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Toronto real estate market; Cheap comparatively worldwide?

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  • Mar 4th, 2014 2:24 am
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[OP]
Deal Fanatic
May 1, 2012
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Markham

Toronto real estate market; Cheap comparatively worldwide?

We should look at the real estate market in the GTA from another perspective.

Has it occurred to you that perhaps real estate in Toronto was simply too cheap for far too long? In fact, a case can be made that it is still too cheap. Perhaps this hot real estate market is simply the result of catching up, in order to reach normalized values.

I am not equating the GTA to Alpha++ cities such as New York, Hong Kong, Singapore, and Beijing. But stop and think for a second, where in those cities can you get a 1 bedroom 1 den condo for less than 350k? In fact, where on Manhattan can you get a semi detached for around 1mil? Those would be considered a bargain in those cities, yet it is considered overpriced in Toronto.

We all know that Toronto is a destination city. It's not Chicago, Detroit, or St. Louis. The GTA is project to grow 40% in population by 2036, yet where are these people going to live?

We all know that roughly 50k immigrants settle in Toronto annually. From their perspective, properties in Toronto are simply too cheap not to buy (even now).

If it weren't for rent control and the stagnation of wages, real estate properties would be considered quite the bargain. Do you know what $1500 gets you in Manhattan? A shoebox... a shoebox you sublet from someone else who rented the apartment.

At some point, rent control will loosen, wages will increase, and more immigrants will settle in the GTA. These prices are only going up. Not forever, but at least until the prices have reached an equilibrium with demand.

In 20 years, the GTA is project (on the low end) to contain just over 9 million people. That is 3.2 million extra people, where are they going to live?
12 replies
Penalty Box
Aug 11, 2005
4175 posts
1410 upvotes
Is the GTA also producing 3.2 million more jobs? If so then it doesn't matter.
Sr. Member
May 26, 2010
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138 upvotes
Anikiri wrote:
Mar 3rd, 2014 3:35 pm
At some point, rent control will loosen, wages will increase, and more immigrants will settle in the GTA. These prices are only going up. Not forever, but at least until the prices have reached an equilibrium with demand.
You can happily make an assumption that rent control will loosen and that a flow of immigrants will continue (despite the government's current crackdown on immigration)? You could easily assume that wage growth will continue to stutter along, like it has for the past few years, and that the economy won't be able to create enough jobs to sustain the immigrants - and that the immigrants continue to choose Toronto as their destination of choice.

Plus you have to factor in, that if people are swarming to Toronto, as it, as you said is a relative bargain - what is the attitude towards Toronto, when it's fundamentals match the normalized values other major cities in the world? Will Toronto still pull in the people - if people are not making a financial play on moving to the city?
[OP]
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May 1, 2012
8941 posts
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Markham
mattieuk wrote:
Mar 3rd, 2014 3:49 pm
You can happily make an assumption that rent control will loosen and that a flow of immigrants will continue (despite the government's current crackdown on immigration)? You could easily assume that wage growth will continue to stutter along, like it has for the past few years, and that the economy won't be able to create enough jobs to sustain the immigrants - and that the immigrants continue to choose Toronto as their destination of choice.

Plus you have to factor in, that if people are swarming to Toronto, as it, as you said is a relative bargain - what is the attitude towards Toronto, when it's fundamentals match the normalized values other major cities in the world? Will Toronto still pull in the people - if people are not making a financial play on moving to the city?
The third and former second world countries are pumping out rich and educated people at a phenomenal rate. Where exactly can you immigrate, now a days?

Australia
Canada
New Zealand
what else?

Now which cities appeal more to you, if you had a choice?

Toronto
Vancouver
Montreal
Wellington
Auckland
Melbourne
Sydney
Brisbane
Deal Addict
Jan 11, 2004
1277 posts
161 upvotes
Compare Toronto to many of the large metros in the US and you will see that Toronto isn't that expensive. This alone doesn't justify or undermine the current prices. It just helps puts things in perspective. Unlike the US Toronto/Vancouver is such a large part of the "Canadian Market" it skews things alot more then down south.
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Jun 28, 2007
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Anikiri wrote:
Mar 3rd, 2014 3:35 pm
We should look at the real estate market in the GTA from another perspective.

