When people talk about the residential real estate market softening, there are two extremely important factors which they often overlook. These factors play a crucial role in determining prices and are so influential that I  find it hard to believe they’re overlooked so frequently. Please don’t make this mistake when YOU’RE trying to gauge the market so you can determine the best time to buy or sell. Remember these two things: people will always need a place to live and, at least for the moment, prices in central Toronto are lower than in many other major cities of the world.

How do these factors affect prices? They have a positive effect on demand. Let’s look at them one at a time.

First, people will always need a place to live. If you’ve just had your first baby and are living in a small apartment while looking for a home in which to raise your family, you want to move. Prices may influence the timing of your decision to a certain degree, but ultimately you’re going to move because it’s a matter of your lifestyle and your happiness and not just dollars and cents. The same holds true if your home is too large because your kids have moved out. You’re ready to move. This is what makes residential real estate very different from commercial real estate and other types of investments. With them, it’s all about the rate of return. If the rate of return is not high enough, there will be no buyers. Not so with residential real estate because it’s also about being happy in the place you live. As an example, look at what happened in the Fall of 2008 and first few months of 2009 after the Enron meltdown. The residential real estate market in central Toronto definitely slowed down and prices decreased by approximately 10-15%. However, as soon as people realized that prices weren’t going to plummet, they started buying again and prices very quickly passed their pre-Enron levels. Why? Because there were lots of people who wanted or needed a new place to live. To state this plainly, the level of demand may fluctuate, but there will always be demand for residential real estate regardless of price becauses people will always need a place to live.

Now on to the second factor. At the moment, prices for residential real estate in Toronto are low when compared to other major cities in the world. I’m not suggesting that Toronto is on par with London, Paris, New York, Rome or Hong Kong (I’m getting the travel bug just rhyming these names off), but it’s a great city, our economy is relatively stable and I know I’m not alone in feeling that, as much as I love visiting these other cities, I’d rather raise my family in Toronto than anywhere else. A couple days ago I received an email from a realtor in Miami Beach advising me that he just sold a condo in a 15 year old building for $7.5m (don’t ask me how I got on his list because I don’t know). This worked out to more than $2,850 per square foot. That’s much higher than prices here in Toronto. And the U.S. real estate market is supposed to be in the doldrums?! When you can buy a gorgeous new condo in a perfect location in Toronto for between $1,500-$2,000 per square foot, won’t that look like a great deal to people coming from other major cities? Just a short while ago I received a call from a realtor in Boston who told me that his client, for whom he said money is no concern, visited our fair city and decided to sell her place in Boston and move to Toronto. We’ve got a pretty good thing going here. Sometimes I wonder if we realize just how good it is or if you have to live elsewhere to realize that Toronto is a fantastic city.

So, to sum up, if you’re waiting for prices to fall to buy your next home or rushing to sell before the market softens, or if you’re just trying to figure out where the market is headed, don’t forget to consider that people will always need a place to live and that Toronto is relatively inexpensive compared to other major cities.