real estate roundtable

Toronto’s Real Estate Roundtable: Where is the pandemic housing market going?

Our all-star panel weighs in on this fall’s most pressing real estate questions

PANELLISTS

Barry Cohen, Luxury Homes Specialist; Principal, Barry Cohen Homes Inc.

Odeen Eccleston, Co-founder (Wiltshire Homes Canada) & Broker of Record (WE Realty Inc.)

Jennifer Keesmaat, CEO, The Keesmaat Group ­

Michele Romanow, Dragon on CBC’s Dragons’ Den; Co-founder & President, Clearbanc

William Strange, SmartCentres Professor of Real Estate and Director – Centre for Real Estate and Urban Economics, Rotman School of Management, University of Toronto

Benjamin Tal, Deputy Chief Economist, CIBC World Markets Inc.

POST: With dropping prices, a fourth pandemic wave, and another potential lockdown, are we starting to see the beginning of a major correction in prices?

Jennifer Keesmaat: When this discussion began (mid-August) it was beginning to feel like we were moving out of the pandemic and into a new normal. But just a few days later, there is consensus that we are entering a fourth wave. That reflects how volatile a situation we continue to be in, and this will be reflected in the real estate market. But we don’t really know how. Many families with children found schooling combined with working from home caused a profound space crunch. If the Delta variant forces us all to hunker down once again in the coming months, will the real estate frenzy reignite as people once again look for more space? Or has that market of buyers already activated that choice? To me, the school question is a big piece of the puzzle here, since children are unvaccinated, and protecting them is going to be a critical priority moving forward. Approval of a vaccine for children could shift things once again. It really depends on whether there is an appetite for buying and selling during this round of staying at home, like there was in the first. But at the end of the day, if you pull back the lens beyond the time frame of a fourth wave and take a longer-term view, all signs point to continued price escalation because the fundamentals that drove us to this point — including a chronic undersupply of rental homes — are likely to remain in place. Put simply, we are not building enough housing across all ends of the affordability spectrum to meet a continually growing population. Canada has aggressive international immigration targets, and a large portion of immigrants will locate in the GTHA. Things will really heat up once immigration programs are reinstated. At the same time, internal migration will continue to be concentrated in large urban centres. The larger trends of consistently expanding demand for housing and consistent undersupply of it are likely to continue based on the modest government interventions in place today to drive forward more housing supply.

Benjamin Tal: The slowdown in resale activity is hardly a surprise. Two factors are at play here: low interest rates have created a sense of urgency to get into the market, so in many ways we have borrowed activity from the future, and it seems that the future has arrived. The second factor is price resistance in the low-rise segment of the market given the rapid increase in prices during the pandemic. The improvement in the highrise market reflects the impact of the opening up as cities are back, and the realization that the condo market is the only affordable channel. In that space, higher price PSF is masked by continued decline in average unit size. The price gap between new construction and resale units has narrowed enough to make new construction competitive. Contraction costs and inclusionary zoning mean that we might see continued upward pressure on prices of new construction, which in turn will put upward pressure on prices in the resale market. Bottom line, despite the fourth wave, we might see more of the same in the coming months — with low-rise slowing (with potentially a modest decline in prices) and highrise outperforming.

William Strange: A correction is usually defined as a return to fundamentals, as with the burst of a bubble. In the current situation, we have seen profound changes to fundamentals. Even as workers return to their workplaces, it seems nearly certain that working-from-home and other interaction-at-distance practices will remain with us to some degree. And the nature of reopening is not yet known. So at this point, the main thing that we know is that there is a lot of uncertainty. I would be more confident in predicting that there will be volatility and surprises than that we are now on any particular trajectory.

Barry Cohen: Yes. Unit sales have been dwindling downward since peaking in March. But, from January to July, more than 79,000 sales had been reported by the Toronto Regional Real Estate Board. That’s the best first seven months on record. Ever. If anything is happening in the GTA, it’s a supply crunch.There is no available inventory. Just 9,732 listings were available for sale in July. That is the lowest number for July in the past decade, and I’m pretty sure that may be the lowest number in July since 2000. Single, detached homes under $1 million are unicorns in the 416 area code. Only six out of the 25 districts in the 905 offer an average priced home under $1 million. Values have skyrocketed across the GTA year-over-year. RE/MAX Canada recently released a report that found nearly half of TRREB districts in the GTA reported upward price appreciation of 25 per cent or more in the first half of 2021, compared with 2020. If inventory levels remain low in the coming months, we’re likely to see even greater upward pressure on average pricing throughout the GTA, as we will see the re-emergence of foreign buyers. Bear in mind that this rapid price growth has occurred largely without the presence of foreign buyers, as borders and travel has been restricted. If more inventory comes on stream, average prices will stabilize. Only time will tell…

