Last year, we began a series of interviews with real estate consultant Jim Reid, one of the most experienced and respected voices in Greater Toronto Area real estate. We’re happy to welcome you into 2017 with the second installment in this series, which started with a comprehensive list of advice and strategies for real estate agents. Focusing on market trends and generational issues in relation to the industry, Jim brings his wide-ranging perspective and acumen to bear once again.
How would you describe today’s Canadian real estate industry? Was 2016 a better year than 2015?
Canada’s real estate sales industry employs over 113,000 people, i.e. 0.6% of the national workforce. Canada’s (under-valued?) balance sheet has $24 Trillion in assets of which $6 Trillion (25%) is land and property. With a GDP of $2 Trillion, real estate accounts for 13%, i.e. $260 billion in 2016. Undoubtedly, we are one of Canada’s most important, diversified, competitive and well-regulated industries.
In my personal opinion, balancing supply and demand in our industry should always be a dynamic process where time and resources can adapt to changing market characteristics. However, well-meaning regulatory constraints and artificial incentives tend to become locked-in and thus cause abnormal anomalies across our industry.
Four current major anomalies would include: unheard-of price increases in hot markets, continued migrations into our major markets, corporatization of our industry and widespread millennial deferral of family formations in private housing. Adding to these is the short-term mindset regarding a New Vision for our industry.
We have also lost the flexibility of the post-war years of the last century and have greatly slowed down the pace of change and innovation in an age of more rapid changes throughout our society and its thousand cultures. One need only look at our past twenty years of experience in building new communities with less than 200,000 dwellings per year. The world wants in and we are not prepared to enable the potential growth and development that awaits us during this century.
Our industry needs a new Strategic Vision, yet we have nothing in place to define and plan a long-term vision. We are still trying to control our old paradigm, instead of creating a better one.
The tragedy of Fort McMurry’s burning may force new thinking for that city and thus reveal a dynamic new community. But they may be forced by existing regulations to rebuild the contemporary vacuum packed houses squeezed onto minimalist lots that pollute our landscapes. Canada’s risk averse mindset is not conducive to real innovative progress.
Of course, measuring 2016 against 2015 in a purely quantitative context will reassure those who think that more is better. Unit sales are up, as are prices, and possibly values. Our economy is presently driven by our industry more than any other. But digging below these surfaces, we find that costs to maintain our properties, pay our property taxes, insurance, energy needs and family lifestyles are rising much faster than our incomes. This is particularly true for our growing seniors demographic.
With housing and home ownership being such an integral part of the Canadian lifestyle and National Culture, we must take on these challenges to our future prosperity. Cities in Europe are mostly typified by absent landlords, and the majority of citizens are tenants. With over 60% of Canadian families becoming homeowners, we are indeed blessed by comparison.
Canadians tend to recognize that we are all unique and have different values and perspectives. Is there a reason why our housing can’t be equally as dynamic and progressive?
I had the privilege of raising my family in a community that contained over a dozen architectural styles. It also included a large neighbourhood where eight builders agreed to follow Georgian styling of the 1800’s and thus there were over 70 different models. Living in such an environment was a daily delight. In and around the small city of Kamloops B.C., I found many communities with a wonderful diversity of housing.
Perhaps the large cities need to look to our smaller cities for leadership in building Canadian style communities?
Do major cities establish a model followed by the whole country or can small cities live by their own rules?
Most certainly, the markets within the major cities and the markets within the smaller cities have somewhat unique and different mixes of markets. Thus, it remains important that smaller cities retain a significant latitude to design their housing and commercial models.
Many Canadians complain about the stereotyped malls and their “me too” brands that have driven vibrant local family retailers out after several generations of serving their communities.
This is due less to progress and more to our governments tilting the development market heavily in favour of well capitalized large corporations. This has also all but eliminated fair and vibrant competition across the nation.
People may not realize that our real estate markets not only reflect our different demographies, but also our different lifestyles and a thousand cultures. Local regulations concerning real estate development and zoning should be significantly different and all should be more tolerant towards small property owner capital funds and granted greater freedom (regulatory exceptions?) to do what they like on their properties (within reason).
Global Cities
When it comes to pricing, the difference in prices in the big cities vs. the smaller cities can be very significant, as we’ve seen in Vancouver vs. every other city in Canada. The big cities, which are becoming global cities, are more likely to attract wealthy investors. During times of economic and political turmoil, the rich will find that Canada offers a safer and more stable place to live or a “safe house” if they may need it.
Unfortunately, Canada has yet to discover the optimal longer term vision and planning processes that can adapt to rapid growth or rapid shrinkage in housing demands. Thus, anomalous pricing will inevitably occur.
An interesting trend has seen some of the large home builders who began in major city suburbia development, expanding their product mix into the smaller cities. In Barrie, Ontario, you get to buy the same 12 home designs and their mirror image models as were built in the mundane Toronto suburbs ten years earlier.
As a professional realtor, it is irksome that this sameness and lack of diversity is producing homogeneous markets with truly boring monotony of designs. For a country so rich in land, we have certainly produced far too many of our own ticky-tacky boxes communities.
We should likely blame our regulation-producing planning and development government agencies that have only approved stereotypical designs that meet their hundreds of requirements. It is understandable why builders just can’t afford to secure approvals for an endless variety of creative housing in Canada. Custom builders are now few and far between as most of them have moved into the in-fill market business, where they can build one or two of their approved designs in different mature neighbourhoods. We are victims of our own faith in stigmatic regulatory solutions.
