Crossposted at http://www.fochfamily.com/blog

The real estate market in the Greater Toronto Area is, for lack of a better word, weird. As a result of this new reality we’re living in, it’s really tough to find reliable data to formulate any kind of empirically verifiable investment thesis. This has caused me, and a handful of others I work with, to resort to really simple data sources to create some qualitative metrics about how we evaluate property.

One of the ways I analyze property with clients right now is by trying to understand who you’re likely to be selling the property to in the future. Last week I spoke about exit planning for investments on my instagram story, and it prompted me to dive in a little bit more to help people make a decision within their best interest.

Basically, you should formulate a purchase mandate based on the information about the future market we can surmise based on population distribution.

 

Real estate - most likely purchasers for your home
In Canada, two major population groups are present in the buyer pool right now, and co-incidentally, both have similar demands.

 

And in today’s market, there is currently concentrated demand in only one price range in the market right now – the bottom. Why is this? Well, if we look at the population distribution of Canada, the two largest clusters are:

  1. baby boomers
  2. their children (the dreaded millennials, yuck!)

Don’t get me wrong, Gen X is doing big things in the market right now, they’re just doing, different big things. Gen X would be responsible for most second-home demand (family homes) and honestly, they really suffered in the 2017 boom as a result of it. Gen X wants family homes because they actually have families. Millennials are sort of just starting that whole thing – and that’s fine, and it’s also caused some pretty predictable outcomes in the real estate market.

So, if we operate under the assumption that a lot of baby boomers are downsizing (they are) and a lot of millennials are just entering the market (they are), it’s easy to build a buyer profile for each one, and it’s also easy to understand their needs and wants, and why they’ve created a concentrated demand for entry-level product.

Screen Shot 2019-07-15 at 2.47.31 PM
These buyers want a lot of the same things, despite having these desires for vastly different reasons.

Toda, Millennials and Boomers want a lot of the same things from their property acquisition, even if their motivation for wanting those things is different. Here are a couple of examples:

  • Boomers want smaller/no yard because they want to enjoy their retirement. Millennials want a small yard because they’re time starved and don’t have time for maintenance.
  • Boomers want smaller houses because they live more simply. Millennials want smaller houses because, frankly, it’s all we can afford.
  • Boomers want proximity to amenities so they can age in place (doctors, hospitals, etc.) Millennials wants proximity to amenities for prompt access to the things they need, like avocados, and toast (time-starved, remember?).

These are great, simple conclusions, but WHAT DOES IT MEAN!?!

It means that whatever type of product boomers and millennials demand will always be the highest- and second-highest demanded product in the market, respectively. Right now, it just so happens to be that in most markets, they’re demanding the same thing. This has created a race to the entry-level product, which is having immense upward pressure on the price floor.

My thoughts? If you were to try to translate this to an investment thesis? Millennials are going to have kids and need bigger homes, while Boomers are more likely to live out their days in the homes they buy today. So, if you’re purchasing for capital appreciation on a 5-year hold, there may actually be some merit to buying outside of the entry-level market, in the 2nd-home market. With how much price acceleration we’re seeing on the price floor anyways, I’ve never seen a better bargain for the increased utility of a second home over a first-home, especially in areas like Newmarket, Holland Landing, and Keswick.

– D

 

 

P.S. Source data below – Statistics Canada.

0 to 4 years 1,951,024
5 to 9 years 2,030,883
10 to 14 years 1,990,826
15 to 19 years 2,106,893
20 to 24 years 2,437,542
25 to 29 years 2,573,476
30 to 34 years 2,550,512
35 to 39 years 2,514,450
40 to 44 years 2,378,927
45 to 49 years 2,405,692
50 to 54 years 2,578,047
55 to 59 years 2,726,152
60 to 64 years 2,456,212
65 to 69 years 2,035,754
70 to 74 years 1,625,256
75 to 79 years 1,109,870
80 to 84 years 765,850
85 to 89 years 504,086
90 to 94 years 237,609
95 to 99 years 69,827
100 years and over 9,968

 

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