A Good Read - Robust Real Estate
Robust Real Estate
by the Globe and Mail 28 Mar 2018
A few things stand out when one reads the 2018 Wealth Report, the popular look at prime real estate trends and wealth issued annually in early March by Knight Frank.
Toronto's place in the report's Prime International Residential Index (PIRI) slipped a bit from December 2016 to December 2017, compared with the previous year. PIRI tracks the value of luxury homes in 100 key locations around the world.
Toronto ranked sixth in 2016, with luxury home prices up 15.1 per cent, but fell to 16th in 2017, at 8.7 per cent. Guangzhou in China led the charge at 27.4 per cent, while Vancouver, feeling the effects of the province's tax on foreign buyers, continued to slip, from a No. 1 ranking in 2015, when it was up 25 per cent, to No. 37 in 2017, up just 3.5 per cent).
When looking at fundamentals that drive the luxury real estate market in Toronto, so far in 2018, it's all a question of perspective, says Brad Henderson, president and chief executive officer of Sotheby's International Realty Canada.
"When you look at the market year over year, comparing January 2017 to January 2018, it appears that the market is down," he says. "But January 2017 was a historic month. So, in fact, the market now is back to a more normal pace, given that you are comparing it to what was an abnormal period of time."
So far in 2018, according to Mr. Henderson, for the overall market for properties north of $1-million, the trends are generally the same – the gradual slowing down of condominium sector's previous robust pace, and a more pronounced downturn in the detached-home sector.
Mr. Henderson points to a logjam – a shortage of product in the market currently. People are not as concerned so much that they can sell their homes, but they are concerned that they won't be able to buy something else, or the difference will not be worth it to them in the end.
Government regulations such as the foreign-buyer tax in British Columbia, Ontario's Fair Housing Plan (which includes a tax on foreign buyers), twinned with rises in interest rates, "chilled the psychology of the market," Mr. Henderson adds.
Still, looking at the past several years, the fundamentals all remain roughly the same – strong consumer confidence, buoyed by business confidence, means people will opt more to engage in real estate trades. A strong stock market with low interest rates and strong GDP growth have all contributed to that.
A wildcard has been gyrations in the stock market the past 30 to 40 days. And don't underestimate alarming comments by U.S. President Donald Trump in favour of trade tariffs.
"If this becomes more persistent and dramatic, that will chip away at business and consumer confidence," Mr. Henderson says.
The cost of money is starting to rise, although that isn't likely to affect many people in the top tier markets – properties north of $3-million to $4-million – "because people that can afford those homes tend to use financing as a strategy, not a necessity," Mr. Henderson says.
Michael Kalles, president of Harvey Kalles Real Estate Ltd., agrees: "A lot of people are on the sidelines with the new mortgage regulations coming down, but when you look at the ultra high-end market, these transactions are insulated from mortgage changes."
The big fundamental to focus on, according to Mr. Kalles, at least in the longer term, will be the massive, generational transfer of wealth over the next 10 years ($750-billion, according to a Canadian Imperial Bank of Commerce study, the largest in history for the time considered), and the impact that will have on the luxury real estate market.
Christopher Wein, president of Great Gulf Homes, when looking at market fundamentals for 2018, points to the fact that Toronto is still in its early stages when talking about wealthy, global cities – robust luxury markets such as Hong Kong, New York, London, Los Angeles.
"As cities become more globally recognized, you start to get more global investment into that city," he says. "Foreign ownership in true global centres like New York and London is far higher than anything we are experiencing here. If Toronto is truly going to become a global centre when it comes to the economy, diversity, culture, technology, then we need to encourage foreign investment and ownership, not discourage it."
Mr. Wein adds Toronto will see more and more luxury, boutique projects, especially on the condo side. Luxury condos continue as a desired asset class, particularly among foreign investors and among baby boomers who are downsizing, twinned with the push toward urbanization and the elimination of any negative stigma regarding condo living.
"I think we already have a very healthy luxury home market," he says.
Livability, safety, the growth of Toronto as a tech city, and immigration policies with respect to openness and diversity are other fundamentals driving positive growth. From Mr. Wein's seat, headwinds include what is happening with interest rates, the availability of mortgage financing for both local and international buyers and the effects of government legislative policies.
Luxury builder Shane Baghai points to rises in development charges, continuous increases in bureaucratic red tape and shortage of staff at the city level, resulting in delays and higher costs of construction, on top of the type of challenges Mr. Wein talks about, as negatives to keep an eye on. Mr. Baghai predicts reduced sales volume within the GTA for new construction as prices rise.
"The remedy for the situation is availability of rental units, and unfortunately builders do not have the incentive to add to the rental stock that the city and province need for an ever-growing demand," he says.
Mimi Ng, senior vice-president, residential sales and marketing, for Menkes Developments says: "The key factor driving the luxury market for new or pre-construction product will be supply. Buyers in this market segment are highly discriminating and very patient. Developers will need to bring in high-quality projects into the right neighbourhoods to attract this buyer group.
"If we see some great luxury projects launched in the market this year, then buyers will respond. Otherwise, they are content to wait on the sidelines until the right opportunity comes up," Ms. Ng says.
Toronto and Vancouver will continue their overall strong performance in 2018, Mr. Henderson says, while Montreal continues to expand as a market that people in the industry are keeping an eye on.
"We have seen very solid gains in terms of the number of trades there, upward pressure on prices, as that market continues on its journey to becoming a world-class market," he says.
The fundamentals that have been driving growth in Toronto are also fuelling Montreal's rise to more prominence. Great Gulf doesn't currently have any projects in Montreal, but Mr. Wein says the company is keeping an eye on opportunities there in the luxury space.
"When you add up all those global fundamentals, Montreal has those in spades," he says.
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