Toronto Real Estate Buyer's Market Has Small Downsize Potential - by Jim Reid, Broker

TREND: 1985 - 2005

This 21 year picture of annual changes in average selling prices and unit sales volumes demonstrates the versatility of the GTA real estate market.

Torontonians usually pull back in sales volumes when prices heat up: 1987, 1989, 1990 - but jump back into the market when prices appear low: 1991, 1992, 1994, 1996.

Interestingly, the 9.4% price increase of 2002 was stimulated by a large unit sales increase the previous year. But, since 2002 there has been a "recession" in price increase rates. Price increases have been diminishing, but politicians and real estate industry leaders have said nothing about this to the public.

Also, the graph highlights the "hyper-price-increases" of 1986 - 1989 that led to "hyper-unit-sales -declines" in 1987, 1989 and 1990. Clearly the message is that large price increases stimulate large volume declines. Similarly, modest price increases haven't had a significant affect on unit sales.

BUYER'S MARKET

Many GTA neighborhoods passed the 50% threshold of Sales to Listings in 2006. In fact the GTA slipped to 49.5% in September, officially entering a "Buyer's Market".

However, the "days on market" number is still quite good as it hovers around the 40 days to sell mark vs. traditional periods of close to 60 days. This means that more properties are being listed as homeowners decide to upgrade while interest rates are attractive.

The market average price increase will be close to 5% in 2006, but I believe that prices are probably flat. The GTA has a multi-billion dollar home-improvement market nowadays and these updated and upgraded properties are pushing up values. These are the properties that are selling in less than 40 days.

Homes that are not fixed up are sitting on the market. In one area they are averaging 130 days to sell and eventually sell at a 9.9% price discount vs. the 3.3% for the fast movers. This is what the "Buyer's Market" is really about!

Buyers are willing to wait for a home that doesn't need any maintenance or updating. They want to leverage their downpayments into a higher market value property. They don't want to waste their downpayment on making the property nice to live in. Also, these younger buyers are used to "new" things, so they don't want your "old" junk. They expect to live on the very edge of their "cash flow", so their mortgage payment will be "maxed" and there will be no savings for repairs and upgrades.

Vendors need to tune in to this new generation of "newbies". By cashing in on their escalated home equity through a line of credit, Vendors can create the cash to fix up their properties. If the work is done professionally, and with professional taste, the Vendor has an excellent chance of getting a return of more than 100% on their repairs and updates.

Alternatively, if they don't fix up their home, it will take them 5 to 6 months to sell and they will be grasping at a very low Offer!

FUTURE GTA MARKET

Speculation can drive a real estate market to extremes. Some neighborhoods have been affected by speculative activities, but generally it appears to me that people are putting a lot of thinking into different GTA neighborhood lifestyles.

There appear to be a lot of childless couples postponing family obligations. Their lifestyles are quite different than the Mom's and Dad's locked into wage slavery and hot chocolates at the hockey arena. Also, the pre-boomers who made a lot of money inventing things for the boomers are now entering their retirement lifestyles. The housing needs and expenditure profiles are quite different for these three major demographics.

Add to this balanced mix of homeowners the fact that the GTA is at 6 million now, with another million arriving over the next 7 years, one must conclude that any downside to the housing market must be low.

Also, take a look at the ultra-luxury condos and homes springing up around town and in cottage and ski country. Wealthy people from all over the world want a piece of Toronto real estate.

Perhaps the global recession that has just begun will lead to some economic restructuring, but with the improved market flexibility and adaptability built into many corporations nowadays, we shouldn't become too pessimistic. The movers and shakers who need cheap unskilled labor have already closed their local plants and have set up elsewhere. Our skilled labor force and capital intensive manufacturing sector produces products and services needed by rich people anyway. So we shouldn't be as vulnerable as economies run on cheap labor.

The bottom line... property values may decline a bit in the GTA during the recession, but if you are planning to hold onto a property for five years or more, then your downside risk of buying the right place now is nominal. In fact, with the right location your upside potential in the GTA is significant.

Jim Reid, B.A., M.B.A., Broker, ABR