The first quarter of 2019 came to an end and the state of the real estate market was and has been on everyone’s mind. The federal and provincial budgets came out, the stress test is still here, non-residents own more property than previously thought, there’s been big spring openings, condo prices are still rising, tax hikes are up in the air - a lot is going on.
To get a better grasp on the housing market, we reached out to some industry professionals to get their opinions on a few hot topics. Our first Q&A was with Ben Myers, President of Bullpen Research & Consulting Inc.
Newinhomes.com (NIH): The Globe and Mail recently published an article about 1 in 10 condos in Toronto being owned by non-residents. Is this a positive or negative statistic?
Ben Myers (BM): I don't see it as a negative, as long as those non-residents are renting the units out and creating tenant supply - they're also now paying a 15% tax, which can only help the provincial budget. But, if non-residents are increasing demand by 10%, developers need to be able to increase supply by 10% to ensure that prices don't rise too quickly. Looking at new condo rent growth over the last three years, supply has not kept up with demand.
There were 17,000 Toronto CMA new condo apartment completions in 2018, which is 30% more than 10 years earlier, so developers clearly responded to the increased demand from both foreign and domestic buyers. But based on my estimates, the market needs 25,000 to 30,000 annual completions to satisfy condominium and rental apartment demand, and if non-residents can help developers achieve their pre-sale construction financing targets (typically 70% absorption), then they're providing a benefit to the market by acting as a middle-man. I'm not convinced non-resident buyers are crowding out local buyers, there are 12,000 new condo units for sale in the GTA and hundreds of sales offices where anyone can walk in and buy a new condo unit. If you're worried about getting "first access" best to call True Condos or Talk Condo, two of the best brokerages out there.
If foreign buyers purchased $40 billion of real estate in Canada, that means $40 billion of foreign capital is now in the hands of Canadians, going directly to construction workers, planners, architects, suppliers, lawyers, realtors, mortgage brokers, marketing companies, advertising companies, and most importantly, real estate consultants!
NIH: Hundreds of buyers recently lined up for a grand opening at New Kleinburg. Do you think this was a one-off type of thing, or is spring going to be a busy season for the GTA's new home market?
BM: Low-rise developers have been slow to adjust to the new pricing reality. The average unsold new single, semi and row increased by 45% in 2017, and average pricing has yet to fall back below that early 2017 price level, which I believe will start to trigger more new home sales. When sales are not occurring, few sites are launching, and prices are decreasing, there is no sense of urgency to buy, especially with a stagnant resale market, which is where most of the new home buyers are coming from.
Given the difficulty in finding low-density lands and the length of time it takes to obtain approvals, developers don't want to slash pricing to move product, and don't want to launch in a poor market. However, they have to weigh that against the carrying cost of the land, and their need to generate income to pay themselves, their employees and their other financial obligations. That said, people still love new homes and reasonably-priced low-rise developments that come to market by experienced developers will sell in 2019, I'm convinced of that.
NIH: According to Altus Group and TREB, condo sales have been falling slightly, while prices are still rising. Do you think this trend will continue? Will prices eventually drop if sales fall too much?
BM: I think there are a lot of factors in play in both the new and resale market that has led to fewer sales, and it's not necessarily a significant drop in demand. New condo launches in Q1-2019 were way down, but several of the sites that have come to market have experienced sales success including King's Landing by Concord Adex, Line 5 by Reserve Properties, and TC4 by Centrecourt Developments. With an all-time record for condominiums under construction in the metro area and construction costs having jumped by 15% to 20% over the last 18 months, developers want to ensure they have all their ducks in a row, including some certainty on costs before they come to market. Another factor delaying launches is the OMB backlog.
On the resale side, there were nearly 25% less condo completions in Q1-2019 compared to the first quarter of 2018, but despite that, active condo apartment listings in March were pretty similar year-over-year, so fewer sales could definitely lead to lower prices later in the year. One factor that may prevent that from happening is many condo owners may want to move-up to a bigger place but need to sell their homes for a certain price to do so. If they don't get the price they want, they won't sell, as opposed to lowering their price. Not everyone that lists a home for sale, has to sell, some listings are simply the seller "testing the market."
NIH: CMHC defended the First-Time Home Buyers Incentive recently, saying that 2,000 buyers in Toronto would have qualified last year. What's your opinion of the FTHBI?
BM: That's a tough one, I'm sympathetic when it comes to first-time buyers and the difficulty they face getting into the market, but adding 2,000 buyers at the bottom end of the value spectrum will likely drive up prices in the affordable segment, eliminating some of the benefits. However, the incentive plan is similar to one utilized by Options for Homes, which I admire greatly. They recently built a new building near me, south of the Danforth, which has helped many people get into homeownership that wouldn't have been able to save the necessary amount for a down payment. I hope that their deal underwriting is very rigorous, and they get the right people in the right property types, and I think it can be a success for those buyers while not having a negative impact on the market overall.
NIH: CUR released a report saying Toronto property taxes have room to increase by 20%. What are your thoughts on this?
BM: I don't like paying higher taxes, but I think it's necessary. My priorities for those taxes are transit and daycare. We need to be able to move people quicker and more reliably through the region, and that means building the relief line, building more than one stop in Scarborough, and extending the Eglinton Crosstown to the Airport in the west and to Kingston Road in the east.
It think it's so sad that people are delaying or not having children at all because they can't afford them, and productivity in the region is lower than it should be when a parent wants to go back to work, but chooses to stay home because their income is not higher than their child care costs.
NIH: Finally, what's your advice to buyers looking to buy a new construction home right now?
BM: My advice is to always surround yourself with an experienced team, a Realtor that is actively involved in the pre-construction market, and a mortgage broker that can explain all your financing options. You have to do your research, how much more is this new condo in comparison to a recently completed resale project? If it will take four years to complete this project, what level of market appreciation is required in the resale market to justify this purchase. Read the agreement of purchase and sale very closely and understand your closing costs.
If you're looking at the purchase as an investment, where are rents in comparable projects, and what can I reasonably expect those monthly rental rates to be at occupancy of this development? Make sure you're allowing a buffer for higher maintenance fees, higher interest rates, insurance, property management, and a vacancy allowance.
We extend a big thank you to Ben Myers for shedding some light on some of the hottest topics in the real estate market right now. Stay tuned, we’ll have the opinions of other industry pros coming soon!