I have a lot of news to share with you today.
The final market watch report for 2021 came out last week.
There are a few key points I want to highlight about the 2021 market and we’re going to discuss how they’re going to affect the market outlook for 2022.
Then I also want to touch on a new report suggesting a surtax to be charged on homes over a million dollars, including principal homes.
And of course, we’re off to a rough start for 2022 with yet again another lockdown.
How is that going to impact the Toronto real estate market?
There are 3 key points I want to highlight in the market watch report.
#1 The Numbers
In 2021, more than 120,000 sales were reported in the MLS system.
That’s 7.7% higher than the previous high in 2016.
Compared to 2020, sales were up a huge 28%, but new listings were only up by 6.2%.
You can see that supply and demand imbalance and the result is of course record high prices.
We’re seeing an all-time high average selling price of $1.09 million dollars at the end of 2021.
That’s 17.8% higher than the peak in 2020.
These are all the recorded numbers in the resale market and do not include the pre-construction numbers, which we’ll talk about separately.
#2 Demand in the City of Toronto
In 2020, the trend was for people to move out to the suburbs, so there was a surge in demand in the 905 area.
But in 2021, there was clearly a resurgence in demand for homes within the City of Toronto.
Sales in the 416 area was up a substantial 36.8% compared to 2020.
While the growth for the surrounding GTA suburbs was only 23.6%.
What’s causing this shift in trend going back to the city centre?
The demand for condos.
The reopening and affordability issues are combined factors that drove the resurgence in the condo segment.
#3 Housing Policies
The 2021 housing market was all about a lack of supply across all home types and intense competitions among buyers, so the result was high prices.
The report draws this conclusion:
“Looking forward, the only sustainable way to moderate price growth will be to bring on more supply. History has shown that demand-side policies, such as additional taxation on principal residences, foreign buyers, and small-scale investors, have not been sustainable long-term solutions to housing affordability or supply constraints.”
Speaking of housing policies, a CMHC funded report drew a lot of attention last week.
It suggests that an annual surtax starting at 0.2% should be charged on homes valued over $1 million dollars.
And this would apply to all homes, including principal homes.
The report thinks that this surtax would help to make housing more affordable.
Of course, it sparked debates.
But here’s the thing, the government had already made a statement to the Canadian Press last week.
“The federal government has clearly stated several times that we will not be introducing a tax on the equity of primary residences in Canada,” the government said.
Afterall, the surtax was just a suggestion by a CMHC funded report.
Another common noise that we often hear is about condos being heavily owned by investors.
Investors often get the blame for driving prices up, so why doesn’t the government just impose a tax on investors to discourage them from buying?
That’s going to make housing more affordable, right?
It’s not what you think.
The government actually relies heavily on investors to increase housing supply.
What do I mean by that?
We all know that we need more housing supply, doesn’t matter for rent or for sale, we just need more housing units to satisfy the growth in population.
Let’s suppose investors are not allowed.
Developers are trying to put up new buildings to increase supply.
They will have to sell the majority of the units at pre-construction in order to secure the construction loans.
How many end users are going to purchase a unit that won’t be ready 4 to 5 years down the road?
Not very many at all.
Your job, your family could change a lot in 4 to 5 years, so most people would go for a resale when it comes to self use, something that they can make use of immediately.
So if developers can only rely on end users, they are not going to do very well in sales.
If they can’t sell in advance, they can’t build, then supply actually decreases.
Why can’t the government just build more rental units themselves?
When the government does things, it needs to go through many different layers.
The result is a much longer timeline.
More time costs more money.
And with the ever increasing construction costs, plus the inflation, supply chain and labour challenges we’re facing right now, inefficiency is going to be very very costly.
So it’s actually going to be much more expensive for the government to construct a building compared to a developer who builds for profit.
And in the end, where does the government’s money come from?
The taxpayers.
People are going to have to pay more taxes.
So the government built units may help some people, but they are going to hurt some people as well.
You see, that’s why the government relies on market developers to increase housing supply and developers rely on investors to start building.
So I can’t see how the government can go without investors in the condo market.
And now we’re starting 2022 with a new round of lockdown.
The government is extending benefits again.
That means more and more money printing even though inflation is already spiking to a 20-year high.
I recently heard an interesting statement.
“Cash is a Liability and Debt is an Asset.”
It certainly flips the accounting books upside down.
But in this crazy world right now, is it a good idea to go by the books?
Indeed, it’s the worst time ever to own cash because cash keeps devaluating day by day with money printing.
Food prices. Gas. Eating out.
The cost of many everyday things is going up.
Inflation was already high up at 5% last year while we are getting less than 1% on our cash savings. That means our cash has 4% less buying power.
The government was planning to tame inflation with an interest rate hike in the spring.
But now with a new round of lockdown, is the government ready to hurt the economy with an interest rate hike soon?
We’re cycling back to what we’ve seen at the beginning of the pandemic.
Low interest rate.
More money printing.
People are going to spend more time at home with piles of extra savings again.
Qualified people are going to make use of debt to acquire more assets.
And asset prices will keep inflating.
With housing prices inflating at the rate we’re seeing, are we in a housing bubble?
We definitely are in a housing bubble.
Is the bubble going to burst?
Of course it will.
You see, things go in cycles.
The housing market goes up and down, up and down, but the general long term trend is always up.
People often have a misconception about a bubble burst.
They thought a bubble burst would mean going back to prices we had like 10 years ago.
It’s pretty obvious that’s not going to happen.
Prices may inflate another 30% in the next 2 years with all that money printing.
And when the bubble bursts, it may drop 10% back.
It’s all about how much it inflates before it shrinks.
Keep in mind that the long term trend is always up.
It’s very dangerous to keep a lot of cash in this pandemic era because the government keeps printing money.
The wealth gap between the rich and the poor will keep widening and you want to make sure you don’t fall onto the wrong side of the gap.
If you have extra cash, make sure you put it into assets.
If you want to know what’s the most suitable for you to invest in, schedule a call with me at the link below.
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