Violent crimes down.
Mental health and drug-related issues up.
I would normally write a couple hundred words to go along with charts and graphs, but I think the two charts below convey all necessary information. So I’ll save you the time and simply share the charts below:
I recently came across a chart on Reddit that showed the average daily mean temperature in Toronto has risen about 3.5% since 1841. This chart is nice and simple to understand.
However, I wanted to dig beneath the surface to get a more detailed picture of what’s actually going on. Specifically, I wondered whether Toronto is experiencing hotter summers or milder winters. So I broke out the data and created my own chart.
To answer my question I needed to add more variables to my chart, unfortunately making it more complicated to understand. However, if you take the time to digest the information the conclusions are pretty clear.
Each data point in the red shaded area in my chart below represents the maximum mean temperature in the previous 12 month period. The blue shaded area represents the minimum mean temperature in the same 12 month period. Maximum mean temperatures occurred during the summers and minimum mean temperatures occurred during the winters. So what this basically shows is the hottest periods of historical summers and the coldest periods of historical winters.
I then layered on a linear trendline to illustrate the broader trend.
As you can see, the trend is up – for both summers and winters. Summers are getting hotter and winters getting milder. What I found interesting, however, was that while mean maximum temperatures during summers has increased by about 2 degrees Celsius since 1840, mean minimum temperatures during winters has risen about 3.5 degrees Celsius.
Simply put, winters in Toronto are getting milder faster than summers are getting hotter, significantly contributing to the city’s overall rise in average temperature.
Note: The data for this particular weather station is only available until June 2003. I suppose the weather station was closed then?
I recently hired two people to join my team, which is domiciled in Toronto. Both of my new employees live miles and miles away from the GTA. One jetted to Montreal when the pandemic started, and honestly I don’t know if he’s coming back.
Who can blame them? These are well-paid individuals, but who can afford to live in Hog Town? Certainly not people in the early stages of their career.
And those that do live in the GTA require a premium to make it all work. Wage growth overall has fallen behind housing price increases, but those in demand can hold out for higher wages. Want a highly-skilled Toronto employee? Then better be prepared to pay Toronto wages! Of course, it doesn’t work that way for all. Low-skilled workers are sharing apartments and living with their parents, as Toronto is now a city that is only accessible to the wealthy.
It’s a sad state of affairs. But one to which employers must adapt.
Highly skilled people are moving further and further away from the Big Smoke, simply because – even with decent wages – they can’t afford to live in Toronto.
If Toronto is to remain a business hub, three things must happen: 1) housing stock must increase to dampen housing price appreciation, 2) demand from speculators and money launderers must be squashed, 3) regional transit must improve to allow suburban dwellers to quickly commute to the city, 4) companies must embrace remote working beyond the pandemic, 5) companies must decentralize head office work by setting up offices across a wider region and 6) companies must raise wages to attract talent that is leaving for cheaper cities.
Hiring skilled employees is a highly competitive marketplace. If a prospect has multiple options, they will go with the company that is more flexible and willing to let them work from a location that doesn’t put them in debt for several lifetimes or pays them a premium for coming into a Toronto office.
Many companies are dealing with this problem by shoving their heads in the sand. Executives don’t realize how big this issues is because they tend to hire more senior employees earning $150,000+ salaries who have been on the property ladder for 10+ years.
For middle-managers and supervisors in the trenches, the prospect of hiring a junior-level employee for $55,000 is laughable. Anyone willing and able to accept that salary either lives with their parents or lives 100 miles away. And when a business is able to hire someone at this level – knowing the housing situation at hand – that person will quickly seek to move up the ranks. That means far less loyalty from junior employees than what companies might have seen in the past.
Due to the housing bubble, the war on talent in Toronto has evolved dramatically over the past year or two. Businesses that ignore the problem will lose talent. Businesses that embrace the challenge will become attractive places to work.
The middle class in Toronto is dying. Some would argue it is already dead.
With the average home price in Toronto flirting with $1 million, most Torontonians have zero hope of ever affording a home. Nope. Real estate is now the sandbox for the rich and their heirs.
A Millennial or Gen Z with a top 10% income and aggressive savings plan will never afford a home.
Over the past decade, the average annual price increase has been over $51,000. This will only worsen as prices rise at an exponential rate. Indeed, over the past 12 months, the price of an average home in Toronto rose by over $81,000. This means if you didn’t save more than $81,000 over the past 12 months your ability to buy a house hasn’t improved.
Even with an astronomical 50% savings rate, a couple would need to have a gross income of $220,000 ($110,000 each) just to keep up with rising house prices. And they’d have to save/earn considerably more to put a dent into their proportional down payment.