Has it occurred to you that perhaps real estate in Toronto was simply too cheap for far too long? In fact, a case can be made that it is still too cheap. Perhaps this hot real estate market is simply the result of catching up, in order to reach normalized values.

I am not equating the GTA to Alpha++ cities such as New York, Hong Kong, Singapore, and Beijing. But stop and think for a second, where in those cities can you get a 1 bedroom 1 den condo for less than 350k? In fact, where on Manhattan can you get a semi detached for around 1mil? Those would be considered a bargain in those cities, yet it is considered overpriced in Toronto.

We all know that Toronto is a destination city. It's not Chicago, Detroit, or St. Louis. The GTA is project to grow 40% in population by 2036, yet where are these people going to live?

We all know that roughly 50k immigrants settle in Toronto annually. From their perspective, properties in Toronto are simply too cheap not to buy (even now).

If it weren't for rent control and the stagnation of wages, real estate properties would be considered quite the bargain. Do you know what $1500 gets you in Manhattan? A shoebox... a shoebox you sublet from someone else who rented the apartment.

At some point, rent control will loosen, wages will increase, and more immigrants will settle in the GTA. These prices are only going up. Not forever, but at least until the prices have reached an equilibrium with demand.

In 20 years, the GTA is project (on the low end) to contain just over 9 million people. That is 3.2 million extra people, where are they going to live?
I agree to some extent that Toronto real estate is undervalued relative to other major cities in the world. As far as global cities go, Toronto might not be an "Alpha++" like London or NYC, but it is considered an Alpha city like Los Angeles or Chicago (see rankings here: http://en.wikipedia.org/wiki/Global_city) Such a distinction usually does result in a "premium" for real estate in those cities, all else equal.

That said, I think the undervalued moniker for Toronto applies more to its commercial real estate (ie., office and retail) than its residential real estate. Prices for single family homes in Toronto are already quite lofty in comparison to other alpha cities. Although an argument could be made to suggest that multifamily property prices have room to run to catch up with other alpha city pricing - its not like we have major shortages of this product compared to other alpha cities. So while the demand might be there, there is certainly more than enough supply for today and into the near future.

Also we need to be careful how the "rent control" angle gets played in reference to Toronto. While rent control certainly applies to old tenement style apartment buildings, it doesn't apply to those residential buildings built after 1993. This means that the market is free to determine the rent for newer product. Although average rents in newer buildings definitely carry a premium over rents in older buildings, new building rents aren't seeing much growth today simply because there is an ample supply of this product in Toronto - its not because of rent controls.
Member
Jan 7, 2014
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Richmond Hill
gomyone wrote:
Mar 3rd, 2014 4:11 pm
I agree to some extent that Toronto real estate is undervalued relative to other major cities in the world. As far as global cities go, Toronto might not be an "Alpha++" like London or NYC, but it is considered an Alpha city like Los Angeles or Chicago (see rankings here: http://en.wikipedia.org/wiki/Global_city) Such a distinction usually does result in a "premium" for real estate in those cities, all else equal.

That said, I think the undervalued moniker for Toronto applies more to its commercial real estate (ie., office and retail) than its residential real estate. Prices for single family homes in Toronto are already quite lofty in comparison to other alpha cities. Although an argument could be made to suggest that multifamily property prices have room to run to catch up with other alpha city pricing - its not like we have major shortages of this product compared to other alpha cities. So while the demand might be there, there is certainly more than enough supply for today and into the near future.

