Whenever we see the market heat up as much as it has over the past couple of years, we are continuously discussing the proverbial real estate bubble.
I think when you’re responding to this question it’s important to put things in the correct context. The question should really always start with, “what are your short and long term real estate objectives?”
What we have seen in our market over the past year or so is a combination of factors that continue to put significant upward pressure on prices in all areas and property types.
1 – We have historically low interest rates where buyers are paying more than 50 – 60% principal the day they move into their properties.
2 – We have a clear lack of supply. We are one of the fastest growing cities in North America and we continue to struggle to keep up with the demand from immigration. There are a number of factors contributing to this ranging from outdated government policies to lack of buildable land, and none of them are going to be solved anytime soon.
3 – The third factor is a generational transfer of wealth from parents to children. These early inheritances are unlike anything we have really experienced before at this scale, and they are having a significant impact on the market. How long this will last is unknown but it’s a reality of the current market landscape.
So what does that mean for the real estate market moving forward?
Well there are a couple of important areas that I am paying specific attention to.
- I am closely watching what’s going on in the new construction market. We are currently seeing thousands and thousands of properties selling all across the GTA at prices that are significantly higher than the current resale markets in those areas.
The more of these units that sell, the more I believe the current market prices are protected. I compare this to the resistance levels you would find in the stock market. As stocks fall, they meet price points where significant shares were purchased and this blocks prices from sinking lower. I look at the new construction market as this same type of parachute in real estate.
- I am paying attention to immigration. The Canadian government has made it very clear that they plan on making up for lost time. Immigration targets have been significantly increased moving forward which will put upward pressure on both rental and purchasing demand. If this holds true we could see the market continue to be hot for the foreseeable future.
Regardless of any short term changes in the market, there are a couple of principles that always remain the same for me as a real estate investor.
- Real estate is a strong long term investment, and it’s value as an investment should always be weighted over a reasonable period of time. In the US, the average time between buying and selling a primary residence is around 10 years. For comparison sake, our most recent real estate bubble was actually in 2017. It took exactly 3 years for average prices to get back to and surpass the peak from that year. For those who purchased during that period, their property would be worth around 16% more today based on our current average market price.
- The second principle to follow is that there are always valuable opportunities in the market, you just have to know how to look for them. Multi unit properties, laneway houses, resale condos that are adjacent to new construction projects that just sold for 40 or 50% higher all represent potential value. If purchasing real estate is important to you and your investment portfolio there are many ways that you can find the right property for you and reduce your risk. At the end of the day it’s all about educating yourself and surrounding yourself with trusted advisors.
My advice for buyers is to remain patient and to ensure that you are working with a great real estate advisor who truly understands the current market relative to value.
One of the things we’ll probably look back on in terms of this market is that our historically low interest rates, combined with rising prices pulled future buyers into the market and put pressure on move up buyers to get into their forever homes sooner than they would have. This could in turn reduce some of the buyer demand in future years and could have a slight cooling effect on market growth. This scenario of course ignores the immigration effect but is important to consider nonetheless.
What is abundantly clear, is Toronto and the surrounding areas continue to be one of the most sought after places for people and business to call home. We have steadily grown our profile on the world stage and continue to do so. As long as that’s the case, our real estate will continue to be a highly sought after commodity and an excellent place to build long term wealth.
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