Non-Resident Speculation Tax (NRST). The NRST is a 15% tax on the purchase of a residential property located in the Greater Golden Horseshoe Region (GGH) by individuals who are not citizens or permanent residents of Canada or by foreign corporations.
The net result specifically in the Greater Golden Horseshoe area is that the number of offshore property transactions was reduced to 1.6% in February 2018, down from 4.7% in May 2017.
The non-resident speculation tax has helped to curb foreign speculation in Ontario real estate
Rising Interest Rates
Further market headwinds come in the form of rising interest rates.
The benchmark rate set by the Bank of Canada (also referred to as the overnight rate) is at 1.75%, up from 0.5% in the summer of 2017. The Bank of Canada is signalling to move rates to between 2.5% and 3.5% which are considered more neutral as we now move away from the post 2008 era which called for lower rates that were intended to stimulate the economy. (EDITORS NOTE: As of March 2019 some analysts are predicting rate cuts by the Central Bank due to the slumping oil sector which Canada's economy is so heavily dependent upon. We will update you as soon as more information is released, make sure to sign up for our newsletter to stay informed.)
The prime rate that banks use to set variable-rate mortgages take their cue from the overnight rate. Since the prime rate is now at 3.95% it means that the banks markup is 2.2%. When the overnight rate rises to 3% the prime rate would be approximately 5.25%.
5-year fixed mortgage rates take their cue from the interest rate on the 5-year Government of Canada bond. Current 5-year bond rates are at around 2.4%. This means the banks markup on a fixed rate is around 1.1% since a 5-year fixed rate mortgage is currently available at around 3.5% discounted. Historically the last time banks posted a 5.25% prime rate was in 2008 and the 5-year bond rate at that time was around 3%. With a rise in bond rates to 3% this would translate to a 5-year fixed mortgage rate of 4.1% discounted.
Even though mortgage rates have been on the rise they are at historically low levels and will continue to be so in the considerable future.
Record Level Immigration and Population Growth
Immigration is on the rise due to a shortage of workers in the Canadian labour market as well as with the fact that Canadians simply are not having enough children to maintain the necessary population growth to support our economy.
Between July 2017 and July 2018 immigration to Canada was 412,747, the highest rate ever recorded, surpassing by over 90,000 the last record level which occurred last year. Canada's population growth rate of 1.4% is the highest among all G7 countries:
- United States (+0.7%)
- United Kingdom (+0.6%)
- France (+0.3%)
- Germany (+0.3%)
- Italy (‑0.2%)
- Japan (‑0.2%)
From Q3-2017 to Q3-2018 Ontario’s population grew by 257,618 or 1.8% higher compared to last years figure of 208,282.
The Greater Toronto Area (GTA) is projected to continue to have the greatest population growth within Ontario for the foreseeable future with its population increasing by 2.8 million, or 40.8%, to reach almost 9.7 million by 2041. The GTA’s percentage share of the overall provincial population is projected to rise from 48.3 per cent in 2017 to 52.3 per cent in 2041.
Within the GTA, Toronto’s population is projected to increase by 33.5% from 2.93 million in 2017 to 3.91 million in 2041. Growth in Durham, Halton, Peel and York is projected to grow by over 1.8 million. Peel is projected to see its population increase by 47.8% to 717,000 by 2041. Halton is projected to be the fastest-growing region, with a population increase of 56.2% by 2041.
Canada's and the GTA's in particular population growth is staggering and it will continue to increase aggressively in the foreseeable future. Record level immigration will continue to put pressure on the rental market and housing prices in general.
Record Level Employment
In December 2018, Canada's overall unemployment rate was down to 5.6%, the lowest level since Statistics Canada started measuring data more than 40 years ago. Ontario's unemployment rate is 5.6% as well. In addition, Canada's GDP in Q3 2018 grew by a solid annualized rate of 2%.
Canada's and Ontario's record level unemployment as well as healthy GDP is a great indicator for the health of the economy as a whole.
Supply of Condos in the Toronto Real Estate Market
There will be a record number of condo unit releases in 2019 followed by a drop off in the years ahead. Note that projections into the future are based on currently available data, expect more projects to commence in the years to come as builders finish current projects and shift resources to new ones. Given these statistics the current market will offer potential home buyers and investors the greatest choice of projects to choose from. Countering this trend is the massive drop off in single family home construction.
A record amount of condo units will be released in 2019, followed by a softening in years ahead.
How Will All These Variables Affect Toronto Condo Prices in 2019?
While there are many other market forces at play the ones we have illustrated should give us a basic foundation that can serve as guidance for future Toronto pre-construction condo market trends. The strongest influence for Toronto condo price appreciation as well as unit rental demand (which is already at a 30 year high at 0.7% vacancy) is the record level of immigration that will be coming into Canada and the Greater Toronto Area (GTA) for years to come. A fairly healthy economy spurred by record low unemployment as well as decent GDP growth adds more support. Additionally, Toronto area condo builders are witnessing construction cost inflation of 10% which will continue to add more pressure on Toronto pre-construction condo pricing.
This however will be counterbalanced by the imposed B20 stress test as well as the The Non-Resident Speculation Tax. Additionally, rising interest rates will play a role in cooling the market, although some analyst are calling for rate cuts because of the slumping Canadian oil sector which Canada's economy is so heavily dependant upon. The biggest worry for investors however is the aggregate housing affordability measure (measured by RBC Economics) which increased slightly to 53.9% in the third quarter of 2018, which is up 1.5% from a year ago. The housing affordability measure is calculated as a share of household income that is required to cover ownership costs of a home.
Given all the market forces at play we are predicting a more balanced Toronto condo market in 2019 mainly due to the large number of condo units being released. We predict a modest single digit percent price increase overall in the condo segment. Watch however for opportunities for studios as a shortage has emerged. The cost of a studio has increased 16.8% year over year in Q3 of 2018, compared to about 10% for a one-bedroom, 7.5% for a two-bedroom and 3.3% for a three-bedroom condo. Additionally, savvy investors can look for opportunities in the fastest population growth hot-spots such as Halton and Peel.
Bottom line, a more balanced 2019 is expected with slight price appreciation in the Toronto condo market, however, look for the highest gains in the most affordable studio sized condo units. Look also for opportunities in the fastest population growth regions of Halton and Peel.
If you have any further questions regarding Toronto real estate investment opportunities or are interested in buying a Toronto pre-construction condo make sure to contact us today! Remember to also sign up for our newsletter to get timely Toronto real estate investment updates!