Also we need to be careful how the "rent control" angle gets played in reference to Toronto. While rent control certainly applies to old tenement style apartment buildings, it doesn't apply to those residential buildings built after 1993. This means that the market is free to determine the rent for newer product. Although average rents in newer buildings definitely carry a premium over rents in older buildings, new building rents aren't seeing much growth today simply because there is an ample supply of this product in Toronto - its not because of rent controls.
commercial estate didn't really go up much in value in the past 6-7 years...
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Jul 16, 2003
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I have been saying this for a while. I often tell my family that I cannot afford to retire back in Brazil (where i was born) as prices there are far higher than here in a lot of cases.
Andre Oliveira - Mortgage Agent
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Each individual country and even city has a certain chunk of RE that never really goes down, and for which the valuation makes no sense. Where the elites of the era park themselves (today, the elites are mostly financial/government types, but in the past, they were more closely associated with industrialism). But for the other 95% of the city, over the long term, the fundamentals, that RE must be affordable to an individual average family, taking out a loan, and paying it back over their working lifetime, must and always will remain intact.

Is Hong Kong a haven for China's elites? Darn right it is. Just like downtown Sao Paulo. But that doesn't keep the RE in all of China, or all of Brazil, significantly higher than what the long-term fundamentals dictate. The evidence is, throughout most of Canada, that there is a major lending bubble mostly spurred by extremely loose lending standards. If you buy the premise that Toronto is the sort of "world class" city deserving of a premium multiple, then the discount that we see may very well be just a reflection of the sort of discount applied broadly to Canadian assets (including stocks, bonds, the CAD$, salaries/talent, etc.). But even then, that's a fairly difficult premise to buy, and Canada tends to be far more egalitarian than we see in many other countries. In other words, a multi-millionaire can live in a modest house in most of the GTA, not get extorted, and still have ready access to all of the infrastructure (physical, social, financial) that rich people use. While this isn't possible in many other big cities without living in the areas specifically designated for such. For instance, when I lived outside of Canada, I lived in a locked compound with armed guards -- these simply do not exist in Canada, but were considered pretty much mandatory for people of any means in that country!!!
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
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Downtown Sao Paulo? The city (including metropolitan area) has almost 20 million people. The state of Sao Paulo has more people than all of Canada.
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bigwhite418 wrote:
Mar 3rd, 2014 4:47 pm
commercial estate didn't really go up much in value in the past 6-7 years...
Cap rates for commercial real estate have been squeezed pretty tight in the last 6-7 years. Much of what is on the market has a lot of deferred maintenance. That's at least what I have personally seen.
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Nov 24, 2004
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The "cheap comparatively worldwide" argument the OP is making has been advanced by many others before (though usually in the context of Vancouver real estate, more so than Toronto, and often accompanied by the Hot Asian Money angle). I have never found either argument persuasive, because they assume that the whole real estate market is driven by a group of people who can afford to live wherever they want in the world, and choose particular cities based on relative affordability. There is no real evidence for this; on the contrary, in big Canadian cities, house prices are well-correlated with mortgage debt. People are borrowing money to buy houses in the city where they live, and are paying their mortgages with employment income.

Based on this, I don't think it's really valid to compare nominal house prices between cities and say that one is "cheap comparatively worldwide" without also looking at local after-tax incomes and home-ownership levels. OP's mention of house prices in Manhattan is a perfect example of this; it assumes that the demographics of the home-owning public are the same in Manhattan as they are in Toronto, whereas in reality Manhattan has a much lower home-ownership ratio and higher average salaries than in Toronto.

The only exceptions I can see to this are cases where people come in and buy homes for cash, with no mortgage to carry. But despite all the Hot Asian Money talk, this is a tiny tiny fraction of the house-buying public. Everyone else needs to pay their mortgage, and uses their local income to do so.

The rent-control argument is a red herring. Nothing built in the last 20 years in Ontario is subject to rent control.
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laptop-tech wrote:
Mar 3rd, 2014 7:44 pm
Downtown Sao Paulo? The city (including metropolitan area) has almost 20 million people. The state of Sao Paulo has more people than all of Canada.
No point in engaging you extensively in debate, since I've never been to Sao Paulo nor Brazil. But would you agree that the variation in quality/size/characteristics of housing from low end (ie: slum, shanty-towns) to top-end (ie: luxury city centre appartment) are generally more dramatic than we see in the GTA?

I respect you as being authoritative as to the response, and wouldn't want to draw any incorrect conclusions by the pictures I've seen on Google or elsewhere, as such pictures may not be representative.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...

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