Toronto Real Estate Market Regulation Has Buyers Spooked
Author: Tracy Ruddell
More than a week on from Wynne & Co.’s 16-point Fair Housing Plan, everyone’s had time to digest the proposed changes and think through the likely ramifications. We’ve also seen early signs of what could be a softening of the Toronto Real Estate market.
Here’s what we’re seeing as Real Estate professionals.
Unlike most GTA Realty brokerages, we were all-for Government intervention. Moderate regulation. Say, a foreign buyer’s tax OR a vacancy tax, test it out for 6 months and use that time to gather all the missing data before making further policy changes or adding another tax.
What we got wasn’t moderate. We got an over-stuffed plan to continue planning. It was primarily aimed at charming Millennials, the market who are drowning in rent and can’t find a home to buy, even with a sizeable down payment. Kathleen Wynne and her cabinet know they don’t stand a chance at re-election without securing the younger demographic and enticing them to get to the polls next June.
We were just as shell-shocked as many of you to hear the Province announce not one, not two, not even three regulatory changes but a 16-point Fair Housing Plan to cool the market. Here’s the thing: many of these changes aren’t actually doing much; they’re commitments to strike a committee who will continue talking about issues and maybe make changes down the road. Where the real change comes into play is with foreign buyer taxation and rent control.
Rent control arguably has more negatives attached to it then positives; we’ll talk about rent control on this blog soon. The foreign buyer’s tax, on the otherhand, is quite reasonable and the extra conditions Ontario has placed around it ensure that we’re targeting the right demographics, unlike Vancouver–i.e. foreigners who are permanent residents living and working in the Golden Horseshoe, contributing to building our economy, won’t be effected.
The problem with Kathleen Wynne’s approach is that, when you throw a massive, 16-point plan at the public, people get confused, they get spooked and they sit back to wait and see how it all plays out. It was all too much, too soon and it’s going to become a self-fulfilling prophecy. Slowly introducing regulatory changes over the coming few years, once the data is there to inform those new regulations, would’ve been the prudent response but we’re nearing the next election year. So, perhaps we shouldn't have been surprised that we were instead hit with a juggernaut of taxation and noncommittal promises.
This juggernaut has, frankly, scared the crap out of many buyers and sellers. Those of you who read our blog consistently or who have worked with us already know that we are going to tell it like it is, even if it’s topics that REALTORS® traditionally stay mum on. So, here’s the truth: showings have dried up to an absolute stand-still on nearly every property we’ve seen listed over the last week, including many kick-ass properties that would’ve had a dozen showings a day for the first three or four days of list just a few months ago.
Our REALTORS® are having to talk our buyer clients off a cliff and explain that the regulations put in place are very unlikely to crash the market and that what we’re seeing is a reactionary blip created by fear-mongering; that the same thing happened in Vancouver, it lasted 6 months, and home prices are now back up +12.3% year-over-year for the first quarter of this year. And we’re having to calm our seller clients who are, understandably, quite concerned after having just a handful of showings on beautiful, well-appointed properties that should’ve sold by now for top-dollar.
We have talked with multiple, other brokerages and almost everyone is reporting the same trend over the last ten days: Buyers are spooked.
The question on everyone’s lips is, how long will this market blip last? Are we in for a few bumpy weeks or will it take months, a la Vancouver, to see Toronto home prices head back on the rise (ironically, to where we probably would’ve been anyway, even without Government intervention)?
The other major problem with Wynne’s plan is timing.
Our Broker of Record, Mark McClean, Past President and currently on the Board of Directors at the Toronto Real Estate Board (TREB) and Director-at-Large at the Ontario Real Estate Association, had this to say about the timing of the Fair Housing Plan:
“The timing of this 16-point plan was bad. Well before the plan was announced, I detected some slowdown in the market already. While interest rates are very low, the banks were tightening the screws, in a lot of ways, by not approving people or sending them to B lenders who were charging a lot more interest. I saw a slight uptick in deals falling apart because buyers, who thought they qualified nicely, were suddenly having their financing denied.
In addition, the spring market almost always brings on more competition. Everyone waits to list their houses until the spring and so all of a sudden there's more product, more choice and buyers feel like they can wait for more options.”
The prudent thing for the Provincial Government to do would’ve been to wait at least until this summer to see how the spring market played out. Politicians were feeling the pressure to act quickly, however, and the Liberal's ratings in the polls were tanking one year out from election 2018.
Yes. We did say that. A foreign buyer’s tax or a vacancy tax made total sense.
There are many REALTORS® who have argued with us that a foreign buyer’s tax will do nothing to moderate prices for the average local home buyer. We actually agree with you. There is no proof that foreign buyers make up a significant portion of the market. The reason we believe this tax is necessary is for a very specific market where we know that foreign investors make up a disproportionate percentage of transactions: the pre-construction condo market.
We’ve seen wealthy foreign investors buy up whole floors of new condo buildings, blocking local, end-user buyers, and that needs to be stopped. For more info, you can have a read of our previous post on Cooling Speculation in the Toronto Market.
