Toronto Real Estate Market 2021: What Canada Government Cooling Measures Might Take Place?
Toronto real estate and the GTA real estate markets have been appreciating really quickly in 2021 because of all of the monetary easing measures from the Canadian government. Now, big banks are calling for Canada government intervention to cool the Canadian real estate markets.
Watch this video as we talk about what’s been happening to Toronto real estate, what to expect moving forward, and ultimately, how to make the most out of these opportunities as a Toronto real estate investor.
Inflation Drivers
What’s one of the hottest topics in the news recently? Yes, inflation! And that’s mainly because governments around the world have really been money printing machines. All of this new money supply is a big reason there’s been so much mounting inflation risk. Just like how there’s been a K-shaped recovery in stocks, meaning some industries have been doing a let better because of the pandemic whereas others have done a lot worse, inflation is also K shaped too.
This has been happening even before the pandemic. But with the extra monetary easing from our governments, this difference in inflation just makes things more obvious. Certain things in our economy haven’t increased much in price or have even deflated over time. Let’s go over this with a few examples:
- Labour Outsourcing: For the past 25 years, clothes have actually gotten cheaper … mainly because of labour outsourcing. You might have heard a lot of news about fast fashion in recent years and I’m not here to discuss the ethics behind it today but the reality is that labour outsourcing is still very prominent and that’s why the cost of many consumer goods have been kept very low.
- Technology: tech products are also become cheaper and it’s not just because of outsourcing. Another driver here is because of improving technology, so continuous improvement is making things like computers better and much cheaper over time.
- Ease Of Supply Increase: We can just look one year back at face masks – when demand shoots up and supply can’t keep up, prices skyrocket. Non surgical disposable face masks went from $1 a piece at peak of the pandemic, now Amazon sells them for 25 cents each. Face masks are quick and easy to make so naturally the market attracts more competition to enter quickly, and once supply goes up, then prices come back down.
Inflation & Toronto Real Estate
If something can have labour outsourcing, can be improved to technology or if supply can easily be increased, then chances are they won’t be subject to high rates of inflation. If they have a combination of these factors, then it’s more likely to see deflation. But when none of these factors apply, then the price of these assets will go up a lot more than average inflation.
You can argue some building materials can have labour outsourcing or be improved by tech, but a big part of real estate construction still requires local labour. Plus, the bigger part is that it’s hard to increase supply when you have no more land like what’s happening in Toronto. So, you’ll have to wait for redevelopment opportunities, and even with that, construction takes time.
When you combine this with Toronto being the fastest growing city in North America, Toronto’s supply growth really needs to speed up and catch up to demand. Otherwise, real estate prices will just continue to skyrocket which is what we’ve been seeing for the past 10+ years.
It seems like no matter what the economic condition is, there’s always demand for real estate. Right now, real estate prices have been in a lot of news headlines because demand for real estate in the suburbs have sky rocketed because of record low borrowing rates and higher household savings. In Toronto, demand hasn’t surged but has stay more or less stable because prices are higher than the suburbs and immigration was put on pause.
Big Banks Call For Government Intervention
Even when interest rates start to increase, this is probably when immigration will start to resume, we expect demand for Toronto real estate to continue to be stable. Right now the bigger concern are the real estate price growth outside of Toronto, and many big banks like RBC and BMO have been calling for government intervention to cool the market with a good concrete list of ideas for Canada.
In the long run, I think it’s useful for you as a real estate investor to understand types of government measures are happening now, what’s likely the government’s focus will be moving forward, so that you can make the best real estate investment decisions.
Possible Demand Curbing Measures
In terms of demand, one thing to keep in mind is that the government doesn’t want to reduce real demand, but rather non-essentials like those from foreign buyers, second / vacation homes or from speculators in the market.
Reduce Foreign Buyers: When we look at foreign buyers, Toronto and the greater Golden Horseshoe region has already tackled the foreign buyer piece with the Non‑Resident Speculation Tax. It’s possible that places outside of our region might have something similar later on which can create a drop in real estate prices on those areas but won’t be a big impact for Toronto.
Reduce Vacant Homes: Vacant homes is another hot topic. The Mortgage Bankers Association in the US has noted that the percentage of second homes and investor mortgage applications have shot up a lot recently, going from under 10% to now over 14%. Even though this is in the US, it’s likely that second or vacation homes are increasing in Canada too.
Toronto is already ahead of the game, with the vacant home tax set to implement starting next year in 2022. In fact, this is already in place in Vancouver – and if you look at the stats over there, it shows that Vancouver’s vacant homes cost 52-59% more than the average home price. So that this means really is that once vacant home taxes kick in, it might soften prices in the luxury market but won’t be a big impact for average home prices in Toronto.
Reduce Speculators: There’s very high real estate transaction costs in buying, selling, land transfer taxes, holding costs, and these can add up to over 10% of your property price. So this means property prices need to be up over 10% to just break even, and when you start making money, speculative real estate gains are taxed as income instead of capital gains.
So assuming you were in the highest tax bracket, if you make $100,000, then around half will go to taxes giving you only $50,000. Whereas if you made the same amount as a long term investment, a quarter will go to taxes so you get $75,000. When you combine this with the fact that real estate investing isn’t all that passive, there’s a lot less liquidity and there’s high capital requirements especially in Toronto, speculating real estate especially in Toronto probably isn’t a major concern for the government.
Raise Interest Rate: And how can we forge the last demand curbing metric that everyone likes to talk about. The thing is, if you raise rates, then it doesn’t only affect real estate but borrowing all around. This means the government has to be really careful when doing this because our economy is still far from fully recovered as a whole. So I think this is probably not a strategy that the government will focus on if we’re only at real estate only.
Possible Supply Increase Measures
Reduce Short-Term Rentals: You can see that supply tactics worked really when Toronto stopped allowing Airbnb’s and short term rentals in non primary residences starting last year and we saw how to condo market reacted.
Increase Condo Developments: Another solution is really to crank up condo construction which is definitely happening and we have the highest crane count in North America. But of course not everyone wants to live in a condo, as seen with COVID-19.
Increase Freehold Density: So here’s where we’re at. A big shifting focus for Toronto will continue to be to build up density on existing land with single family homes to help supply to keep up with demand.
- It first started twenty years ago with Toronto allowing secondary suites in semi and detached homes, and now it’s even opened up to townhomes as well.
- In 2018, Toronto added laneway houses to their plans and started incentivizing people to build them by deferring or waiving development charges. Building laneway houses continue to become easier with fire access requirements becoming more lenient starting this year.
- The city of Toronto is working on approving garden suites which can open up even more opportunities to increase density and this is expected to roll out as early as this summer.
If this is successful, Toronto real estate prices won’t have parabolic price growth which is actually good for everyone but will still continue to grow at stable rates above inflation because factors like labour outsourcing or technology can’t keep real estate prices low.
Change Opens Opportunities!
And having regulations that can increase density on freehold properties is actually great news for real estate investors because it opens up a lot more opportunities.
If you’re up for the challenge, you can get a good chunk of value add appreciation and boost your rental income as well. With the city of Toronto being motivated to increase livable space in freeholds, the process will be easier for you and help to solve our supply crisis – so a win-win for everyone.
As a ballpark figure, you’ll need around $250,000 to buy freehold property in Toronto with 20% down and also accounts for minor renovations. When you add a secondary suite in the existing house, you might be looking at around $50,000+ more and laneway houses can cost you north of $300,000 and can be funded with a construction loan.
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