This is next to impossible for families in Toronto – the median family income in Toronto is $86,600, according to Statistics Canada.
Nobody but the ultra rich are able chase home prices, and this real estate reality is spreading throughout Canada. Frankly, this is disgusting and will have a huge impact to the quality of life and stability of Canadian society.
Toronto homeowners are now made up of three classes of people. 1) True middle-class and working class people who bought their house decades ago. 2) The moneyed class. 3) Foreign speculators and money launderers.
Eventually, legacy homeowners will die off or sell their homes to fund retirement and we’ll be left with a housing stock fully owned by the rich. Where will the average person live then? Who the fuck knows.
Working class and middle class people lucky enough to have bought a house decades ago likely have a lot of equity. You’re probably thinking they should just take out a second mortgage and give their kids a couple hundred grand towards a down payment. This is what many people do, but it’s not without massive downside. Effectively, it simply spreads the cost of home ownership across generations. Moreover, it puts people who are approaching retirement severely in debt. The initial intent is that the kids repay their parents, but that’s highly infeasible while they still owe the bank $800,000. Giving the money back to parents might take decades, by which point their parents are working themselves to death to repay their second mortgage and afford retirement. So not only is the middle class collapse hitting Millennials and Generation Z, it’s impacting Generation X and even younger Boomers, who can no longer retire (a component of the middle class dream).
None of this takes into consideration that this massive pile of mortgage debt is balancing on a knife’s edge of low interest rates and presumed real estate price appreciation. Canadians are so indebted that the slightest reversal of these two assumptions can collapse the Canadian economy.
This is everyone’s problem. The middle class – citizenry with a decent paycheque and a decent quality of life – is the glue that holds society together. If the most basic necessity (shelter) is unobtainable – or only obtainable by taking massive risk and to the detriment of every other part of dream – there will be no middle class.
Fairness, justice, economic prosperity, social stability all require a solid middle class (and vice versa). The further stratification of society into a rich minority and poor majority will only lead to a mass population with nothing to gain…and nothing to lose.
Many of these locations previously had lineups 9-5, Monday to Friday (or at least during the peak times [morning and mid-afternoon]). What does it say about the long-term viability of downtown commercial real estate when dozens of Starbucks locations are willing to abandon prime locations?
Is Starbucks closing all these Toronto locations because it realizes office occupancy won’t recover for at least several months?
Or because it believes office occupancy will never fully recover?
Hard to say.
Still, one could argue that Starbucks had too many locations to begin with. However, the company is not known for being reckless with its real estate footprint. I would think this retreat is not caused by simple redundancy. Rather, I assume Starbucks believes the strategic long-term viability of its downtown presence has changed.
When we’re past Covid-19, life might look very different. And not just because your local coffee joint is gone.
List source: Blogto
Despite the worst recession since the Great Depression, Toronto real estate is booming.
The boom isn’t occurring because of affordability. The proportion of income used to pay mortgage principal and interest, property taxes and utilities is approaching the 1989 high.
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The Toronto housing market is bifurcated. Condo listings have risen dramatically, as Airbnb hosts abandon ship. Meanwhile, listings of detached homes have plummeted. Prices have reacted accordingly, with condo price appreciation lagging behind. The median detached home in Toronto has appreciated by 28.2% over the past year.
Despite the difference between listings, months of inventory for both condos and detached homes in Toronto remain very low. Toronto remains a tight housing market.
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The state of the Toronto housing is also showing up in average days on market data. At all price points, home sales in Toronto are actually happening faster than in 2019.
As a result, prices have risen across all home sizes for detached homes in Toronto year-over-year.
Similarly, Toronto condo prices have risen across all sizes, but (as previously indicated) to a lesser extent.
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What happened to the real estate crash everyone was predicting?
While the lockdowns did create a dip in prices across Toronto. Prices have recovered from the dip. Note, however, Toronto got a boost from a hot market going into 2020 before the lockdowns occurred (see the February price increase).
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Government benefits are helping to keep the system whole.
48% of the Canadian workforce is currently receiving CERB (Canadian Emergency Relief Benefit). That equates to over 20% of the population for most provinces, with a huge proportion of beneficiaries residing in Ontario alone.
The question remains: are these benefits propping up the Canadian housing market and can they be gradually removed without creating significant housing market disruption?
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Businesses are closed or operating at reduced capacity. Millions of people are unemployed. Mortgages are deferred. The need for office space is being questioned.
