We think it’s pretty safe to say that many people are confused about the state of the Greater Toronto Area’s (GTA) new home market right now. Prices are up, sales are down, inventory saw a little spike, and thousands of people are still flocking to new openings. To get a clearer picture of what’s going on in the new home market, we chatted with Ben Myers, Senior VP, Market Research & Analytics, Fortress Real Developments.
Newinhomes.com (NIH): New home supply increased last month but sales dropped. What should people make of this?
Ben Myers (BM): The increase in supply on an absolute basis was relatively minor, and while monthly sales were down from last year at the same time, they were still well in excess of the long-run average for May.
Nearly 50% of the ground-oriented units (singles, semis and row) released were sold during the month, and when you look at the new high-rise condo projects launched since the announcement of the Fair Housing Plan, the majority have been successful with 13 of 17 selling over 40% of their units and 10 of 17 selling over 60%.
Highly desirable markets and developments are still seeing a mad rush of buyer interest: a high-rise developer sold over 1,600 units in three towers over the last two months in Vaughan and a 250 unit new home subdivision in Richmond Hill sold out in less than five hours last weekend.
NIH: BILD says the province's Fair Housing Plan has had little effect on the new home market. What do you think?
BM: Anecdotally I’ve heard developers say there has been less interest since late April, but demand was so high and supply so low, sales are still going to be made anyway. Instead of 2,500 people registering for a 400 unit project, you still have 1,500, and there’s still not enough product to satisfy all of the potential buyers.
NIH: Why is it important to analyze the resale market and new home market separately?
BM: The trends in the two markets are not always in sync because the product and delivery times are different. Some buyers like to buy new, they can choose and customize the floor plan, and they can select their suite finishes, appliance package, backsplash and paint colours. For low-rise housing they can opt for a finished basement, and the communities are often comprised of young families close to brand new schools.
High-rise projects are also extremely popular with investors that know they are buying something that won’t be completed until 2020 or 2021 at the earliest, so it seems pretty silly to base that decision on what’s happening with market conditions in the summer of 2017. Many buyers are also enticed by the new technology, green features and warranty that are included in the majority of new builds.
The supply in both markets is completely different as well, especially on the low-rise side. There were about 14,000 single-family listings in the GTA resale market last month compared to just 1,400 units of unsold developer inventory, if buyers wait, the new home they want will be gone.
NIH: The average price of a new condo unit in the GTA exceeded $600,000 in May 2017, which is a 33% year-over-year increase. Do you think prices will continue to rise at this rate?
BM: I hope not! In the short run it is obviously a huge benefit for revenue at our projects, but in the long run it is not healthy, as it entices speculative investors that disrupt the market. Additionally it is very bad for first-time buyers looking to get their foot on the property ladder. Rapidly rising prices can also drive up condo rental rates, forcing price- and rent-sensitive Torontonians to move outside the GTA, or it can be a barrier to entry for top talent that is considering moving here. We don’t want to discourage the best and brightest from making Toronto their home.
There have been a couple of big factors impacting new condo pricing, a lack of options in the resale condo market with GTA completions down 21% over the first five months of the year according to Altus, the new mortgage rule changes that made it more difficult for first-time buyers to afford single-family housing, and an increasing average unit size.
Some downtown developers are offering larger units, and more suburban projects have come online this year with family-friendly product. When the market is not super hot, developers choose to do smaller units because they sell faster, when it is hot, developers will launch larger units, as they can often be less expensive to build (fewer walls between suites, only one kitchen, lower development charges per-square-foot).
Despite all these factors, I don’t expect the growth to continue. Like 2011’s price spike, I expect a flattening of prices in the short to medium-term.
The crowd at Richlands in Fieldgate Homes' sales centre
NIH: Compared to April 2017, there were less new condo sales in May, but the amount of sales is still 61% above the 10-year average. Is this a sign of the condo market taking a breather?
BM: Monthly sales are heavily impacted by the new projects that open during those four weeks, data is quite volatile and lumpy. No conclusions can be drawn from the overall numbers on a monthly basis, best to look at success or failure of the individual projects that came to market.
NIH: The average new townhome in the GTA now costs more than $1 million. Were you shocked to hear this or does it make sense to you?
BM: Other than the outer suburban market, developers are starting to do fewer single-detached projects and concentrating on townhouses to maximize their unit yield and to satisfy the municipalities’ desire for higher densities. Townhouses are getting much larger, and you’re seeing more luxury townhouses aimed at move-down buyers with two-car garages, 9’ or 10’ ceilings, and high-end finishes. This is driving the end-selling price up.
If anyone says they weren’t shocked by the price increases in the new and resale market this year, they’d be lying.
NIH: We've heard that the cooling in the market is mostly psychological. Can you explain what this means?
BM: The Vancouver market is a perfect example, in August of last year transactions stopped because there was uncertainty, people thought the new foreign buyers tax would have a big impact on the market, and they took a “wait and see” approach to determine if prices would plunge. After several months of watching prices stagnate, buyers were comfortable that values wouldn’t collapse and they started to jump back in. Prices in greater Vancouver are back to pre-foreign tax levels.
The future price expectations of buyers and sellers can be clouded by perceived risks, and when new measures are introduced to cool the market, people believe that risk has increased. That risk is often heavily overstated.
NIH: What's the most important thing for a homebuyer to know right now?
BM: The best thing a prospective homebuyer can do is their research. Look at the actual data yourself, especially the long-term trends. Read opinions from both the housing bears and the bulls, and remember that you should be buying a home as a place to live first, not as an investment first. It is impossible to time the market, you always have to live somewhere and your friends and relatives don’t want you on their couch, so don’t try. Don’t be influenced by the “cash out before the crash” crowd or the “buy now before it’s too late” crowd, they don’t know what is going to happen, make your move when you are comfortable and have your finances in place. You’ll also have to adjust your expectations.
Buying a home is one of the biggest decisions of your life, give it the level of scrutiny it deserves.
Big thanks goes out to Ben for once again taking the time to chat with us and shed some light on the state of the new home market.