Toronto Housing Bubble About to Burst?
A Look into the Condo Real Estate Market

The Toronto housing market is bound to crash. Toronto’s housing prices have rapidly appreciated into the “unaffordable” realm and a price adjustment is simply inevitable. It’s official; Toronto is in a real estate bubble. This is the headline that mainstream media has been using to sell ad space for the next ten years.

Here’s the deal; prices haven’t adjusted and they aren’t going to adjust anytime soon without major external factors. If you’re crossing your fingers waiting for the Toronto real estate bubble to burst so you can buy into the market at its slump, you’ll soon find yourself priced entirely out of our market, especially in Toronto.

8 Factors Driving Up The Toronto Housing Price

Before we can come to the conclusion that Toronto is in a real estate bubble, let’s look at all the different factors driving up the housing prices.

1. Simple Supply and Demand Economics

Lack of supply and surging demand is likely the most substantial factor driving the “Toronto condo bubble”.

Graph explaining why there's a Toronto housing bubble (condo units under construction vs year)On the supply side, we have a lack of developable land and developers are hindered by endless red tape and legislation driving the profitability and feasibility of new condo builds down. To make matters worse, many developers rely on financing their new condo builds. To do so, they’re typically required to pre-sell 75% of the units in the building. This makes it inherently risky for developers to move too quickly or try to forge forward on multiple developments concurrently.

Furthermore, condo development costs have nearly doubled in the past two years. The cost of glass, steel, and other building materials have surged, reducing the profitability of new builds and meaning that many condo developers who pre-sold their units prior to the increase in cost are netting significantly less profit than originally intended. This makes it easier for developers to obtain financing. Reducing the amount of time and money it takes to get condo developments approved in Toronto are important steps to increase supply but making those changes today only helps us in four or five years time, when those developments are finally complete and taking occupancy.

On the demand side, we have a wide range of factors. Primarily, we’re a rapidly growing city with a steady stream of new immigrants, new industry, and new jobs. Our housing demand is growing at twice the pace our supply is and to compound issues, we’re seeing less resale listings this year in Q2 than 2017 Q2 (down over 15%). This is inherently bad news (or good, if you’re a real estate investor/property owner) given our lack of supply in 2017 caused condo prices to surge as much as 30% in many segments. Anticipate another 15%+ appreciation this year, unless we see a surge in inventory Q3 onwards.

2. Toronto is Rapidly Becoming a Tech Hub

Believe it; last year, Toronto saw 28,900 new tech jobs created. That’s more tech jobs than San Francisco, Seattle, and Washington saw created last year combined.

If the supply and demand crisis in our residential sector wasn’t enough to convince you, the situation only gets better in our commercial space. As of 2018, Toronto has less commercial/office availability than New York or any city in North America for that matter. Our commercial vacancy rate is essentially non-existent. Finding and securing an office or other forms of commercial space lease in Toronto is damn near impossible. Trust us ,like many other tech-businesses, we turned to co-working spaces like WeWork because of how scarce it is out there. Our booming tech scene is rapidly making commercial and office space unreachable for us “smaller” businesses, and there’s not a whole lot of commercial space under construction.

3. Google is Coming – Sidewalk Labs

After an extremely lengthy vetting process, Toronto’s been officially chosen as the location of an extremely ambitious ‘Smart City’ planned and executed by Alphabet, Google’s sister company. In collaboration with local governing bodies, Alphabet is in the planning and approval phase of transforming Toronto’s East Waterfront into a Utopian smart city with a mix of residential, commercial, and recreational spaces. This will also include the relocation of Google’s Canadian HQ to the East Waterfront of Toronto.

I could go on and on about Sidewalk Labs and the incredible transformation the East Waterfront of Toronto will undergo but just know this, where Google goes, the rest of the Tech industry follows, and so does its money. Read more about the Sidewalk Labs redevelopment on Alphabet’s official site here.

Downtown Toronto map

4. The Rental Housing Market in Toronto is Downright Terrifying

Toronto’s residential vacancy rate is right at about 1%, half that of Manhattan, and clocking in at 1/4 Chicago’s. Condo units sitting unoccupied or un-leased in Toronto simply isn’t a thing. There’s a huge demand for resale units, but there’s a borderline crushing demand for rental units.

Bidding wars are now commonplace for rental units. You read that right, lease listings are regularly going for over asking and receiving multiple offers, often sight unseen. There’s even the occasional lease listing holding an offer date. More than ever before, condo hunting is becoming a daunting experience, regardless of if you’re looking to lease or buy.