To put it lightly, both retail and commercial real estate is experiencing one of the most transformative moments in history. While malls and brick-and-mortar retail has been under pressure for years, Covid-19 compressed a decade’s worth of change into a couple months.
The charts below highlight the current state the real estate market.
With the huge surge in unemployment and minuscule savings, Americans are suddenly unable to pay their bills. 32% of Americans missed (either fully or partially) their July mortgage payment.
Delinquency rates vary by property type (overall delinquencies approaching decade highs) but are rising rapidly.
New York is the most stressed area at the moment, likely due to its concentration of people/businesses, real estate valuations and the severity of regional lock-downs.
Toronto-area housing has remained strong through the downturn, with prices actually increasing.
Although Toronto has experienced a resilient housing market, it could face increasing pressure over the next several months as rental supply rises (driving down the price of rent). The decline in condos leased combined with the surge in listings has pushed the condo rental inventory from 1.5 Months of Inventory (MOI) at the end of March to nearly 4 months at the end of April.
How is Canadian real estate holding together? Government handouts. Approximately 20% of the Canadian population is receiving CERB – a $2000/mth support payment from the Federal Government.
If and when CERB benefits are taken away, Canadian real estate will likely face growing pressure. Not only is the supply of rentals growing rapidly, immigration is plummeting. This combination could tip Canadian real estate into negative territory. Of course, there’s always the possibility that immigration once again picks up in the future, but it’s debatable whether this will be enough to absorb the rise in housing supply.
Canadians aren’t working.
Employment has collapsed, as much of Canada slowly emerges from Covid-19 quarantines. In fact, the number of employed persons in Canada is near a 15 year low (see chart below).
This probably underestimates the problem because it doesn’t include people who are still technically employed but not receiving a paycheque. Many of these people will undoubtedly be added to the unemployment rosters soon.
It’s no secret that Canadian households are up to their eyeballs in debt. Debt requires money to service, making Canadians highly vulnerable to a negative change to their incomes. The current change is probably the worst we’ve ever seen, putting all forms of household debt at risk of default.
Hundreds of thousands of Canadians suddenly can’t pay their debts and have deferred their mortgages as a result – especially in Quebec, Alberta and Ontario (see chart below). But as I explained in a previous article a mortgage deferral is not a free lunch. The deferred payments are simply adding to what the borrower already owes. (In case you weren’t paying attention, that includes interest on deferred interest.)
All mortgage deferrals do is delay the inevitable. The ability for Canadians to start paying their mortgages again in the future is dependent on employment picking up very quickly. Unfortunately, this doesn’t seem likely. It could take several years for joblessness to shrink back to pre-Covid-19 levels.
The massive volume of mortgage deferrals is a stark warning sign: The Canadian housing market is on the verge of collapse, and with it the Canadian economy.
Simply put, when people can’t pay their mortgages, either they sell and become renters or the bank forecloses and sells the property for them. Either way, a lot more distressed sales enter the market, putting downward pressure on prices. Couple this with a dearth of buyers – due to general economic weakness – and housing inventories rise, again pushing prices down.
It’s only been 3 months and housing prices in Canada area already down 10% across the board. Some parts of Toronto are already down 18%.
While these numbers might not sound huge, they are. A 10-18% change within 3 months is massive! Unless the unemployment situation resolves quickly, by the end of 2020 prices could be down 20-30% across the board.
This isn’t just a housing market issue. The entire Canadian economy is overly dependent on housing and housing-related activity to drive GDP growth. A housing slump will be felt across the entire Canadian economy, with the drag lasting for years.
Ironically, if the housing market declines significantly it will open the door to home ownership to Millennials and Gen Z, which until now were locked out of the market.
Anyone who knows me and reads this is going to think I’ve lost the plot. Stay with me. I have good reason for writing this article.
Let’s ignore the craziness for a minute and explore the long-term fundamental support for Toronto real estate.
Before I start, let me first get this out of the way: I (still) think Toronto real estate is outrageously priced. According to Zolo, the average warm pile of bricks in TO sold for $982,189. This is 18.6% higher than last year! The market is tight and homes are on the market for an average of 16 days.
Over the decade ending 2018, the performance of the Canadian housing market was a rarity across the world (chart below). It’s only fair to question whether buying now is a stupid idea.
The market is hot and the current pace of price increases seems unsustainable. Everyone knows how ridiculous TO housing prices are, yet they continue to buy. The market stinks like speculative frenzy. It has for years – but this is the bubble that refuses to pop.