Beyond that, introducing cooling measures without any solid data to inform those decisions is ludicrous and that’s a big reason why a lot of the points on the plan are noncommittal; they’re all about striking up committees or setting aside incentive funds with no solid implementation plans behind them yet.
To look at Wynne’s plan objectively, we really need to step back and revisit why there was a need for Government intervention in the first place (and certainly, there were and are many critics to any form of regulation of a free market). Why are people so worried about a hot Toronto Real Estate market, anyway? This may be over-simplifying matters but when you get right down to it, there are two big concerns and the feared outcome of both is the same: that GTA homeowners end up owing more than what they own on their homes.
The first big concern is that our current rate of speculation (and in particular, foreign speculation) is too high. If too many wealthy foreigners park their money in Toronto Real Estate and our economy softens, they may all sell at once to get their money out. We could have a sharp increase in supply that the market is unable to absorb, thereby sending home prices plummeting. This concern is only valid if we have high numbers of speculative buyers and the truth is, we just don’t know what those figures are because we don’t track the data. That will likely change with Government intervention, however, and that’s a positive change.
The second big concern is that low interest rates are pushing up against a dwindling supply of new homes and that’s led to a major supply versus demand inequity, in turn leading to fierce bidding wars. Most of the houses for sale in Toronto that we’re selling for clients or bidding on with our buyer clients are not selling to foreigners; they’re selling to local, end-user buyers. When you have 20 people bidding on a home, that’s 19 people who are losing (including 19 REALTORS® and their brokerages).
This very well may be inflating prices to artificial levels that are not sustainable. The fear here is that some buyers, particularly with first-time buyers or buyers on non-traditional mortgages (for example, those buying with only 5% or 10% down), wouldn't be able to survive a major market correction and they’ll end up having to sell at a loss and find themselves in debt.
These are both valid concerns and something needed to be done to decrease the likelihood of these things happening. The problem is, when too much is done, too soon, it can bring about the very thing you’re trying to prevent: too many listings and not enough active buyers. That’s exactly what’s happened this past week. Buyers are spooked and, those who aren’t in a chain and forced to buy soon, are stepping back. They’re waiting to see how these changes play out and what impact they have on home prices before making any offers.
The other big market change that regulatory action was hoping to bring about was a softening in prices so that first-time buyers (representing over 50% of the GTA market, currently), can stand a chance at owning a home one day. This is a huge concern for everyone in the industry: how does the average young urbanite who’s being paid less in a city that costs more than ever to live, ever afford to buy when home prices are going up +25%, +30% a year? There’s simply no way for the average renter to ever out-earn / out-save the market. Certainly, the increase to the first-time buyer home rebate introduced by the Liberals on January 1, 2017 was one small step in addressing this affordability issue for first-time buyers.
The problem with focusing almost entirely on first-time buyers is that it would take a significant cooling for Toronto home prices to drop to the level they need to to become affordable for significantly more first-timers. This would cause a major blow to existing homeowners who could find themselves in serious, financial hot water. Most Toronto homeowners have the bulk of their equity in their homes and so cooling the market too much would almost certainly cause more economic hardship than we’re experiencing under current, hot conditions. This notion of pushing "affordability" is really a double-edged sword.
The big question on every seller’s mind right now (along with their REALTORS®) is just how long this market softening is going to last. Just how spooked are buyers? We’re split on this at our offices. Many of us believe this is a three- or four-week blip caused by an over-reaction to the Plan and it will all be back to business as usual soon. Others feel we have a rough six months or more ahead of us.
What we whole-heartedly all agree on, however, is that what's been happening these past 10 days is a temporary, artificial softening due to shock over the Government announcement and that real moderation in the rate of home price increases was already starting to happen naturally. We predicted in our 2017 market predictions that we'd see price growth moderate to about +10-12% year-over-year, in about a year's time. We were probably being conservative; we may still see home prices increasing +15% or more on average in Toronto by 2018 but the days of +30% annual price increases can't last forever, we all know that. It's unlikely to suddenly get signficantly cheaper for buyers to purchase a home, however. In short, you're unlikely to save money by waiting. In fact, for buyers struggling to find a home, your best chance may be taking advantage of this small window of slowdown in showings; you may just find yourself the only bidder on offer night if you act quickly. Now that could actually save you money.
Bottom line, the best thing we can all do is to continue buying and selling when it’s right for us to do so. Don't be driven to act differently because of scare tactics. Wynne’s plan is not as fulsome as it appears on the surface; foreign buyer’s tax (aimed at what’s likely a small portion of the market) and rent controls are the two biggest changes here. Let’s not allow political rhetoric and fear-mongering in media articles spur a situation where we bring about our own Real Estate demise.
Join us again later this week for our Market Update report when we’ll give advice to sellers thinking of listing soon. How should you price your home for sale and navigate a (potentially) softening market?
Lead image by azem from Shutterstock.