Toronto's housing market is teaching all Canadians a lesson on how overrated it is to have your house soar in value.
April was a routinely brisk month for housing in the city and surrounding region – average prices rose to $739,082 from $636,094 a year ago, or 16.2 per cent. Commentary from the Toronto Real Estate Board noted an interesting detail, however. Actual sales of detached and semi-detached houses were down in the city because of a lack of listings.
To recap, we have the hottest real estate market this side of the Rockies and the number of houses for sale isn't enough to satisfy the hordes that want to buy. "Many would-be buyers were not able to find a home that met their needs," TREB said in its official news release.
There are a few theories about why people aren't selling. TREB's thought is that some Toronto households are choosing not to sell because on their next purchase they would have to pay a municipal land-transfer tax that piggybacks on top of a similar provincial tax. Together, these taxes amount to $21,763 on the sale of the average-priced house in the greater Toronto area.
Fear of missing out on further price gains may also be a factor. Given that the average house price in the Toronto area increased more than $100,000 in one year, this is a legitimate sentiment. But delaying the sale of a house you plan to sell – just to make more money – is risky.
By selling now, long-time owners can lock in a huge and satisfying gain. By waiting, they lose control. They're hostage to a market that might rise further, or fall. Expect the scarcity of sellers in Toronto to solve itself when prices fall. Boomers will be flinging their houses onto the market to salvage as much of their peak gains as possible.
Another theory on why there aren't enough sellers to meet demand for houses in Toronto is that people can't afford to move. Selling your jackpot win of a house means buying someone else's.
There's an obvious solution here – sell your Toronto house and move to a community where prices are much lower. But Toronto's a magnet – it has the neighbourhoods, the culture, the restaurants and the jobs that people want. Changing cities is only a niche solution to the problem of how to unlock the equity you've built in a house.
Downsizing from a house to a condo can work, but not for everyone. Getting the size and location of condo you want may end up costing nearly as much as you net from your house. If you plan to move downtown from the suburbs, it's possible a condo could cost a bit more than you made from your house.
For sure, some boomers are staying in their houses because they love the life and can't imagine living anywhere else. But this attitude can't fully explain the shortage of sellers in Toronto. It may be that a house becomes a kind of prison after it soars in value. You can't move because you'd have to pay an expensive tax and run the risk of missing more price gains ahead. And then there's the problem of buying your next house.
Unless you move somewhere cheap, is there any benefit to owning a house that has soared in value? The more your house increases in value, the higher your net worth. You can't eat your net worth, buy stuff with it or use it to pay bills, so this is really just a victory on paper. A bank will give you a big line of credit if your house is worth a lot, but you'll pay interest when using it that adds up even with today's low interest rates.
Houses in hot markets are considered to be great investments for two reasons – they've risen steadily in value and can be sold tax-free if they're a principal residence. But the behaviour of homeowners in Toronto suggests these two benefits aren't producing results.
We know that millennials are the biggest losers in expensive housing markets because of the negative effect that rising prices have on affordability. Boomers who have owned houses for decades are supposed to be the big winners.
But if it's correct that owning a house that has soared in value is overrated, then who's benefiting from the hot housing market?