Fall in Downtown Toronto Condo Demand Will be Short-Lived
June 19, 2023 | Posted by: Calum Ross
It is no secret to Toronto people that the downtown condo market has been a subset of the Toronto real estate market that defied gravity and logic as we all sat back and watched the prices of select condos go up in value even when the underlying real estate economics of this asset class defied logic.
For those who want to truly understand real estate economics let’s stop and look at real math instead of speculation that often leads people to make bad decisions. So here are the real economic fundamentals. These fundamentals will show us with a high degree of certainty that the market and demand for these properties are at a turning point when you look at real market demand. So here is the real math.
- Net migration of people – you don’t have to travel around the world too much before you realize just how good we have it in this country. We have great education systems, amazing quality of life and so many great and wonderful things about living in Toronto, Ontario, and Canada that the list of good things about this city and country is simply too long to effectively cover in a one-page article and since I need to save some time and content for my next book – you can expect to see it there.
- It’s not just my (obviously biased opinion) – it’s the opinion of people all over the world. It’s no secret that I am first generation immigrant to this country from Scotland and while I am exceedingly proud of my British heritage … ever time my plane tells me we are approaching Toronto, Pearson airport I feel a sense of happiness because while the City of Toronto is not without fault the fact remains that you would be hard pressed to find another city that has our amazing combination of waterfront, friendly people with an amazingly diverse and rich cultural background. While it may seem like Canada is letting in too many people you may want to stop and think more broadly about what that is telling you. When people from all over the world want to move into your country it tells you (us) that there is lots of excess demand for this great country – and why anyone thinks that’s a bad thing is simply difficult to comprehend. I keep seeing people who complain about immigration but simultaneously complain about falling real estate rents or housing demand in their area. That may in fact lead someone to believe that their mother may have accidentally dropped them on their head when they were little. Well, the good news is that if that is the case, we have a great healthcare system and lots of amazing advancements in head trauma. You will be ok to better understand things and this article if you use your brain to better understand real estate economics which is suggesting we are about to have a meaningful shift in prices for some key housing segments. Now is a very good time to get “sage real estate or investment advice” from people and places that can understand markets and are better equipped to give it. So here are some things that I know for sure.
- Current mortgage rates indicate that there is a historically high spread between bonds and mortgage prices which reflects lenders account for some degree of credit losses coupled with a built-in spread for profit. When they build in too much profit it begs those who understand debt capital markets and credit to ask the very fair question which is why? After all an inverted yield curve tells us that the market has already priced in material drops in interest rates that are what the smart money sees.
- When interest rates rise as a rule – real asset prices go up. The problem with this statement is that price elasticity dictates that prices are fast going up but slowly going down. Let me put this in simpler terms because I wouldn’t wish most advanced economic courses on my worst enemy – let alone my readers and friends. Assuming you did want to endure the very complex models of correlation coefficients and what it means for various asset classes here is the “Coles notes” or “cliff notes” version of what you need to know in case you decided to abandon your hopes of being a mathlete in favor of the pursuit of happiness. Keep in mind that the price elasticity of real estate is also inclined to be uniquely different at the lower price points when compared to the higher price points which is also a byproduct of macroeconomic and microeconomics with the effective application of multiple regression analysis.
- Real estate supply and demand are always driven by a very complex array of a multitude of factors. Some of this I learned in school, some by direct observation, and some by adjusting for what we all see happening with structural shifts in the demands of various real estate asset classes and what this means for various real estate asset class demands so here goes.
- In the long run stocks should outperform bonds which should outperform money markets which should then also be slightly lower than long-term real estate appreciation. When this ratio gets too out of wacky it’s almost always a sign that, “Houston – we have a problem!”. Over the last hundred or so years (roughly) real estate as an asset class does appreciate but as we all know this metric is, of course, a function of the underlying value of the asset relative to the cash flow which then must be brought down to the net present value of current and future cash flows which obviously must also be then discounted used the correct discount rate which is of course not the easiest thing in the world to calculate unless of course you really understand debt, equity and the global capital market trends which in turn adjust the global, north American, Canadian and some would now know better and even stop to consider the localized discount rates. As I have said far more than one thousand times before – the valuation of real estate assets for personal shelter and the valuation of them for investments is a dramatically different formula. I am of course tempted to come back to the comment about brain trauma and or failing to use our brains which in fact could be arguably two very effective arguments to more correctly explain the same mathematical observations that are so obvious to the educated real estate investors that it’s a difficult thing to watch.
- The quality of your advice and whom you get it from matters. If you think that good advice is expensive then you very obviously don’t understand the cost of bad advice. If you take a good look at your own relative return on assets classes, adjust for the net present value, inflation, and government policy while of course taking the time to better watch and understand the very smart US and Canadian Central Bankers who do on occasion get it wrong – but this is indeed a very rare and almost all but a once in a lifetime situation when even Central Banks can make errors, but then again someone with a brain would more correctly understand that kind of situation is only what happens when the almost all brilliant world central bankers have to do so because it’s more than likely the lesser of two evils, but then again what on earth do I know?
Calum Ross is an Amazon and Globe & Mail best-selling Amazon real estate investment author who is an alumnus of Harvard Business School and holds an MBA in Finance from the Schulich School of Business. He is a licensed Broker and Wealth Advisor in Toronto, Ontario