Real Estate Matters: ‘But where in the Beach did you buy?’

As the truly superb summer of 2016 fades into memory, some events this fall are beginning to capture and hold our attention. As of this writing, the Blue Jays are eight wins away from a third World Series, and the electricity and vibe in this great city — and country — is remarkable. Hockey is back. Whether it’s minor, amateur, or professional hockey, Torontonians, get busy with it! And then there’s the whole mess of the American presidential election, continuing to raise eyebrows here and worldwide. You can bet this race to the bottom still has some surprises in store.

And with all of these distractions, Torontonians still have time to talk and shop real estate.

The new mortgage rules and discussions of a new foreign buyer tax similar to the one recently implemented in British Columbia haven’t yet spooked the robust Toronto real estate market, nor our own Beach market. Perhaps because any extra tax on non-resident buyers will not affect our specific Beach market in any significant way.

Beach buyers continue to pony up large offerings for available properties in all price ranges, due in large part to the low rate environment. How soon rates will increase and the slope of the upward curve for rates remains speculative at best. But it is an eventuality, with the American Fed making noise that they are looking at a rate hike early in the new year. We’ll see how the Bank of Canada reacts in turn, but most pundits agree that rates need to be “normalized”.

It is the staggering amount of household debt that these new mortgage rules are engaged to counteract, especially the new “stress test” on buyer’s finances when they look for a mortgage. Buyers who have less than a 20 percent down payment and are looking at a fixed-rate mortgage of five years now must prove they can withstand the financial hit of higher mortgage rates that are almost two percentage points more than the rates when they buy now. These new rules will mostly affect first-time buyers and the wildly enthusiastic move-up buyers, but the groundwork for rising interest rates is being set.

Consider the very real possibility of your mortgage interest rate being almost double — or more — within a time period of five years. The stress test for all Beach buyers, especially those move-up buyers, will be whether or not they looked to invest more in the value of location, location, location, if they were able, or did they place their valuations and offering price decision more toward the brick and mortar and stylish staging. In this market, there is a tendency toward the latter, but what will hold value over time when interest rates return to “normal”?

The principal of value in real estate, like beauty, is in the eye of the beholder. Value can be objective, as in income properties. But for many buyers the idea of value is subjective — it is created and exists only in the mind of a particular buyer. It is the price that people will pay for a property “irrespective of its cost…its value is measured through the present worth of all the future benefits that likely will accrue through its ownership.”

This principal in real estate has been very much in play over the last decade, especially in the Beach.

This subjective principal of value can be viewed in many ways. One of the most commonly held views, and one to which real estate values have always been aligned, is the notion that location is everything in real estate. The Beach is without question a great location within the City of Toronto, and our neighbourhood’s increasing property values reflect that principal.

But it is apparent that many Beach buyers are looking past the time tested idea that location is paramount and ongoing in a property’s value, as some buyers are not being careful enough to buy into a good or better location in the Beach despite being able to at the time. Many sacrifice a better Beach location for a better house. Their financial and personal circumstances may have necessitated this, but better location should have been a major factor in their final decision. And if you`re buying right now, this should weigh very heavily on your decision. In due time, it won`t be enough that you bought in the Beach, but where in the Beach you bought.

With interest rates still hovering at historic record lows, it’s my opinion that some Beach buyers are simply paying too much money for houses in locations that just don’t support those hefty sale prices. Remember, the final value of that property in a certain Beach location is in the buyer’s sole opinion as well.

I don’t know if – and, more specifically, how much — Beach property values are going to continue to increase in the long term. But they will and should as long as the cheap mortgages remain.

I do know — and I don’t believe anyone can argue this point — that eventually interest rates and the resulting mortgage rates will increase.

Maybe not in a year or two, but they will go back up to what we may refer to as more “normal” rates. And that will change this real estate market, because this real estate market isn’t a normal real estate market, based on the trends of the last five or six decades.

When the rates do get nearer to normal, then sales will slow, resulting in larger inventories of homes and more choice and selection for buyers. More inventory usually results in downward pressure on property prices. Then, when the market returns to normal, the old stand-by principal of “location, location, location” will once again be paramount.

If you have any questions or commentary about this article, or Beach real estate in general, please feel free to email me at Or call my office at 416-690-5100.

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