Real estate is a non-negotiable for everyone. We all need a place to live. Many have made mass fortunes off of real estate. As a tangible and real asset, much like gold, silver, and bitcoin, real estate is a part of every investment portfolio.
However, even with the onset of a global pandemic, the work from home paradigm shift hasn’t stopped the Toronto real estate market from soaring to unseen levels in history, especially its surrounding suburbias. February 2021 just reported another record-breaking stat where prices have risen 3.3% month over month. Take a million-dollar home, that’s a couple hundred thousand dollar price increase in one month. In fact, all over Canada, we are experiencing a housing market that many experts are calling unsustainable, and heading for a crash worse than the United State’s 2008 Great Financial Crisis, which almost brought down the entire global economy. Without the support of central bank money printing during Covid, all of the world’s economies would be in their greatest depression.
In a recent Bloomberg article, Toronto ranked 5th in the world for the least affordable cities. And a quick scroll on the internet completely supports that Toronto real estate is borderline unaffordable for about 90% of Earth’s population. An average and unremarkable home starts at $1 million dollars and upward. Anything less than a million is considered a deal or is a condo.
We spoke with long-time agent Chris Sills of Royal Lepage Signature about the trends he’s seeing, and in his 21 years he has, “never seen anything like it”. Before the onset of the pandemic, rentals for 1 bedroom condos were averaging in rent for about $2400 – $2600 per month. Now? $1700 per month. Condo owners have suffered mass losses with over 50,000 people leaving Toronto thanks to the work from home shift. Simultaneously as condo values dropped, Barrie, Collingwood, and Haliburton all saw property values double, as people left en masse to areas with space, nature and waterfront access.
Another story he regales illustrates the real-life madness going on. While doing some comparables for a listing he was about to have go public, a similar home was on the market for $1.1 million – nothing special, outdated interior, all original bath and kitchen. When that listing went public, it sold for $1.44 million – $300,000 over asking. When he put his listing public on Thursday morning for $1.4 million, by Friday afternoon, a bully offer (going in before the competition with a pre-approved, no condition, higher than asking offer) was accepted for $1.62 million. Something he had never seen before. When we asked him who was buying these properties, he said foreign money, but not in the way we may be thinking of it. They already live here, but have foreign money looking for a good home. And most have double incomes worth over $200k annually. The market may seem irrational, but something is worth what someone is willing to pay for it.
He has some reservations regarding the current environment because of the possibility of rising interest rates in the future. While the amortization periods (time you have to make your monthly payment) are longer, your interest rate has to be re-negotiated every 5 years. And no one knows what Central Banks will have to do in 5 years’ time to regulate the markets. If they have to raise interest rates, some people may not fare so well as they are already severely over-leveraged in homes that aren’t really worth what they paid for. Banks may not allow a fixed mortgage in 5 years – who knows.
Chris first began his career in commercial real estate, and the trend there has been another interesting story. Not surprisingly, office space has suffered greatly; commercial vacancy rates have never been higher, with mass subleases flooding the market. Industrial space and investment real estate (apartments etc) have been doing just fine. Retail is also going through a massive shift he shared, with both big winners (big box) and big losers (small businesses, restaurants).
While it may be convenient to attribute this kind of growth to people moving here or families having more kids, that’s not the entire story. It is really hard to talk about Canadian real estate without acknowledging the Bank of Canada’s role in inflating asset prices to the moon. With $4 billion of quantitative easing (money printing) per week, why would anyone need to ever work again if we all just get rich off our home prices rising? 5000-year low-interest rates, coupled with quantitative easing, are giving the illusion of wealth to those already in the game. Money printing is great if you have access to assets because those assets absorb that new currency.
But if you’re on the outside of this market, which many of the millennial generations and those that follow are, owning real estate now seems like a laughable pipe dream. Money printing, aka inflation, can rise faster than you can work to make the money you need to even amass a down payment. By the time you have saved, the goal post has moved because inflation has eaten an unadmitted 10-15% per year. The Consumer Price Index (CPI), which calculates annual inflation, and comically called the “CPLie” by those who know it doesn’t include food, housing or energy costs, is reporting just under 2%.
However, in every crisis, there is always opportunity. Agent Chris Sills shared his perspective that once the shifts and trends settle, he said there will be many opportunities for people to capitalize on, as he saw the same thing happen in the crash of 2008 that had property values finally come back down to earth.