While many buyers simply hope for the best, others focus on finding a bargain - but all should instead focus on steering clear of the problem areas that bring an overall market down.
When I meet with big banks and government organizations as a real estate analyst, the most common question they ask me is "What are the potential risks in Toronto’s housing market and how do we keep a close eye on them?"
Some of my less astute followers on Twitter assume that by highlighting some of the risks in Toronto's housing market, I'm a permanent bear (or Chicken Little) that always assumes the worst is going to happen.
But given that I lead my team at Realosophy in helping home buyers make better buying decisions every single day of the week, this is far from the case.
As a real estate data analyst, I am driven by my conviction that real estate markets are not homogenous or highly localized - within a single borough, let alone a city, neighbourhoods and even smaller pockets within them often perform at different levels, as do the different types of housing on offer in a market (e.g., detached homes vs. semi or row homes vs. condos).
Now, on the face of it, every realtor believes that real estate is very local — as captured by that old real estate chestnut that home buying is all (and only) about ‘location, location, location.’
But while realtors tend to stress those special pockets that will ‘always do well’, they are less eager to point out what also must be true - that some areas tend not to 'always do well.'
I really believe that a bit of fear is important any time we are making a big decision, which includes buying a home. When you believe what traditional realtors tell you – that prices can only keep going up because there’s not enough supply – it leads you to make lazy decisions and prevents you from spotting warning signs early.
But there's a big difference between cautiously keeping an eye on any potential risks and expecting the sky to fall.
I used to rock climb, and it was on the wall that I realized what an important emotion fear is. On the one hand, you can’t let fear take over because once that happens you either never get off the ground at all — or if you manage to take a few first steps, you soon lose all control and a fall and potentially an injury becomes more likely.
But when you’re climbing well and are in flow, the fear doesn’t disappear — it’s always still there in the background keeping you laser focused, helping you assess risks quickly and ensuring you are making good decisions and that your next step is a smart one.
This is how I like to approach my real estate decisions — and those of all the buyers we advise.
Consider this. At the peak of the housing market in early 2017 the Toronto Real Estate Board was publishing press releases telling people that speculation was not the cause for rapid price growth. They argued prices were rising by 30% per year because there was not enough supply.
In contrast, I published research at the exact same time showing that speculative buying, in particular in York Region, was a key driver behind the rapid price growth in the GTA and it was this speculative buying that was making detached homes in York Region more vulnerable.
My analysis turned out to be correct and prices fell nearly 20% shortly after that with York Region being one of the hardest hit regions. This rapid decline impacted over a thousand households who had to back out of properties they committed to buy, they lost their deposits and were often sued by the sellers. Many families lost their life savings because they were fearless about house prices during a time when they should have been the most fearful.
While I could never have predicted when and by how much prices would fall, by keeping a close eye on these big risks we were able to spot the turning point very early which helped many of our clients avoid costly mistakes by buying in those areas.
Last week, I wrote about my latest data-driven market observation — the outsized impact that investors are having on Toronto's condo market.
Does this mean I think condo prices will fall tomorrow? No, the market in the short term looks quite stable. But it’s impossible to predict what the market will look like 6, 12 or 18 months down the road, especially with proposed changes to Airbnb rules and property tax increases in Toronto, both of which will impact investors.
This is why it’s critical to keep an eye on all the potential risks – including the impact investors might have on the condo market.
I find most of the buyers and sellers who sign up to work with us at our brokerage Realosophy want a company that is proactively looking for risks – rather than promising pots of gold.
And they are not fence-sitters too afraid to make a move at all either.
They are instead savvy consumers, looking to reach their home buying goals while steering clear of problem areas as best they can.
Because the reality is, prices will fall again one day and if we are not asking ourselves why they might fall and what house types, neighbourhoods and condo buildings they might fall in, then we’ll never be able to spot the early warning signs and steer clear of them – the way we did in 2017.
Photo Credit: Getty Images
John Pasalis is President of Realosophy Realty, a Toronto real estate brokerage which uses data analysis to advise residential real estate buyers, sellers and investors.
A specialist in real estate data analysis, John’s research focuses on unlocking micro trends in the Greater Toronto Area real estate market. His research has been utilized by the Bank of Canada, the Canadian Mortgage and Housing Corporation (CMHC) and the International Monetary Fund (IMF).
Follow John on Twitter @johnpasalis