Trouble ahead for Toronto’s overvalued property market

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It may have been labelled the world’s hottest luxury property market, but Canada’s largest city is by no means a safe bet for investors

Under pressure in Toronto
The real estate market is under pressure in Toronto

The city, which straddles Lake Ontario’s northwestern shore, might be a far cry from the arguably more exciting and established markets of North America, but at first glance Toronto is still a highly attractive prospect for global investors.

Buoyed by governmental stability, a diverse array of cultural and lifestyle amenities and a ‘hot’ property market, it’s not entirely surprising that Christie’s International Real Estate recently awarded the city the top ranking in its world’s hottest luxury property market survey – part of the Luxury Defined 2015 report.

“The city is one of the world’s great economic hubs, attracting high-net-worth individuals from across the globe,” says Michael Sherman, communications director for Christie’s International Real Estate.

He adds that Canada’s stable government and economy makes it a draw for companies to set up shop and its cultural and lifestyle attractions make it a desirable city to live. And the facts are there to prove it. Over the last couple of years, Toronto has witnessed a surge in demand evidenced by skyrocketing prices and a record number of sales.

Is Toronto the world's hottest luxury property market?
Is Toronto the world’s hottest luxury property market?

“[In 2014] was the Toronto market’s second-best year on record,” says local agent Justine DeLuce of Chestnut Park Real Estate. “If there had been more inventory, the record would easily have been shattered.”

In February 2015, Toronto’s sales volume climbed 11.3 percent year-on-year making it the only city amongst Christie’s top 10 global markets to enjoy a faster pace of sales in 2014 than the previous year, while properties valued at CAD1 million (USD800,000) and more spent an average of just 31 days on the market in the same period, per Christie’s – San Francisco came in second with 71 days.

The property market in Canada has also started to see the effects of the weaker Canadian dollar, with some US buyers looking to Canada for real estate options, says Kevin Skipworth, owner and broker of local company Dexter Associates Realty.

“With the quick change in value for Canada’s currency, it is still early to see any real effects yet but this will continue as the year progresses,” he adds.

As the global wealth demographic shifts towards Asia – revealed in the 2015 Billionaires report undertaken by PwC and UBS – it’s not only American investors who are hoping to take advantage of the weak Canadian dollar; wealthy Asian buyers are also eager to explore opportunities in cities such as Toronto that are seen as stable safe havens.

“Asian money in the real-estate context is attracted to places where there are great schools for their children, and that doesn’t have to an economic hub; that could be any big city in Canada or anywhere else in the world,” according to Dan Conn, CEO of Christie’s International Real Estate.

More: This Toronto neighbourhood has become a magnet for foreign buyers

Beneath the surface, however, the narrative isn’t as compelling as Christie’s’ praise suggests.

Soaring prices, affordable housing shortages and an overvalued market are causing real macro-economic concerns. Many analysts agree that it has become much harder for Canadians to put a foot on the first step of the property ladder.

Soaring prices, lack of affordable housing and an overvalued market cause macro-economic concerns
Soaring prices, lack of affordable housing and an overvalued market cause macro-economic concerns

Housing supply reportedly dropped 8.7 percent year-on-year through February 2015 and, according to figures released by Toronto Real Estate Board, the average price for detached property now exceeds CAD1 million. The Real Estate Board also noted that all housing types, including condominium units and townhouses, showed an average price increase of 7.8 during the same period.

More: Ghostbusters target Canada’s Chinese buyers

The situation is particularly bleak in the affordable housing segment. The record number of people (more than 165,000) in the state of Ontario now on the waiting list for rent-geared-to-income housing units has prompted public rallies and protests. Still, the Ontario Non-Profit Housing Association estimates that the average waiting time in Toronto for an affordable unit is six years.

The ramifications are also expected to affect the macro-economy, and many economists have warned that the city’s property market is headed for a significant pricing correction in the near future, and perhaps even a crash.

Current real estate pricing is overvalued by 10 percent
Current real estate pricing is overvalued by 10 percent

The Economist estimates that the country’s housing prices are 35 percent overvalued in comparison to incomes, while the Fitch Ratings Agency asserts a more conservative 20 percent overvaluation. The International Monetary Fund has also voiced concerns, and warned that Canada’s current real estate pricing, together with other overvalued markets such as Belgium, Australia and France, are a threat to the global economy and must be addressed.

The Canadian government, however, seems to be listening: “We’ve been overvalued by at least 10 percent for several years,” Stephen Poloz, governor of the Bank of Canada, said at a recent press conference. “It’s not as though we became overvalued yesterday.”

Indeed, with smaller Canadian markets already seeing considerable price declines, intrepid investors must decide whether the undeniable global appeal of Toronto trumps the risks. As Madani asserted in a Capital Economics report, “it may only be a matter of timing” before the city suffers the same fate.

Toronto top properties

The Davies Condos by Brandy Lane Homes

The Davies Condos by Brandy Lane Homes
Price: From CAD639 (USD524) per sqft
Unit: 1064–1931 sqft
Completion: 2017
Features: Rooftop sunbathing area; situated on Avenue Road within walking distance of Yonge and Summerhill, private racquet clubs, best public and private schools

The Jack Condo by Aspen Ridge Homes

The Jack Condo by Aspen Ridge Homes
Price: From CAD400,000 to CAD2.5 million (USD328,000 to USD2.05 million)
Unit: Between 595 and 668 sqft
Completion: 2018
Features: limestone facades, 24/7 concierge, security, valet, private lifestyle management, huge outdoor terrace

Yonge + Rich 25 Richmond Street East by Great Gulf

Yonge + Rich 25 Richmond Street East by Great Gulf
Price: Average CAD606 (USD485) per sqft
Unit: Between 496 and 1,009 sqft
Completion: July 2018
Features: 5,000 sqft fitness centre, chiropractic services, acupuncture, holistic nutrition coaching community lounge

12 Degress by BSäR Group of Companies

12 Degrees by BSäR Group of Companies
Price: Average CAD767 (USD615) per sqft
Unit: Between 462 and 1,560 sqft
Completion: 2015
Features: Catering kitchen, rooftop pool, cabana lounge, contemporary design aesthetic, 9-foot ceilings, low density development comprising only 96 units

is an editorial assistant at Property Report