Cover story: 10th annual real estate roundtable
Bank economists and market experts are calling this market a bubble after the recent 22 per cent increase. What is the state of the GTA real estate market right now?
This reminds me a lot of the mid-’80s or the late ’80s, and the market is on fire, as everybody knows — up 22 per cent is impressive in one year. We sold our house last summer when three of the four flew the coop, and not unlike most buyers, we thought we were just downsizing. Now we’re actually looking at an upsize because we can’t find anything to downsize to. So it’s a concern. I have a new compassion for today’s buyers.
I don’t find it helpful to call the market a bubble because nobody here is calling for it to pop. In my perspective, the term “froth” is more appropriate because you have underlying fundamentals that remain solid on unemployment, population growth, credit metrics. And then you have some form of speculation or some type of behavioural economics driving prices a little bit higher or faster than they would be otherwise. And I think that’s a better way to frame it.
You know, when I was [chief economist] at Merrill [from 2002 to 2009], I started calling for the housing collapse in 2005. So I was early by about two years. But I remember that I called it a bubble in my reports, and it got people very upset. But the thing about bubbles, bubbles do pop and this bubble will pop. And the question is, how do you define the bubble? And I would say that anything that is at least two standard deviations above any historical norm, if you don’t call it a bubble, you’re being disingenuous.
And when we have a situation in the GTA where now it takes 10 years of, say, median family income to buy a typical single detached home, this time last year it was more like seven years. We haven’t seen this before. It’s more than double what it is in the rest of the country. Home prices are about 30 per cent above what any economic model will tell you where “they should be.” So it is a bubble, and if we do acknowledge that bubbles have this history to pop, it’s just impossible to time. When it does pop, it’s going to have some serious implications for the economy and the financial markets.
So counterpoint: The assumption behind a bubble popping is that demand will decrease. The bubble doesn’t pop if demand doesn’t decrease. So from my perspective, you need to put Toronto in a global context. Toronto, at this moment, is emerging as politically stable, as a beacon of openness for people all over the world, and as a result we’re seeing immigration increase.
The interest in the city, just over the past six months, has increased exponentially on a global stage. So if that’s something that’s going to change then, yes, we’re at risk of a pop. But if that’s something that’s not going to change, if this is our new reality, if we are now emerging for the first time in history to be on par with places like London and Paris and New York — which by the way, everyone’s been talking about how they’re going to pop for 50 years, and the pop hasn’t happened because their desirability on a global scale has continued to be unprecedented [— then Toronto won’t pop in the near future].
I think talking about the bubble is entertaining on the financial pages, but it’s not going to help the millennial generation and the issues around supply. I agree with Jennifer, there are very strong reasons why demand is increasing. Toronto is a great place to live. Our economy is much stronger relative to the rest of Canada. We’re attracting 80,000 immigrants per year. We have low sustained mortgage rates, and we’ve got a new generation, a larger cohort, coming in with the “Bank of Mom and Dad” backing them up, so you see a big demand increase.
What about the boomer that doesn’t want to move from their home? I see report after report where they want to stay. They’d like to continue living their life there, but on the other side of it, you do have that Bank of Mom and Dad, and we’re seeing many families say, OK, I’m going to gift that estate just that much sooner, so that their kids can stay in Toronto.
There is a serious social and, therefore, political problem. And that is that most millennials can’t get into the market without very significant parental support. And we’re not talking about $50,000 or $100,000. They need really significant money, which most families don’t have, particularly if they have several kids. So they’re faced with a number of unpalatable alternatives. They either stay in rental accommodations; they go into a miniscule condo; they have a very long commute; and they move out of the city.
If you just took five per cent of the Greenbelt, the Greenbelt is 1.8 million acres, five per cent is 90,000 acres. If you liberated that for development in a 10-year period, you can house 1.5 million people in half a million residences. And no one would notice it other than the fanatics, who view this land that McGuinty set aside as somehow sacrosanct.
The other aspect is that this is very situational. It’s really Toronto now. It used to be Toronto, Calgary and Vancouver. And for two totally different reasons, it’s now just Toronto.
