CIBC senior economist: GTA market more sustainable than 2016

by Clayton Jarvis on 13 Feb 2020

On February 5, CIBC senior economist and executive director Royce Mendes delivered an address on the future of Toronto real estate to attendees of the 2020 Outlook on the Housing Market. The event, hosted by Sotheby’s International Realty Canada agents Paul Maranger and Christian Vermast, took a detailed look at the current state of the city’s market and how it compares to the anxiety-riddled highs of 2016-17.

“While there has been talk of the Toronto market heading towards a ‘bubble’,” Mendes said, “that is likely unfounded. The market now, compared to 2016, appears much more sustainable, and therefore in less danger of a boom and bust cycle.”

When asked by REP why he was confident in his assessment despite the fact prices in Toronto have been climbing steadily for months after almost a year of minimal gains, Mendes credited a perceived decrease in the kind of speculative buying that paved the way for the mortgage stress test and Toronto’s tax on foreign owners.

But RBC chief economist Robert Hogue feels the recent dramatic price increases in Toronto – the average selling price increased by 12.3 percent year-over-year in January – as being far too reminiscent of the 2016 frenzy that drove home values to their current lofty position.

“This is not a good sign,” Hogue wrote in a recent report for RBC, in which he predicts that the benchmark price for homes in Toronto could increase at a double-digit pace in the next few months if inventory remains constant.

“If it stays low, prices will keep ramping up beyond the next couple of months. Worse, if supply shrinks even further, prices could spiral upward like they did in 2016 and early 2017,” he wrote.

No surprise, then, that the market in 2020 will favor investors who already own property and are looking to scale up.

But according to Sotheby’s Maranger, there is hope for first-time buyers. They may not be able to land a detached property in Toronto, but condos provide both a worthy alternative and an eventual path to larger properties.

“If we look to the past three years, the condo market has actually outperformed the residential housing market,” he says. “So, in fact, a condo buyer would have done financially better,” and built up a fair amount of equity as the market has warmed up. “It's an outstanding time for someone to step out of the condo market and into the single-family residential market.” 

But a transition from condo to detached properties carries with it major financial obligations. These homes will need to have an income-generating component to be financially viable as investments, Maranger says.

“We strongly encourage buyers to purchase homes that offer ancillary rental income.That could be in the form of a basement apartment in a house or a duplex / triplex. They could live in one of the units and rent out the other(s) for additional income. This will get the first-time buyer onto the property ladder. Then, in five years or more, when they are ready to upsize, they can either keep their rental property as an investment or sell it.  It allows for tremendous flexibility,” he says.

The path to owning multiple properties is there, but with the average condo now selling for over $600,000 in Toronto, taking the first step has never been more challenging.

 

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