TREB: How Simple Math Explains Our Price Increase – Part 2

In Part 1 of the TREB report analysis, I dissected how we’re going to hit the $900,000 average price at the end of the year. In case you missed it, you can read about that here: TREB: Average Price $900,000. Is it True?!

In the second part of this Insight Series, I’m going to reverse engineer the Math for you to explain why $900,000 is completely possible despite how crazy you may think it is. Remember, it was only 5 years ago when the first pre-construction condo launched for $1,000 per square foot in the downtown core; everyone said that it was way too expensive. Fast forward to the present day and it’s now the norm. Currently, there are condos selling at over $2,000 per square foot!! Oh how times have changed…

1) Rental Rates – The growth of rental rates has continued to increase, but not as fast as in 2017 and 2018 because we had quite a bit of rental supply in 2019. However, despite a good number of unit completions in 2019, we still had over 4.5% increase in rent in all categories which is well above inflation. Like I said in the very first point in Part 1 of this Insight Series, there is a shortage coming from the lack of units sold in 2018 (completion date 2022/2023). What’s going to happen to rental rates then?

2) Completions Based on First Occupancy Dates – This chart below is a bit harder to read, but essentially, it’s a chart showing how many condo units will be completed. You can see that we’re projected to have a record year for completions in 2020, but it’s going to drop off in 2021 and will continue to drop off further after that. This is exactly what I was talking about earlier in the very first chart of this Insight Article series; the lack of supply from 2018 will catch up to us and will surely be a problem in the future. Here’s hoping that our governing bodies will eventually address this rampant issue of supply!

3) Type of Unit Completions – You can see from the chart below that in 2018, we had smaller units completed (i.e., mostly 1-bedroom + den units). However, as low rise freeholds become increasingly unaffordable, you can see that the builders (as mandated by the city) are shifting their focus to larger condos. This is evident through the increasing percentage of planned completions on the larger-sized condo units (i.e., the 2 to 3-bedroom units). Raising a child in a condo will soon become the norm, and people will be forced to accept this as a result of the affordability gap.

4) Population Growth – This part is fun and is one of my favourite parts of studying the real estate market and economics. As shown in the illustration below, you can see that we’re expected to have a 41% increase in population by 2041, or in 21 years. That’s an absurd number, not to mention the fact that our government always underestimates those numbers; I’m curious to see where we’ll really be by 2041. Also, you can see in the illustration that we have a very good amount of job growth in relation to our population growth. This is fantastic if you’re an investor because that means more tenants to rent to and higher rental rate growth!

5) Job Growth – Ontario makes up 52% of Canada’s GDP. Take a look at how many jobs are being created in the GTHA on an annual basis in the diagram below. This level of job creation is great, but the trouble is that we’re creating more jobs annually (75,000), than we are creating houses (42,000) – that’s almost 2 times as many jobs as houses! That is a major problem when these jobs are all high income, 6-figure jobs. In other words, that spells disaster for the cost of living as those high income individuals would be willing to push prices even higher. On the flip side, this will be great if you’re an investor.

6) Slow Building – A growing housing supply is required when population and jobs are increasing. However, we’re well under the number of housing completions that we need each year in order to keep up with the population and job growth. In order to meet the required housing completions needed, we need to complete about 50,000 to 60,000 homes per year. Our record was in 2014 when we had almost 35,000 completions. We’re going to need to double that pace starting now if we want to solve the housing supply crisis. I never want to be a pessimist, but realistically speaking, I am very doubtful that we’ll hit those numbers consistently for the next 20 years. As a result, that’s why I’m bullish on where the average price will be in the next 10 years. It’s a simple math problem like I’ve been preaching for the past 2 years.

7) Average Annual Income – You can see in the chart below that the average family income is expected to increase to over 6-figures from 2020 onwards. This is a combination of creating higher income jobs and the immigration of more skilled workers to Toronto. With more money in their pockets in the next 10 years, they will be able to buy more expensive homes and keep up with the rising price of real estate. The question you should ask yourself is whether your household income will increase at this projected rate. If not, then you better make a move now. Whether that’s buying your first property or your next investment property, the time is now. Reach out to me at Zhen@PrimePropertiesTO.com to plan your next move.

The Wrap – So that’s it, you just absorbed the highlights of a 63-page report in the matter of 14 summarized points. The writing is written all over the wall. If you understand and grasp all of these statistics provided by all of the experts and prognosis provided by me, then you understand that it’s now or never for Toronto. If you think the prices are high now, then you’ll be in for a surprise in the years to come. But if you can accept that this is our new reality and want to capitalize on it, then you’ll make your next move now. Your Move. Your Future.

Until Next Time, Your Move. Your Future
Zhen Liang
Zhen@PrimePropertiesTO.com

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