Is Toronto the 3rd Riskest Real Estate Bubble? Let’s Connect the Dots

Published on 4th October 2018

Another week, and another doom and gloom headline. Toronto is like a celebrity who is caught in a scandal, being constantly followed around by TMZ (unfortunately, that was the best pop culture analogy that I could come up with, hope you don’t mind!).

 

Bubble, Bubble, Bubble – In this week’s Toronto real estate bubble watch, we have a Swiss bank, UBS, claiming that Toronto and Vancouver are ranked 3rd and 4th, respectively, on the most likely to burst list (a.k.a., what they call the “Real Estate Bubble Index”). According to UBS, Toronto is only behind Hong Kong and Munich on this list, who are 1st and 2nd respectively.

Source: UBS

It remains unknown as to how this index is calculated, but Toronto is over the 1.5 threshold (i.e., this would represent a higher probability for a bubble burst – according to Swiss Bank anyways). How true is this though? Frankly, I’m quite skeptical about a report from the other side of the Atlantic Ocean telling us when our real estate market here will burst.

Tech Sector RSVP – Last week, I wrote about the sheer amount of money from the tech sector coming into Toronto and how it will likely shape our real estate market in the Downtown core over the next 5 years. At this rate, Toronto has essentially sent an open invitation to all of the major tech companies in the World.

Big Time Tech Money – Shopify just announced the largest ever investment into Toronto by a tech company (Google’s Sidewalk Labs investment is currently TBD and may likely exceed Shopify’s investment). Shopify announced that they will be investing half a billion dollars ($500,000,000) into Toronto – yes, that’s BILLION with a B. Shopify’s 178,000 square feet office at King St West and Portland will be finishing soon and they have already planned to build another 254,000 square feet office at The Well (northwest corner of Front and Spadina in partnership with Tridel, RioCan and Allied). Plus, they will have the option to expand their office to 434,000 if they need to in the 33-storey commercial office tower.

That’s a lot of square footage mumbo-jumbo, so let me give you more real life context. Six years ago, Shopify had 1 employee in Toronto. Now, they are 700 employees strong and are planning on scaling exponentially as they turn Toronto into their global headquarters. Currently, they have 3,000 employees worldwide – where do you think these global employees will go once the Shopify Toronto offices are complete? You guessed it… Toronto!

In other slightly smaller scale news (relatively), the University of Toronto and MaRs just announced that they will be the anchor tenant at Menke’s Sugar Wharf Waterfront Innovation Centre. This is an expansion of their current College & University facilities for entrepreneurship.

What’s All the Commotion? All of this exciting news within the span of a week. The amount of money that is being pumped into the Toronto tech sector right now is just absolutely insane. So this is why the noise surrounding Toronto being the 3rd riskiest real estate bubble makes me skeptical at best.

As per usual, I did some research for you to show you what Toronto’s economic fundamentals look like right now. From this, I’ll let you assess for yourself how susceptible our beloved city is to a real estate bubble burst.

Open the Floodgates – Let’s start with net immigration. The Canada Mortgage and Housing Corporation (CMHC) reported a total net immigration of 75,197 people to the Greater Toronto Area (GTA) in 2016, and a total net immigration to the Golden Horseshoe of 105,146 (international migration).

To say the least, our population growth is absurd. Look at how the population growth compares to UBS’ riskiest real estate bubble cities, Hong Kong and Munich.

Source: https://www.indexmundi.com

Canada has 3.3 times more immigration than Hong Kong and Munich. Where do you think most of that immigration goes to? Yep, you got it – the GTA!

Now let’s take a look at our job growth.

Get Your Resumes Ready! Toronto has an employment increase of 168% in 2018 – that is a record high! Jobs are definitely being created here, especially IT jobs in the downtown core. What do you think is going to happen when Shopify, Uber, Google, Microsoft, Intel, UofT & MaRs, and OTPP have their downtown offices built and ready to go in the next 3-5 years? That’s right – MORE JOBS!

Counting Cranes – The future seems to be promising right? But let’s address the elephant in the room. Everybody sees the cranes in the sky and says we are overbuilding. Let’s look at the numbers.

In all of the GTA, we have 71,170 homes being constructed. You may think that is a lot, but keep in mind that over 80% of these homes are condo units which take 4-7 years to complete. That’s at least 4 years of backed up supply with 100,000+ people immigrating into the Golden Horseshoe each year!

Below is a chart showing the number of completed and unabsorbed homes (i.e., not sold) in August 2018. There was a total of only 468 units completed in August that remain unsold. This statistic is down across the board in all of the GTA, which means there are less and less for sale options available to home buyers.

Looking for Leases – Investors, here is one of my favourite stats that I always monitor: Vacancy rates.

Take a look at the GTA’s vacancy rates; the primary and secondary rental market rates all hover around 1% as per the chart above. This means that for every 100 homes available for rent, 99 of them are rented (and that’s despite our most recent 11% rent increase)!!

Connect the Dots – Our net immigration is approximately 75,000 in the GTA. We only have about 71,000 homes under construction, and that includes construction that started as early as 4 years ago. We have 5 of the largest tech companies investing billions of dollars into office infrastructure in our downtown core and creating six-figure salary incomes for employees. Plus, we are in the middle of a job boom. Then, to top it all off, our vacancy rates average only 1% despite being in the midst of an 11% rental rate increase.

Ladies and gentlemen, let’s face the facts here: We don’t have a bubble risk issue, but rather, we have a supply issue!

The Wrap – When a supply issue is mixed in with a job and population boom, an increase in prices is imminent. The writing is all over the wall already, and whether you decide to take advantage of this is all up to you. So if you’re ready to profit from Toronto’s economic boom (happening right at this very moment), contact us at PPTO to see what investment opportunities are available to you right now.

 

Until Next Time, Happy Real Estate-ing,
Zhen
(416) 436 9436
Zhen@PrimePropertiesTO.com

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