Corporate Hegemony
The effect on our industry has been to design regulations wherein only large corporations can afford the lawyers and specialists needed to get their projects approved. This has created a corporate hegemony within our industry. Small family businesses just can’t afford to pay the upfront costs to get their one or two homes built each year. There is little independence and freedom left in our industry.
Canadians have responded by creating unique interiors inside our homes, but we may have to wait for a new small business vision for Canadian housing parameters and standards to release our Canadian creativity. (By the way, in neighbourhoods with one or two architectural styles, wouldn’t it be nicer if new in-fill homes were creative new versions of the original architectural period styles?)
During the next 25 years, our technology, communications and information age will bring even more changes to our cities and towns. Are we doomed to creating our own Stalag in the north, or will we find leaders who will introduce creative design flexibility back into Canada’s most important industry?
What are the most interesting market trends that you have spotted recently?
Having discussed the Cultural Trends in our industry in the previous blog, we might appreciate a look at the Seniors Demographic Force that is beginning to affect many of our local markets.
The place to begin is the Baby Boom in Canada stretching from 1946 until 1965.
“The baby boom lasted 20 years in Canada. During that time, more than 8.2 million babies were born, an average of close to 412,000 a year. In comparison, the number of births in 2008, when the population was twice as large as during the baby boom, was only 377,886. The average number of children per woman was 3.7 during the baby boom period, compared to about 1.7 in recent years.” (Source: Statistics Canada)
It is these 8.2 million babies, along with later immigrants (many of which will have reached the age of 65 by 2016) that occupy a 15% share of our national population. They are also our wealthiest demographic and own most of our industry’s real estate.
As these 5 million property owners approach 60, they begin to plan their later years. Most envisage a two person lifestyle with occasional overnight visits by their family members and old friends. During the next ten years, the lifestyle changes these people are contemplating will take place across our country.
Only now are markets beginning to better understand the wants and needs of these healthy seniors. They are quite different than their parents who tended to stay in their family homes or move into senior residences for “retirement”.
But “retirement” has a new meaning and paradigm for the Baby Boomers. It is anything but “retirement”. Most of these people will have active lifestyles and consumption patterns into their 90’s. That’s 25 to 30 years of either delightful existence or serious impoverishment and institutionalization as wards of our governments. Canada is not in the least ready for them.
Once again this demographic earthquake will be embodied within our industry. Their birth, birthed the industry we created today, and their remaining existence will significantly influence our industry tomorrow.
Our industry needs to understand these people and adapt to their needs. They are unlikely to buy a 600 sq. ft. condo other than as an important source of recurring revenue. They certainly don’t want to live in them, even though these sky-tents could be all they can afford.
But once again, their diversity will produce a large array of preferred housing options and markets. Our present housing mix is truly ill-suited to the majority of these people.
By examining some of their lifestyle options, and personal attributes, we can determine how the middle class majority will alter our industry’s composition.
Financially, 85% of seniors have a net worth of less than $600k (Statistics Canada). The average for this group is less than half this amount. Thus, cashing in one’s net worth and reinvesting in less valuable property equity is imperative. The CPP and OAS paid into during their working lives is far below their original expectations and even these will be clawed back if they live slightly above the true poverty line. But government funds will only cover food on the table and perhaps some heat, light, water and taxes for education expenses for other people’s children. Regrettably, many will not last long in their first retirement home and be forced into subsidized accommodations.
(Having recently produced some forward budgets for our personal senior lifestyles, there appears to be no way to maintain our initial retirement downsized residence and consumption patterns in the fast approaching era of a negative cash flow.)
The previous generation of war babies is only 25% technology dependent, but the Baby Boomer Canadians are likely 90% dependent. The costs of maintaining their technology devices and their personal or business travel requirements will be significant. The bottom line of these attributes is that city lifestyles will often be replaced by relocations into more pastoral or recreational areas.
Places like Collingwood, 100 miles north of Toronto, are already experiencing the senior movements. While Toronto experienced an over 40% increase in average selling prices in four years, this recreational property area had 28 to 38% increases in their two main markets. Communities south of there and into Muskoka and Haliburton have been calm, but the Boomers are coming. Similarly, all along Lake Ontario from Niagara-on-the-Lake to Port Hope, relatively convenient and spacious townhouses are beginning to feel the trend.
For the more prosperous members of this market segment, foreign fair weather destinations are welcoming senior Canadians in significant numbers. As seasonal renters and rentee’s, seniors are creating new markets in unexpected places due to our cultural diversities. (Note: Short term rental regulations are popping up all over Canada. These are certainly dousing many seniors’ financial options.)
During my career in real estate it was not uncommon for me to co-list second properties with realtors outside my major market. Having two realtor’s represent your client’s interests may become more acceptable going forward.
I encourage realtors to take the courses being offered to ensure you protect yourselves in regards to senior’s rights. But more importantly, you should start meeting seniors and get to know their hopes and aspirations and help them with their real estate financial planning for their next decades. Design your real estate websites accordingly.
By the way, we seniors are much savvier than you might ever imagine!
Want to learn more expert predictions for the real estate market in 2017? Read an expert broker analysis of the Edmonton market trends for the new year.