Toronto Luxury Market Shatters Records Now Outpacing Other Homes
Luxury homes are getting all the buzz lately in 2021. It’s not just where we are in Toronto, it’s across Canada, down to our neighbours in New York, San Francisco and even half way across the world in Hong Kong. Luxury homes seem to be selling at record premiums and outpacing the growth in all other markets. So in this video, let’s dig into what’s happening in the Toronto luxury market in 2021 so far and hopefully this can help you make better decisions as a real estate investor in Toronto.
Real Estate Trends 2021
Toronto semis are up 2% year on year, Toronto condos as a whole are up 5% year on year, and I want to split luxury homes in Toronto into two parts. In this video, I’ll classify luxury homes in Toronto as detached houses in central Toronto from C1 to C15 where average home prices are currently at over $2.5M and this group has seen a 26% year on year growth since last July. On the other hand, luxury condos have actually been the worst performer. Condos in the C2 area have the highest average price, at over $1M, and they saw a 20% decline over the past year. So to be accurate, the best performer in Toronto is not just luxury homes, but specifically luxury houses in Toronto.
What's Happening To The Luxury Housing Market
When you look at analyst reports for why luxury houses have been doing so well, the reason is the same across the globe. The pandemic has caused a bigger disparity amongst the rich and the poor. The rich are becoming much richer because of great stock performance, record low borrowing rates, and they are very cash rich. On top of this, everyone is valuing real estate a lot more because we need to be at home more, so the wealthy are now shifting more of their money into real estate.
I always go back to my favourite sales to new listings ratio to get a better idea of real estate trends, and a higher ratio indicates a hotter market. And when we look at the the ratio for luxury houses in Toronto, you can see that it’s been holding stable at a higher level compared to its long term average over the past six months – and this aligns with why we have been seeing a much hotter luxury house market in Toronto. Whereas the ratio for semis and condos have been dropping over the past six months – and the ratio is actually back to it’s long term average for semis, which is why we’ve been seeing slower price growth in the Toronto semi market.
Sales To New Listings Ratio (SNLR) = Total Sales / Total New Listings
Long Term Trends
If we zoom out even more, you can see that over the past 10 years, luxury houses are typically not as hot as the general market with a lower SNLR compared to semis and condos and the reason is simple – there’s just less luxury house buyers out there. Now the more interesting thing that I noticed is that even with less players, the average appreciation has been comparable to semis in Toronto, and much better than condos. But again, it’s important to note that there are much stronger swings in the luxury market, so luxury homes become less attractive when you look at risk-adjusted returns.
Here’s the reason – it’s a fact that markets with more end user buyers tend to have more price fluctuations because there’s more emotional buying. Now luxury homes don’t make great investment properties because rent yields aren’t great, and so they consist of mostly end users. But when the end users are the most wealth much, it appears that the price fluctuations get even more exaggerated. In the news, they explain that luxury buyers are generally incredibly successful and not used to losing. The mentality is all about outbidding everyone else, being able to win, and so this mindset continues to feed the luxury market frenzy.
Are Luxury Homes A Good Asset?
Well luxury houses can be a great asset to hold, especially if it is your principal residence since it can offer great long term returns, the best tax advantages with no capital gains tax, combined with low borrowing rates and great leverage.
Just remember that this is not the same case for luxury condos especially if you’re coming at it from an investment perspective – you can luxury condos to have the lowest rent yields, the lowest average appreciation, and once you factor in much higher volatility, the risk adjusted returns don’t look that great at all.
Luxury houses have been doing very well over the last year, and because there’s still uncertainty with COVID as I speak, this continues to translate to higher growth potential in stocks, interest rates remaining low for a while, people still wanting bigger homes and all of these continue to prop up the luxury house prices. Having said that, the luxury house market is hotter than normal and it’s not going to stay this way forever. I’d expect their prices to start cooling when we see an indication of rates coming up and stocks starting to stabilize.
Best Real Estate Investment Opportunities
Now if you’re strictly searching for investment opportunities, I’d recommend not just looking at average returns but rather risk adjusted returns which will give you a better idea of how much you’ll be able to make by factoring in the added risk. And when you do that, you’ll see that Toronto semis outperform the rest in the long run and would be the best from strictly an investment standpoint.
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