Why does the mainstream media always get our industry wrong? I watch the news, read newspapers and stay up on current events. But now I am getting skeptical about any news I consume. Whenever anything is written about the Toronto real estate market, I just shake my head, and say, “How can they get it so wrong?”
With 27 1/2 years of helping great families find a property and now with two brokerages with more than 360 agents who happily help thousands of people buy or sell a home, here is my two cents.
The Toronto real estate market is being driven by these major factors.
The first is restricted supply. Eleven years ago, the Liberal government froze development on 1.4 million acres across 325 km of land from the Niagara River through Hamilton (Golden Horseshoe area), all across the north of the GTA and over to Lake Scugog and Rice Lake, under the Greenbelt Act 2005. This had the effect of creating the “GTA Island”, and like Manhattan in New York City, if you can’t afford to buy there, you will commute one to two hours to get to there.
The second factor is rapid population growth that increases demand.
The population of GTA and surrounding area has grown from 3.7 million people in 1986, to 5.5 million in 2005, to 6.3 million now. It will be 7.3 million people in 2021 and 9.1 million in 2036!
If you remember taking an economics course, you will recall a concept called supply and demand. If there is an increase in demand, there must either be a price or quantity adjustment. Right now, we have no capacity to increase the quantity of land available in the GTA and as a result, land prices have soared for building lots and condo development sites.
We also have record low interest rates. A $500,000 mortgage carries for $2,117/month at today’s interest rate. The same mortgage at 10 per cent interest is $4,472/month. A $1 million mortgage at today’s rates carries for $4,234/month.
The last time we had 10 per cent interest rates was 20 years ago and they have been falling ever since. In the last 20 years, there have only been two quarters when prices dropped in Toronto…see the correlation between prices and interest rates?
Another factor is increased “revenue tools” by the government. These are not revenue tools, they are flat out taxes and development fees. Let’s call them what they are. They can add an extra $100,000 to $200,000 to the price of a home.
Labour and material costs keep going up and will never come down.
Canada is seen as a safe haven for money, because we have a stable government, clear rules and we are governed by the rule of law and not by whim. There has been a huge influx of capital from China, Russia, Iran and host of other countries.
From mainland China, more than $1 trillion dollars has left that country in the past 12 months and I am told we have a few more years of this coming (plus their currency has gained a lot against the Canadian dollar).
What factors are not causing prices to go up? Real estate agents!
With the exception of some of the shady practices that we’ve heard about recently in Vancouver (those agents should be booted out of the business and never allowed to trade again), we do not cause prices to go up. We have a legal obligation to get the most money for the seller when we list their property. We explain that you can price it three ways:
1) At market value
2) Above market value – to leave room to negotiate
3) Below market value to get multiple offers.
We discuss the pros and cons of each approach and the seller decides. Guess what? Most of them decide to price it below the market in order to get more bids and sell for a high price. They look around their neighbourhood and see that the approach works!
Which is exactly what I would do in today’s market… because it works for sellers.
For our agents who work with buyers, it is an incredibly stressful market to be in, for both them and the buyer. We have entered into a crazy time with prices rising 16 per cent so far this year. One of our agents has presented 42 different offers for seven clients and has yet to get one accepted.
Can you see why buyers and agents get frustrated?
I hope people will think about this the next time they think about how easy it is in real estate. In fact, at every party I go to, people tell me they are changing careers and either going into real estate, personal training or dog walking. I hope they choose dog walking or poop-scooping, because they are very profitable businesses. We have too many agents, there is no need for more.
There is not one or two reasons why this market is going crazy. It is a multitude of factors and the last thing we need is for the governments to impose more fees and taxes or impose some silly regulations on the marketplace. It’s called an economic cycle, and what goes up above the historic mean, will eventually adjust back to the long term four per cent appreciation that real estate has had for centuries.
I have already seen people starting to cool off and not buy a home, because they simply can’t afford to move up to the home they want. If they just stay put the market will come back around to them.