Odeen Eccleston: We have seen prices slightly decrease over the past few months; however, this was to be expected as the opening few months of 2021 rendered record-breaking, historical highs and were on a trajectory that would have been unsustainably high if it continued. Sales and prices have fallen since the peak for a number of reasons, one of which is the successful vaccine rollout. While restricted to their homes in 2020 and first quarter 2021 (some people with more disposable income than usual), we saw the desire to invest and relocate soar. As stay-at-home order restrictions loosened and lifted and vaccinations increased, we saw a shift in peoples’ focus from relocating and investing to enjoying any semblance of a normal life they could, while they can (before a fourth wave potentially causes everyone to have to stay at home yet again). Many are travelling for the first time in almost two years and enjoying the summer with their families at cottages and abroad. It is also important to note that in Ontario less sales activity in the summer months is not atypical. Though the activity and the prices have cooled compared to the peak, it still remains a hotter market than most other times in history.

Michele Romanow: The housing market right now is a bit deceiving. We saw a shift in people moving out of urban cores into more suburban communities due to COVID-19. Interest rates are the lowest they have been in a long time, which has also led there to be a bit of a rebound. Prices may be dropping marginally, but it won’t continue at this rate for long. The summer has given the market a bit of a lull with restrictions loosening and people travelling once again. With the summer coming to an end, real estate agents have already seen an increase in the number of buyers in the market this month. It is hard to predict what a potential fourth wave will mean for prices due to the uncertainty around variants, but we can assume restrictions will look different compared to previous lockdowns in 2020 and 2021. More and more Canadians are getting vaccinated and restrictions are being loosened. Major cities like Toronto will only continue to see a steady increase in prices. There won’t be a major correction as long as interest rates remain low.

POST: Have small town and suburban real estate prices peaked, or does this segment of the market still have room to grow as more consider leaving the city?

Eccleston: Over the past few years and particularly within the past 18 months, homeowners in the 905, 705, 289 and beyond have gotten a taste and in some cases have grown accustomed to experiencing some of the frenzied 416-like market conditions that Toronto homebuyers, homeowners and real estate professionals consider the norm — bidding wars, unprecedented sales, firm offers, even sight-unseen offers. These great suburban and rural communities, as well as the buyers who have migrated to them, realize that these towns and municipalities possess qualities that consumers are willing to pay for, willing to travel for and willing to relocate for: more space and (comparative) affordability. As a result of this awakening of sorts, the expectations and confidence of sellers in these areas are stronger than ever. New precedents have been set, and I do not anticipate them significantly falling. And with immigration to the GTA expected to resume in 2022, the city of Toronto can only accommodate so many bodies, so only a fraction of newcomers will be able to find and afford suitable housing for their families here. As such, people will continue to explore other opportunities and, when weighing their options, buyers will continue to decide that suburban and rural living, though very different from urban living, come with some beautiful benefits, including increased affordability and, in most cases, being prudent investments.

Strange: There are at least two important forces to consider here. The first is that Toronto remains unaffordable, with high prices relative to income. The second is that technology and the practices of employers have made it possible to work at a distance. Both of these would tend to support rising prices outside of the core. And this is the pattern seen in recent empirical work across a range of cities. This seems to suggest that there is potential for further increases in markets outside the core. Of course, there is great uncertainty right now in both economics and epidemiology. Negative developments in either of these would presumably affect all of Greater Toronto’s markets.

Tal: Every crisis is a trend accelerator, and COVID-19 is not different in this sense. People were moving away from Toronto before the crisis and continued to do so at an accelerated pace during the pandemic. But here we have to put things in perspective. Although there has been a lot of noise about that trend, the reality is that total sales in centres that are between 50 and 300 kilometres removed from the city account for no more than five per cent of total sales. Which means that Toronto is still the centre of the universe. And that was when the city was basically closed. A closed city is not very attractive. But when it opens up, the premium of living in it will rise. The point is that that trend made a lot of sense, but the pendulum might have now swung too far. The discount for moving away from cities has narrowed, some of it under false pretenses regarding expectations about the future of work. The vibrancy of cities will return and so will the demand for housing within them. Buyers will continue to drive until they qualify [for a mortgage] but not at the rate we have seen during the crisis.