I’m trying to acquire 10 acres in Pickering right now, and they’re asking $1 million to $1.1 million per acre. So when you mentioned the millennials now travelling outside of the city to go to cheaper pricing, as a developer-builder, I’m looking at it thinking, “This is ridiculous. What do I have to bring this [Pickering] townhouse to the market for?”
Or you go to another site out in Markham, for example, go back about 18 months, and you
could buy an acre of property for about $1.4 million.Today, to buy that same piece of property, you’re at $2.1 million.
Therefore, you’re introducing a 2,000square-foot townhouse at somewhere between $1.2 million to $1.4 million.
SEAN COOPER: I see two main issues that are really driving up prices. First of all, a lack of supply. If you look for a house in a neighbourhood, and there’s just one or two properties available, it’s going to end up in a bidding war. And that just drives the price higher. Another area I see driving it is the Bank of Mom and Dad. And what’s worrisome for me is that I’m not 100 per cent sure that people have a ton of money to give to their children. They’re probably taking out home equity lines of credit. And what if interest rates are higher in the future?
BRIAN GLUCKSTEIN: It’s going to be a complete shift in the expectation of how you live. Young people in New York don’t think they’re going to have a house. Young people in London don’t think they’re going to have a house. They live in apartments.They raise children in apartments, whether they’re rentals or condominiums. And that’s the expectation. The expectation is just go to a bigger apartment and a bigger apartment. So the whole concept of owning a house is not going to be available for these people. HUDAK: I don’t buy that. Manhattan is an island. London has been around for a thousand years. As Joe said, there is a lot of land. We’ve created our own artificial barriers.
GLUCKSTEIN: But they don’t want to live in the suburbs. A lot of young people don’t want to live in Pickering and Barrie. They want to live in the city where they grew up, where their jobs are and where their social life is. I look at the kids that work in my office. They don’t want to live in Pickering. They don’t want to commute from Barrie.They want to live in the city. They would like to live in Leaside and Leslieville. They would like to live in those areas.
MICHAEL KALLES: Can I talk about condominiums? Eight years ago, I was in a sales meeting, and our salespeople were very uptight about the number of towers that were coming out of the ground. They said, “Oh my God, we’re going to have a glut of supply again.” I said, “Watch out. We’re going to have a shortage.” So in January, I just looked at my numbers, January of 2015. We had 15 weeks’ supply of condos. January of ’16, we had five weeks’ supply. I agree with Brian. I think expectations are going to change. People who want to live in the core, younger millennials, will have to accept condominium living as the solution.
MIKLAS: They don’t actually want to be strapped with a huge mortgage either. They don’t want to go through what we went through as far as paying the mortgage out.
KEESMAAT: But there’s a shift in generational thinking here and we should be cautious not to impose our own thinking and our own values. And we should actually look to this generation. The downtown is growing four times faster than the region as a whole. This tipped for the first time a couple years ago. It’s because of the astronomical demand for condos in the downtown. We’re building more condos in the downtown than we ever have in the past. And yet we have a shortage of supply because the demand is very high.
Two years ago, we undertook a study in our condo communities to assess quality of life, to identify the needs of condo communities. And we were astounded to discover young people living in condos who raised as their number one issue that they want to raise their family in a condo and that the condos need better amenities, and they need better schools in the downtown because they don’t want to leave the downtown to raise a family.
We also discovered that there is a mini baby boom happening in downtown Toronto in condos today. You can tell if you look at the stroller parking in condos. These are kids that grew up with a long commute. These are kids that grew up in Markham, in Scarborough, in Richmond Hill. And they’re saying: It’s not worth it to me. I would rather live in a smaller space. I would rather walk to work. ROSENBERG: I’ve got to go back and retort to a couple of things that were said.
BRIAN GLUCKSTEIN SEBASTIAN CLOVIS TIM HUDAK Host, HGTV Canada CEO, Ontario Real Estate Association Principal of GlucksteinDesign PATRICIA LOVETT-REID BRAD LAMB JOE OLIVER Developer, Lamb Development Corp. Former Finance Minister of Canada Chief Financial Commentator, CTV News