After loosing in two multiple offer scenarios, Broker Ivan Ciraj‘s client turned to lease out of desperation only to ultimately resort to purchasing pre-construction as leasing turned out just as competitive:

“The client was looking to purchase a condo downtown, in the $600,000-800,000 range. We found one loft and participated in a bidding war, got outbid by ~$100,000 and competed in a second offer, got outbid by $170,000 which also happened to be almost $100,000 more than the most recent comp[arable unit].

The client got discouraged and so he opted to look at rental options downtown. I advised that leasing is even more competitive than the resale purchase market and you’re not building equity, etc. Either way, we attempted an offer on a 1 Bedroom + Den and competed with 3 other offers. Got outbid and the unit rented for $2,650/month. My client has 800 range credit score as well as 6 figure salary and we offered 4 months rent up front. No luck.

He finally considered looking at the pre-construction so he can spend time in the market and build equity via appreciation. We looked at parts of downtown which had major upside potential going forward and opted to pick up a unit on the Lower East side due to the immense amount of expansion occurring there, including the Google Smart City. Managed to find a great 2-bedroom unit for a similar price to what 1 + den’s were selling off on the resale market right in the core and he purchased it. In the meantime, he’s opted to continue renting where he currently is and watching the $$$ roll in as prices continue to climb.”

5. Toronto Is Still Pretty Affordable – We Have Plenty of Room to Grow

Toronto as a whole, averages somewhere around $800 per square foot for condo sales. When you look at the core of Toronto and exclude the surrounding markets (Mississauga, North York, Vaughan, etc), you’re looking at about $950-1050 per foot. For the purpose of round numbers, let’s go with $1000 a foot.

Vancouver’s condos are still more expensive than that. New York’s condos come in at $1650 a foot, and well over $2000 a foot when you look at Manhattan exclusively. Hong Kong clocks in at an outrageous $3k+ per foot on average for their condos.

Price per square foot of real estate around the world

Toronto’s finally on the map and we’re becoming a noteworthy city. A city not heavily dependent on any one industry, and one of economic and social stability. It’s only natural that Toronto’s real estate prices continue to climb. 30% per year is not sustainable by any means, but I’d wager it’ll be quite a few years before we see year-over-year appreciation dip into the single digits again.

Toronto’s rental market is equally affordable when you compare it to other noteworthy major metro areas around the world. According to PadMapper, the average 1 bedroom rent in the Toronto core is $2,080 per month, just slightly exceeding Vancouver’s average of $2000/month. Manhattan sits just north of $3,000 per month, and San Francisco comes in at $3,400 per month.

Condo real estate rental prices in North America graph

Historically, Toronto’s real estate market saw a 3-5% rental inflation per year. In the past year, we’ve seen a massive hike in rent prices for two primary reasons; mortgage stress testing and Ontario’s ‘Fair Housing’ Plan. Essentially, the Mortgage Stress test was implemented to ensure affordability in the case of rate hikes. In practice, it reduced the average households buying power by 20%~, resulting in many turning to the rental market due to not meeting the new qualification standards.

The Fair Housing Plan was put in place to make it better for renters but as predicted by many of us, it backfired. Implementing rent increase controls and making laws even more lenient on tenants who break the lease, resulted in a sharp incline in rental prices. Why? Make it less desirable to be a landlord and rental supply gets choked.

6. Many Toronto Condos Are Cash Flow Positive Investments at 20% Down

Condos in Toronto are an incredible investment historically. There are few market segments in North America where a property will produce a neutral or positive cash flow with only 20% down. Here’s a quick cash-flow analysis on a real pre-construction condo purchase one of our clients made.

Toronto Condos has done incredibly well over the 20-year time period that the Toronto Real Estate Board has published reports for. The median price for a condo in C01 Toronto (Realtor Speak for Downtown) was $165,000 in 1997 up to $550,500 in 2017; that’s a 247% increase in twenty years or roughly 10% per year after adjusting for inflation.

Annual average Toronto MLS sale price

7. Our Government Relies Heavily on the Housing Market

The Land Transfer Tax in Toronto dwarfs revenues generated by Income Taxes. Simply, the government relies so heavily on our Housing Market that any changes it makes are very cautious and calculated ones. Admittedly, it doesn’t always feel as though they’re being cautious with moves as rash and goofy as the “Fair Housing” plan, so maybe I’m giving a bit much credit here. Regardless, the numbers are pretty clear:

Pie chart graph of revenue generated from homes sold through TREB MLS in Toronto

8. Months of Supply: We’ve Been in a Consistent Seller’s Market for Years

Months of supply is arguably the most indicative metric of a given real estate market, certainly more indicative than median or average price increase. Months of supply is relatively simple; it’s the absorption rate of any given type of real estate shown in time to sell if nothing new was listed. For example, if we see 1,000 new listings in a month and 250 sales, we have an absorption rate of 4 (1000/250) which means that if nothing new is listed, at the current rate of housing demand, it will take 4 months for all real estate inventory to sell.

