“when all is said and done, more is often said than done!”
There has been a media frenzy lately around The Toronto Markets potential crash and burn… the media loves a car wreck and they are doing their utmost best to create one…
Will it be self fulfilling… absolutely not !!
The Toronto Real Estate scene is adjusting BACK TO MORE NORMAL LEVELS of absorption. The pace of absorption over the past decade could not be sustained forever! As the market drivers… employment growth, immigration and affordability subsided so too would the rate of sales.
BUT A CRASH IT IS NOT! Unless the fundamental law of Supply and Demand is ultimately repealed… and the media is trying their best … the Toronto Market will remain very stable and steady. Here is why…
Employment and Income Growth,
There has been modest but positive job growth with the unemployment rate in the GTA at 8.3 % down from 8.6% in 2011. There were net 127,000 jobs added to the Toronto CMA in 2012 up 4.3%. Income growth has actually held up rather well with average total household income right at the $100,000 mark. Yes, we have seen a downward trend in Manufacturing with its employment proportion falling to below 15%… but it’s been replaced by the Financial Sector with jobs here growing to over 25% of the employment base. Is the strongest banking system in the world about to falter … I don’t think so !
Yes, overall unemployment had been rising slightly through 2011 but 2012 recovered in the second half so a stronger employment market will be reflected in the sales absorption. The U.S. recovery albeit weak and slow is still on a positive track. This is great news for GTA employment prospects through 2013 and beyond. GTA is a direct beneficiary of U.S. Economic Growth. “We’ve found that for every one percentage point change in U.S. growth, we see a sixth-tenth percentage point change in employment growth in South Western Ontario,” says Ted Tsiakopoulos of CMHC … so it’s BACK TO NORMAL in 2013 !
Immigration
Canada has averaged new immigration levels of about 250,000 per year… and there is still a line up at the door. Historically about 100,000 of these new immigrants choose the GTA as their destination. Yes, this has diminished to about the 80,000 level in 2011 as economic opportunities in other parts of Canada (Alberta, Saskatchewan) lured the new immigrant away from the GTA… BUT 80,000 new faces means a demand for over 30,000 new households… each and every year! And the commitment of the new immigrant to Real Estate is remarkable. Their impact initially is felt in the rental market. Older existing rental stock has a vacancy rate of less than 1.5%… Rent control has meant that no new “rental” product has been built in the GTA for nearly 40 years – all those new condos are really the new rental stock. Bidding wars are now evident in the rental market as supply remains very tight.
Affordability
Affordability is driven by these factors
1. The cost of borrowing …interest rates
2. The price of the commodity
3. The qualifying process
The cost of borrowing has not changed… interest rates are at their lowest in history. The incremental price of the commodity has remained very stable with pricing rising at 6 to 7% per year. Price escalation will not continue at this same rate but return to more normal levels just ahead of inflation.
The rules to qualify have changed, particularly for the first time buyer… the buyer of resale product.
This is the basic fuel of the real estate market … the first time resale buyer… he or she starts the market engine.
The Feds and subsequently the Banks have made it tougher for the first time buyer to qualify for a mortgage. The reduction in Amortization from 40 to 25 years combined with the requirement to qualify at the 5 year rate impacted the market significantly. According to the Canadian Association of Accredited Mortgage Professionals 17% of 2010 first time buyer, high ratio buyers would not qualify today. So the first time buyer engine still starts, runs quite smoothly but just a little slower !!
Back to Normal is the Trend for 2013
By the end of 2012 Low Rise sales had declined 19% and Hi Rise 35% compared to 2011…to 14,200 and 18,800 units respectively.
The Low Rise market is only at these historically low absorption levels due to supply. At about 7,000 units, Low Rise product availability is at its lowest level since PMA began keeping records in 1979. If the product was available absorption would be much higher… instead of 14,000 absorption it would be closer to 20,000 units annually.
The High rise market overreached historic absorption levels for the two years 2010 and 2011 …the latter being a record year at over 28,000 sales. Comparisons to 2011 will always indicate a deteriorating absorption but it is only now getting … BACK TO NORMAL !!!
The resale market is about 4% below 2011 sales at 86,000 units in 2012, a very strong year and is expected to produce similar results in 2013.
It is expected that year end Low Rise and Hi Rise markets will total about 33,000 unit sales, a number not experienced since the 2008, 2009 slump. Average annual absorption over the past 12 years has been 40,000 units. During the period of recovery in the 5 year period 1995 to 2000 annual absorption was 31,000 units.
The difference of course, is the shift since 2004 to Hi rise product as a proportion of market share. Yes, the Hi Rise market is adjusting from record absorption levels in 2011 from 28,000 units back to the 16,000 to 17,000 range. But it is the Low Rise market that is actually experiencing the most significant adjustment from averaging over 20,000 units annually in the past 12 years…an impact not driven by demographics or economic shifts but by politically initiated supply constraints. Low Rise and general resale market absorption will remain very stable in 2013 similar to last year. PMA expects 2013 to see 13,000 to 14,000 Low Rise and 16,000 to 17,000 Hi Rise sales for a total similar to 2012 at around 29,000 to 31,000 units. As measured over the past 12 years the normal levels of Hi rise absorption was 17,300 per year…in other words… BACK TO NORMAL !
Live Positive !
Andrew Brethour
Source: Data referenced in the article sourced at RealNet Canada, Urbanation, TREB, CMHC, Stats Canada, and PMA Brethour.