Keesmaat: There is no doubt that remote work and a pending hybrid return to the office is shifting housing choices for many. The big question is the extent to which this will continue to take place. Cities are — and always have been — a confluence of art, culture, sport, culinary options, access to rapid transit and parks. They also offer school choices for kids and post secondary options. All of this has been shut down. As all of this ramps up again, the appeal of our city will continue to grow — even if traditional work arrangements go through some radical change. Yes work matters, but cities are about so much more. What does this mean for small town and suburban real estate? Given that we have a broad shortage of housing supply across the province, even if a small percentage of people shift to live outside of the GTA, pressure will be felt everywhere. The affordability pressures in the GTHA are only going to increase, but they will likely increase in suburban and small town communities too.

Cohen: With affordability a growing concern throughout the GTA, the 905 and beyond will continue to attract homebuyers at entry-level price points and beyond. While companies are still figuring out their new business models, it’s expected most will introduce some sort of hybrid work schedule — three days in, two days remote, switch it up the following week. That combination would likely contribute to on-going movement outside the 416, with the 905, particularly Durham, York and Peel, enjoying a continuation of strong homebuying activity, especially if prices remain on an upward trajectory. Economics will also play a role as job opportunities increase in markets outside the 416. Top of mind are the Amazon fulfillment centres that have cropped up throughout southwestern Ontario, creating thousands of local jobs. Expansion to existing transit routes have also helped, with routes now including GO Train service to Hamilton and Barrie. In recent months, it’s clear that there is a market for properties both within the 416 and outside the 416. If inventory levels remain tight and prices continue to climb, affordability will drive buyers to areas/housing types that offer the greatest bang for the buck — likely condominiums in the core or detached/ semi-detached housing in the suburbs and smaller towns.

Romanow: Toronto will continue to be unaffordable for first-time homebuyers, so demand for small towns and suburban houses will continue to grow, along with the prices. Everything people love about an urban core disappeared with COVID-19 lockdowns. However, restaurants and bars are busy again. Events and concerts have resumed. Life is getting back to normal. Some companies have even started to recall their staff back to the office on rotation. We have been conditioned throughout the pandemic to become efficient working from home, but the return to urban centres is inevitable for certain industries. Many people are yearning for a return to normalcy in an office setting, even in a hybrid form. People want a separation between work and home life — they need that human connection outside of Zoom. So while some companies are moving into the era of all employees being remote, there will be a return into city centres in some way, shape or form.

POST: International students are back, rental prices are rising. How do you see the condominium market playing out this fall?

Strange: The fundamentals are indeed strong, at least in the near term. As for what could upset things, COVID-19 is not over, of course. Also, there is a large but not well-documented stock of vacant condos. As condo prices and rental rates recover, some of these units will be brought on market. How many will contribute to the price trajectory?

Tal: I think that the condo market will do well this fall and the upward trajectory will continue. Basically a reversal of what we have seen in the early stages of the pandemic. There are many factors supporting condo activity. The most important is that with low-rise units reaching a price-resistance level, condos are the only affordable channel. And with the city opening up, this factor is even more important. We will see the return of non-permanent residences and students, which will be a huge factor impacting demand. Add to it that the one-off factor related to increased supply of units, due to the conversion of Airbnb to long-term rental, is no longer a factor, and you have the necessary conditions for a tight market. Inclusionary zoning and rising construction cost will put added pressure on prices.

Cohen: Toronto will continue to be unaffordable for first-time homebuyers, so demand for small towns and suburban houses will continue to grow, along with the prices. Everything people love about an urban core disappeared with COVID-19 lockdowns. However, restaurants and bars are busy again. Events and concerts have resumed. Life is getting back to normal. Some companies have even started to recall their staff back to the office on rotation. We have been conditioned throughout the pandemic to become efficient working from home, but the return to urban centres is inevitable for certain industries. Many people are yearning for a return to normalcy in an office setting, even in a hybrid form. People want a separation between work and home life — they need that human connection outside of Zoom. So while some companies are moving into the era of all employees being remote, there will be a return into city centres in some way, shape or form.

Romanow: The basic premise of the housing market revolves around supply and demand. Yes, international students are returning and some may purchase real estate. I don’t think they are the prime reason for prices going up fast. One of the biggest issues for the Canadian housing market has been foreign buyers who scoop up the real estate as an investment tool. Domestically, as long as interest rates remain low, we will see more and more people trying to enter the market. We are dealing with new metrics and data as a result of COVID-19. We will need to watch the market closely in the fall, to see if restrictions continue to impact the ability to buy, but we can assume that unless there are new housing market–related policies put in place to try to cool down the market, we will see an upward trajectory.

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