Sellers Market: 4 Months or Less

Neutral / Balanced Market: 4 to 6 Months

Buyers Market: Over 6 Months

The Manhattan condo segment is sitting at 6 Months of Supply as of June 2018. Where are we? 1.55 Months of supply.

To most markets and segments in North America, anything as extreme as 2 months of supply or less would be considered an outlier and an anomaly. Downtown Toronto has had less than 2 months of supply since Q1 2016.

Our bidding wars aren’t driven by foreign money or local investment speculation; it’s driven by sheer lack of housing supply and desperation to get into the market

“But we can’t afford it. Something must be done.”

– Millennials

Look, I’m a millennial myself. I get it, Toronto’s housing is rapidly appreciating, school’s more expensive than ever before, starting wages don’t reflect the time and money you put in to your studies.

Let’s get real: Nobody is entitled to the right to affordable housing in Toronto.

Eloquently stated by our resident King West condo expert, Riley Boyko:

“Everyone has the right to affordable housing and nobody has the right to affordable housing in the most desirable place to live in all of Canada.”

Turn to Manhattan for a prime example. The majority of the real estate is owned by the uber-rich 1%, and the rest rent from them. That’s what Toronto is going to look like in 15 years. Many of us millennials will be renters for life if we don’t buy in soon and our children will certainly be the future renters.

Don’t like it? Work harder or move to Barrie.

“You are biased.”

Absolutely. The team at Precondo & I sell Pre-Construction condos for a living. Our sister team, t.condos, sells resale condos. So what? Over 10,000 Condos have been sold in Toronto in 2018 already, excluding pre-construction sales. Is this article going to have a macro, or even a micro effect on our production or the real estate market as a whole? Not a chance.

As someone who actively runs with clients in the Toronto Real Estate market and has a team with a collective 50+ years of experience in our local market, the media is doing us all a disservice by being overly pessimistic about the market. With multiple offer scenarios on any condo downtown below the 600k price point, these headlines don’t seem to be having much effect. The few who buy into the “Toronto housing market bubble” clutch their downpayments waiting for that imaginary bubble to burst. Once they’re priced out of the market entirely, the rude-awakening received is that renting a Condo in Toronto is perhaps more difficult than purchasing one.

There’s a common misconception that in a market this hot, us realtors are making money hand over first. The opposite couldn’t be more true. In a market as hot as this, it takes significantly longer to close a deal, you repeatedly lose in multiple offer scenarios and clients get discouraged quickly. In a market this extreme, it becomes more important than ever to use a Realtor who knows the market in-and-out, because the listing price means next to nothing right now.

What Exactly is a Housing Bubble?

In order to label Toronto’s Housing Market as one that’s in a ‘bubble’, it’s important to accurately depict exactly what a housing bubble is. A housing bubble is an increase in demand, where there is an rapid growth in housing prices caused by an unjustified speculation period.

Generally speaking, a housing bubble is driven by an increase in demand based on external factors such as:

  • Low interest rates
  • High levels of investor speculation
  • Large amounts of foreign investing

Now that we’re on the same page when we talk about the “housing bubble”, let’s see whether we’re in the so called “Toronto condo bubble” era.

Is The So-Called “Toronto Housing Bubble” About to Burst?

Let’s settle the debate on whether there is such thing as a Toronto housing bubble or not.

Here in Toronto, and Canada as a whole, it seems we often turn to ‘foreign money’ as the source of our sharp price increases. BC decided to impose a foreign buyer tax to attempt and slow the market, and sure enough, it caused a slight market slump. In Toronto’s local attempt to curb demand and slow the market to a healthy pace, we imposed the same foreign buyer tax in 2017 and it had no effect. Why? Simple; because foreign buyers only own 3.4% of all residential properties in Toronto, and under 5% in Vancouver.

To this day, I have clients ask me about the ‘foreign buyers’ who come in to Pre-Construction Platinum Sales events and buy up whole floors of units as much as I wish they did, those ‘foreign buyer’ clients simply don’t exist. The vast majority of the clients we have the pleasure to work with during Pre-Construction sales events are 98% Canadian Citizens, and they buy one unit, not twelve.

If foreign buyers aren’t the culprit, perhaps local speculation is. We have relatively low interest rates, and we have quite a bit of HELOC debt in Canada which bodes well for the “local investors are over-leveraged and spreading themselves thin” argument. Counter point is pretty apparent below but we have very high home-ownership rates. A surprising amount of Torontonians own their primary residence rather than lease it, so local speculation isn’t our primary driver either.

So, to answer the big question “When will Toronto real estate market crash?”, It won’t. Toronto real estate is not in a bubble.

Real estate home ownership around the world

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