'Marginal' home buyers setting market value in Toronto

  3/20/2017 |   SHARE
Posted in Toronto Real Estate by Vanguard Realty | Back to Main Blog Page

The most frustrated people in the Toronto area’s real estate market right now are clearly the buyers. But right behind them are many seasoned agents.

The Teranet-National Bank house-price index revealed this week prices across the country jumped 13.4 per cent to a 10-year high in February compared with the same month last year. The Greater Toronto Area powered ahead with a 23-per-cent gain last month compared with February, 2016.

The heat in Toronto has revived talk in provincial government circles of a possible tax on purchases by foreign buyers. The Ontario Real Estate Association has come out strongly against the idea.

A term that’s circulating more often is the “marginal” buyer. These are the outliers who pay huge premiums over the “consensus price” that experienced agents would come up with based on previous sales and micromarket factors. Even though they make up only a small subset of buyers, they determine market value.

Few industry watchers in Canada can agree on what extent overseas investors have become those marginal buyers.

One west-end Toronto agent who has been in the business since the 1980s does see an influx of foreign money. Some cash is flowing from China, South Korea and Vietnam, he says, as immigrants bring their children over to attend school in Canada. But those same buyers also maintain businesses and homes in Asia, he adds. Many split their time between two continents.

Europeans are also interested in purchasing real estate in Toronto, he says, because it’s close to New York and it’s a relatively easy hop across the Atlantic. Vancouver is less of a draw because it’s a longer flight from Europe.

The investors often come from Russia, Ukraine and Cyprus, he says. Some have banks in Luxembourg and large amounts of cash lined up.

“These guys are prepared,” he says.

He does worry about families based in the GTA, however. Many feel pressured by “fear of missing out.” It’s not only the well-off who are transferring wealth to a younger generation. One woman he knows who works as a cleaner is thinking about taking out a $100,000 mortgage on her own house so that her daughter can buy a condo. In other cases, the parents buy a property and have their young adult children make the payments directly to them so that they learn some financial responsibility.

“Kids pay the mortgage; mom and dad are the bank,” he says. “It crosses different income levels.”

The competition is also nerve-racking for buyers, he adds.

“It’s time-consuming, it’s frustrating for families. It’s not just two people – there’s an entourage,” he says of the extended family.

For people who would be stretching to buy in this market, he also advises caution.

“If there’s no compelling reason to buy, sit tight.”

Not that he’s calling a turn in the market. The stricter mortgage rules introduced in the fall have done nothing to slow the market, he points out. He can forsee the market losing some steam if lenders become more militant, but there’s not much to suggest the trend will reverse. Foreign money continues to flow. Still, the desperate buyers and untethered prices do remind him of the exuberance of 1989. That peak year was followed by a steep and lengthy downturn.

Buyers are facing stiff challenges in the GTA and surrounding cities. It’s exceedingly difficult to be the victor in a bidding war when upward of 20 other parties show up at the table. It’s hard to get financing in some cases, and there may be trouble when the bank sends an appraiser to make sure the property is worth somewhere near the selling price.

Shawn Lackie, an agent with Coldwell Banker-R.M.R Real Estate, has seen all of these trials in Durham Region.

When he takes on potential buyers these days, he makes sure they have thought about their exit strategy before he even discusses an entry strategy for the market. Unless they want to spend the next 10 years waiting for the market to realign, he recommends buyers hold back on bidding. Otherwise, they risk seeing their equity under water if the market corrects.

“You will come after me – you will hate me for the rest of your life,” he says. “That’s tough ground to make up.”

Mr. Lackie isn’t predicting a downturn any time soon. He does want buyers to be aware of the risks, however. If mortgage rates rise or a lot of homeowners decide to sell at once, prices may correct. Many economists are sounding the same warning.

“We’ve been going on 10 years now with these unbelievably low rates,” he points out. “That can’t continue.”

Recently, he took a pair of buyers to see a modest house in Oshawa. The house needed work and had electric baseboard heating, but it had a relatively affordable asking price of $350,000 and the couple was interested in making an offer. Mr. Lackie advised them the house had been listed below market value and he estimated that it would sell for between $425,000 and $450,000 with multiple offers.

If the couple weren’t willing to pay more than the asking price, Mr. Lackie cautioned them, they would be wasting their own time and driving the price up for others. Bidding wars typically become more heated as more parties enter the fray.

The couple decided against bidding. The property went on to sell for $505,000.

In Oshawa, Mr. Lackie can’t see any way to justify the sale price at $155,000 above asking. The surrounding houses are also small and the neighbourhood doesn’t merit tearing down the house to rebuild.

In a lot of cases, Mr. Lackie says, these prices are set by “that one whacko” who blows everyone else away.

With most Ontario schools taking time off for their March break this week, many agents are planning to list properties for sale next week. That could relieve some of the pressure. Listings should continue ramping up through the spring because homeowners typically like to list when their properties appear fresh and surrounded by greenery.

Across Canada, real estate prices rose by a seasonally adjusted 1.3 per cent in February compared with January. In Toronto, however, the rise for the same period was 2.6 per cent, marking the strongest gain in five months.

And while prices rocket ahead in Vancouver and Toronto, sales and listings are slumping in both cities, cautions David Madani, senior economist at Capital Economics.

Mr. Madani warns the market conditions underpinning these large annual price gains have continued to deteriorate in the two cities.

Sales in Toronto have slipped by 7 per cent since August, 2016, he says, while new listings have dropped to levels not seen since the recession of 2008 and 2009.

Mr. Madani points to this trend as evidence prospective move-up buyers, whom he calls the real driving force in Toronto, are losing confidence. Unless new listings improve in the next month or two, it’s unlikely housing sales will rebound this year, according to the economist.

“The upshot is that the largest housing markets that have been responsible for the biggest house-price gains over the past two years are now approaching a potentially dangerous tipping point.”

Source: The Globe and Mail

Foreign Buyers, Foreign Investors, Home Buyers, Home Sales Toronto, House Prices Toronto