The Toronto Condo Bubble - Real or Fake? - The Storey Team : Toronto Real Estate

The Storey Team : Toronto Real Estate

The Toronto Condo Bubble - Real or Fake?

03 April 2019
Tom Storey


The Toronto condo market has gone up 64% in price over the past five years, but does that mean we're in a bubble? So let's do the quick math on that. 64% over five years means that each year the Toronto real estate market for Condos has gone up 12.8% meaning every month you've owned a Condo, you've gone up 1% in appreciated value over the past five years. So let's break it down even more. That means that every single month, if you owned a property worth $500,000 over the past five years, you've earned $5,000 a month on appreciation on your Toronto Condo. Now, it's clear to me why this is happening in our market. Number one is lifestyle. I live in a condo right now. Condo living is easy. Anything that happens behind these walls is already paid for by my maintenance fees. I don't have to shovel the snow off my car in the winter because we live in Canada. It's a nice way to live. It's really simple living and this type of living didn't necessarily exist 20, 30 years ago.

Number two is that even though Condos have appreciated at such a high clip over the past five years, they are still the most affordable option. If you look at other markets in Canada where freehold housing is more affordable, the condo market extremely suffers. If you look at Edmonton, Halifax, there's a lot of great examples where Condos don't sell very well. The appreciation is very low, if any at all.

And number three is something I've talked about on this channel before, is that there's three different types of people buying Condos. There's your first time home buyer that's never gonna go away. There's your typical down sizer, meaning they're moving into a slightly older condo, but with a bigger floor plan, and then there is your luxury buyer. You have three segments of the market basically making up all of the market that is all interested in buying a condo. When you look at the freehold side of housing in Toronto, you have your semi detached, your freehold town homes and your detached properties.

Only about 20% of the market can afford to buy those types of properties. Hence, why condos have gone up so much in value. Now, if you go to Google right now and type in Toronto condo bubble, I bet you can go back 10, 15 years of articles claiming that we are in a bubble. And I thought it'd be interesting to look at what the actual definition of a bubble is in terms of investing in real estate. So a bubble is a type of investing phenomenon that demonstrates the most basic type of emotional investing. A bubble occurs when investors put so much demand on an asset that they drive the price beyond any accurate or rational reflection of its actual worth.

Now for anyone saying there's a bubble in any type of market, it's kind of easy to say that term gets thrown around all the time because when people say there's a bubble, they're never wrong until it happens. And then congratulations your right. But that timing could take 10 to 15 years. All markets have cycles. So if you see price growth going in a rate that is unsustainable, there is cause to say, okay, there might be a bubble happening here, but let's break down what's actually happening with Toronto condos. A lot of the blame for the Toronto condo prices will come at foreign investment. So people from outside Canada buying up these new construction condos, a lot of people are saying, they're buying them, they're leaving them empty. It's really just like a bank account offshore to keep their money. And I think that's a valid point.

I think prices have gone up from foreign investment. I don't necessarily think foreign investment overall as a bad thing. I think people wanting to bring their money to Canada does help our overall economy. But the government put in foreign buyer tax in 2017, so they're trying to curb the demand. And it's funny, since the Ontario government did that for the greater golden horseshoe, you're looking at areas now like Montreal and Ottawa. They're seeing the hottest markets in Canadian real estate because all that money that used to be in Toronto and Vancouver, well, they're going to Montreal and Ottawa.

The definition of a bubble said that people are making emotional decisions. It's not rational thinking, it's emotional, but something about buying a house is you can't just go out one day and buy a house. You need a mortgage. It's tough to get a mortgage in Canada these days with the stress test in the rate hikes, it's not as easy as it used to be and it's really hard even for people that make a good amount of money to qualify for what they're looking to buy these days.

So just based on that fact alone, I think in other markets, bubbles make sense when you're buying smaller products, but when the price of something is already so high and the qualification to get in so difficult, you really have to know what you're doing. Not just anyone can go out there every day and buy a bunch of condos. Now, whether people like it or not, the millennials, they are now the biggest generation alive and they want lifestyle. They don't care about cars as much. They don't care about big 4,000 square feet mansions. They want lifestyle and location, so condos are just going to become the norm. I guarantee in the next 15 to 20 years. I'm talking about just the Toronto market here. Raising a child in a condo is just going to become the norm. Canada's immigration numbers are becoming larger and larger each and every year and the majority of those people are coming to the greater Toronto area because of jobs.

Unemployment is at a 40 year low in Toronto, meaning people have jobs they can afford or try to buy properties and interest rates are still low and money is still available. There's a lot of countries out there that the banks will not lend you money. In Canada money is available and affordable. One final thing, the price gap is the biggest thing too why either condos will continue to go up in price or they will slow down at a certain point because at the clip there at almost 12% a year, I don't think that's realistic over the next five years. I think maybe four to 6% is realistic just based on the demand. Right now, if you look at the average condo price in Toronto in the 416 area code was 612,000. If you look at townhouses, it's 764. Semi detach was 1.1 and detach properties here was 1.3 million.

If the price gap, which is 612 right now to 1.1 million for a semi, if that gets closer and closer, people are going to start saying, why am I buying this condo with condo fees when I could just buy that freehold property? But as of right now, it's still a large gap, but if it gets closer, that's when condos will eventually slow down. I hope this information was valuable to you. If you've any questions, I love to chat with you about it, please post them below. I'll make sure to reply. Have a great day, and we'll talk soon.