Crazy Market!

Here’s a great article by my good colleague Glenn McQueenie:

Why does the media always get our industry wrong? I watch the news, read newspapers and stay up on current events. But now I am getting skeptical about any news I consume…. Whenever anything is written about the real estate market, I just shake my head, and say ” how can they get it so wrong?”

With 27 1/2 years of helping great families find a property, and now with 2 brokerages over 360 agents, who happily help thousands of people buy or sell a home, here are my two cents…

The Toronto market is being driven by these major factors:

The first factor is restricted supply.

1) 11 years ago, the Liberal government froze development on 1.4 million acres, across 325 km of land from the Niagara River through Hamilton( Golden Horseshoe area), all across the north of the GTA and over to Lake Scugog and Rice lake, under the Greenbelt Act 2005. Effectively creating undevelopable land or a “lake” that I will call “Lake Greenbelt”. This had the effect of creating an Island called ” GTA Island”, and like Manhattan in New York City, if you cant afford to buy there, you will commute 1-2 hours to get to the “island”.

The second factor is rapid population growth that increases demand.

2) The population of G.T.A and surrounding area has grown from 3.7 million people in 1986, to 5.5 Million in 2005,6.3 million now,and will be 7.3 million people in 2021…and 9.1 million in 2036!!

3) If you remember taking an economics course, you will recall a concept called Supply and Demand. If there is an increase in demand, there must either be a price or quantity adjustment. Right now, we have no capacity to increase the quantity of land available in G.T.A, and as a result land prices have soared for building lots and condo development sites.

4) Record low interest rates. A $500,000 mortgage carries for $2,117/mo at today’s interest rate. The same mortgage at 10% interest is $4,472/mo.
A $1,000,000 mortgage at today’s rates carries for $4,234/mo!
The last time we had 10% interest rates was 20 years ago, and they have been falling ever since. In the last 20 years, there has only been 2 quarters where prices dropped in Toronto…see the correlation between prices and interest rates?

5) Increased “revenue tools” by Government. These are not Revenue tools, they are flat out taxes and development fees. Lets call them what they are. They can add to an extra 100-200k to the price of a home through fees, taxes, land transfer tax, development charges.

6) Labour and material costs. They keep going up and will never come down.

7) International movement of capital. Canada is seen as a safe haven for money, because we have a stable government, clear rules and we are governed by the rule of law and not by whim…
There has been a huge influx of capital from China, Russia, Iran and host of other countries.
From mainland China, over 1 trillion dollars has left that country in the past 12 months, and I am told we have a few more years of this( plus their currency has gained a lot against the Canadian dollar) transfer.

8) Increased Immigration. Now over 300,000 people move to our country every year, and there is a line up of millions of other people who would love to come to our great country.

What factors are not causing prices to go up?

It’s not the Real Estate Agents!

With the exception of some of the shady practices that some agents are doing in Vancouver( they should be booted out of the business and never allowed to trade again), we do not cause prices to go up. We have a legal obligation to get the most money for the Seller when we list their property. We explain that you can price it three ways:
1) At Market value
2) Above market value-to leave room to negotiate
3) Below market value to get multiple offers.

We discuss the pros and cons of each approach and they decide. Guess what? Most of them decide to price it below the market in order to get more bids and sell for a high price. They look around their neighbourhood and see that the approach works!!
Which is exactly what I would do in today’s market… because it works for Sellers.

For our agents who work with Buyers, it is an incredibly stressful market to be in, for both them and the Buyer. We have entered into crazy time with prices rising 16% so far this year. One of our agents has presented 42 different offers for 7 clients and has yet to get one accepted.
Can you see why Buyers and agents get frustrated??( Please think about this next time you think about how easy it is in Real estate and want to get you license. In fact, at every party I go to, people tell me they are changing careers, and either going into real estate, personal training or Dog Walking…choose dog walking or poop-scooping, they are very profitable businesses…we have too many agents, there is no need for more.)

In conclusion, there is not one or two reasons why this market is going crazy. It is a multitude of factors, and the last thing we need is for the governments to increase more fees and taxes, or impose some silly regulations on the marketplace. It’s called an economic cycle, and what goes up above the historic mean, will eventually adjust back to the long term 4% appreciation that Real Estate has had for centuries.
I have already seen people starting to cool off and not buy a home, because they simply cant afford to move up to the home they want. Just stay put, and the market will come back around to you.

Glenn is the Broker/Operating Principal of 2 Keller Williams Brokerages in Toronto. Thank you Glenn.