It is quite possible that Toronto real estate experiences a serious correction. It has happened before. There was a moderate correction starting April 2017, with prices recovering since. There was also a deep housing recession in Toronto throughout the 1990s. As you can see in the chart below, Toronto real estate prices took about a decade to break even after 1989. Many people have been waiting years for a ’90s-like correction, missing out on thousands of dollars of upside. Some day, right? Right???
Is a 1990s-style correction imminent?
According to the chart below, mortgage lending standards in Canada are strong. High quality lending standards means fewer defaults, fewer forced sales and less supply. Of course, there is some pro-cyclicality to it all, as economic strength supports incomes – the foundation underpinning lending standards. What happens to lending standards when the economy weakens?
Will there be a correction in the near future, perhaps triggered by a recession? There are smart people on either side of the argument. Let’s put the debate about a near term correction to the side for now. That’s not the point of this article.
If you’re a 30 year old buyer, maybe you shouldn’t be overly concerned with what happens in 2, 5…even 10 years. After all, a 30 year old buyer is looking to own for the next 30-50+ years. That’s plenty of time to ride out a correction. Even a correction that takes a decade to recover – like during the 1990s – is manageable with a 50 year time horizon, assuming you can keep up with the payments and aren’t forced to sell in a liquidation scenario.
For this article, let’s ignore the craziness for a minute and explore the long-term fundamental support for Toronto real estate.
1) Young(ish) people buy homes as they establish careers and start families. Canada’s demographic trends suggest the home-buying group should grow at a solid rate during the ’20s. This provides a tailwind for Canadian housing demand.
2) Canada remains one of the most attractive destinations for immigrants. Migration coupled with organic population growth makes Canada the fastest growing country in the OECD. New immigrants account for the vast majority of this growth.
This is very supportive to the housing market. Many immigrant populations see home ownership as essential to personal freedom and security. They work hard and do whatever it takes to buy and keep a home. Therefore, Canada’s population growth trend is bullish for real estate.
3) The immigrants coming to Canada are highly educated and ready to work. Most require little government assistance and arrive ready to spend and invest. What’s one of the first things they invest in? A place to raise their families.
4) Everyone that comes to Canada wants to live in Toronto, Montreal or Vancouver. Not all end up in these places – as they discover many opportunities outside of these cities – but the concentration is significant. Toronto in particular contributes almost 20% to Canada’s GDP, so you can see why it is a magnet for immigration. Moreover, Toronto is very ethnically diverse and has built in multi-cultural support..
5) With all this fresh, hungry talent Toronto will soon be second only to San Francisco as a North American technology hub. This trend is self reinforcing, as talent attracts employers and vice versa. Toronto is also Canada’s finance hub. The finance and technology industries will drive Toronto’s economic prospects for decades, supporting Toronto house prices.
6) Finally, although Toronto residents might not see this, the cost to live downtown is still cheaper than many other places around the world. Is Toronto equivalent to London or Hong Kong? Of course not. Not yet. But with ample economic opportunities and solid prospects, comparatively lower cost of living should continue to attract highly educated, workforce ready immigrants from around the world. This again supports Toronto’s real estate market.
Say you’re 45 and you have $1 million of equity in a house in Toronto. Could you sell your house, invest the money and pay rent on a house solely using your portfolio?
I ran the numbers.
It costs about 3 grand to rent a house in Toronto. Assume a 6% return on a portfolio.
Sell the house and invest the proceeds. Withdraw from the portfolio to pay your rent.
If you assume your rent increases close to the legally controlled rate (about 2%) the idea seems to work well. Between ages 45 and 90 you spend about $1.8 million on rent. But at the same time, your portfolio grows to $2.9 million. No depletion here…
Looks good, right? Keep reading…
The problem is this makes a big assumption: your rent increases actually stick to about 2% per year.
In reality, market rents in Toronto are actually rising about 10% per year. Many landlords – seeing market rents rising faster than the controlled rate – will find ways to kick out renters to jack up rents. As a renter, this means you’d likely 1) be forced to find a new house to rent every few years, and 2) experience sudden spikes in rent as you’re forced to align with market prices. Indeed, over the long term, the 2% assumption simply isn’t realistic.
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Simply increasing the rent increase assumption to 4% per year fully drains your portfolio by age 84. This is a bit more doable, although you’re f@cked if you live past 84. Also, a 4% rent increase assumption might still be low, given it’s less than half that of market rent increases.
Obviously, the story gets worse the faster rent increases. At a 10% annual increase, you’re eating cat food in your senior years. In this scenario your portfolio runs dry by age 65 – just in time for retirement!
With a long-enough time horizon a $1 million portfolio isn’t enough to cover rent for the rest of your life.
