A fork in the Road – Metro Toronto 2018 Home Price Forecasts

A fork in the Road – Metro Toronto 2018 Home Price Forecasts

This post consolidates the many Metro Toronto residential real estate forecasts into a single view and shows how respected forecasters can dramatically misread the market.

Don’t get distracted by a single real estate prediction. Most journalists are just sharing real estate price information provided to them in a press release rather than providing insights or presenting the information in a broader context.

Many industry players issue annual real estate price forecasts, but because they are predicting different outcomes some of them must prove to be incorrect. True value comes from seeing the range of forecasts and understanding the factors driving them.

At the end of this article you will understand:

1.     2018 Metro Toronto home price forecasts

2.     The level of accuracy and reliability of the forecasts

3.     How to use this information to your advantage

1. Metro Toronto Forecasts for 2018

Different forecasters have different approaches. The chart below depicts 6 forecasts to provide a broad picture of the market. These forecasts don’t differentiate between detached homes and apartments.

 Royal LePage and TD are forecasting very different outcomes for 2018.

Royal LePage and TD are forecasting very different outcomes for 2018.

The most optimistic forecast calls for 6.8% price growth while the most conservative expects a drop of 5.8%, and the average forecast is for no change at all! To put these forecasts in perspective, last year was a roller coaster for Toronto home prices as they rose over $100 thousand with half of these gains in the lost 6 months of the year.

Analyst expectations for 2018 price growth are inconclusive, however we believe 2018 will see a further pullback in prices as higher rates and government stress tests reduce home buyer budgets. The table below summarized what we see as the key factors at play in the market.

2017 12 Toronto Forecast - Factors.jpg

Andrew Beveridge, an industry veteran with Re/Max, believes there will still be opportunities for property appreciation if the land becomes eligible for redevelopment into higher density condos and townhomes (e.g., property near subway stations). Given the experience of 2017 and the considerable government efforts to cool the market, likely detached home land values will continue to drop in 2018.

According to Andrew, condo prices still have potential to rise due to a shortage of housing and limited rental supply. Today a condo in Toronto costs between $800 to over $1,500 per square foot. Developers initiating future projects will need to sell at even higher prices due to high land prices and rapidly rising construction costs. All levels of government are trying to temper demand but there are many other factors, like rising construction costs, driving higher prices.

High-level forecasts are not helpful when detached home and condo prices aren’t moving in the same direction. The consensus seems to be that 2018 will see more affordability than 2017, and that detached house prices will stay flat or drop while condo prices continue to climb.

2. Forecast Accuracy

2017 12 Vancouver Forecast - Accuracy FB.jpg

Although, most Toronto forecasts from last year were close to the mark none predicted the dramatic rise and pullback. To illustrate the challenges with forecasts, see how the above 2017 Vancouver forecasts from BCREA and Royal LePage were off by a wide margin. But their forecasts were closer than the aggregate numbers imply because even though prices of all homes rose 0.7%, detached home prices dropped 3%. It was an unexpected whopping 17% increase in condo re-sale values that turned things around.
Like weather forecasts, real estate forecasts need to be taken with a grain of salt.

3.  What should I do?

Forecasts are intelligent guesses and when making investment decisions we often focus on the most likely outcome. Prudent investors also consider for the worst-case and best-case scenario.
To benefit from the best-case scenario, a home buyer should talk to their mortgage broker about prioritizing flexible loan conditions. These allow you to get approved for more money, move quickly to close, and have lower fees, rather than focusing solely on rates. Every lender has very different lending rules and most people underestimate how these impact:

  1. How much you can borrow.
  2. How easy it will be to meet all their conditions by the closing date.
  3. How quickly you can pay off your debt.
  4. The penalties and fees charged to pay-off the mortgage or move it to another lender.

To mitigate the risk of a worst-case scenario, try to buy a home at a price that allows financial breathing room and plan to live in it for 5 to 10 years.

 

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Author

David Stroud

President & CEO

Mortgage Sandbox

Contributor

Andrew Beveridge

Real Estate Agent

REMAX

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