Last updated November 4, 2018
Torontonians like to compare the local market to other global cities, so it is important to point out that most of Toronto’s market indicators are similar to those seen recently in Sydney, Stockholm, and London, where markets have recently weakened significantly and home prices have been dropping.
Toronto real estate has also weakened bu not enough to benefit buyers. House prices are down from their 2017 peak, while condo prices have charted a steady upward trajectory.
Let’s first take a close look at the sales activity in Metro Toronto.
Compared to last year, 2018 looks like a terrible year but if we look at the month over month trend, we see that most of the slow down was in the first half of the year. The second half of 2018 was much like 2017 but definitely worse that 2015 and 2016.
If this is the new normal Metro Toronto sales may not return to the frantic sales of 2015 and 2016 for some time.
As well, pre-sales have been dramatically lower as illustrated by this chart from Altus Group, a real estate research and analysis company.
From a sales standpoint, 2018 has simply been a difficult year. The interest rate increase on October 24th and another likely by the end of January will further reduce home buying budgets and either push down sales or prices.
Even though purchases of homes are low compares to recent years, few people are choosing to sell their house. It appears that buyers can’t afford what’s on offer, and sellers are holding back properties, hoping the market will bounce back to previous highs. With few houses available for buyers to choose from, Metro Toronto’s market places the negotiating advantage with sellers. There are less than 5 months inventory of homes for sale and that means that buyers can’t drive a hard bargain and may still encounter bidding wars. The Toronto Real Estate Board (TREB) was at the forefront during the municipal election, highlighting the supply problem and candidates approaches to tackling it.
Average and benchmark prices for houses have moved up in the past couples of months. Average prices are about $100,000 higher than the benchmark and one interpretation is that sales of luxury homes are pulling up the average.
In the broader context, the benchmark price is still down 6% from the peak and average prices are down 17%. Perhaps this Spring will bring better news but this seems unlikely with several interest rate hikes expected between now and the end of 2019.
To put affordability in perspective, a family with a combined income of $150,000 and $150,000 in savings can only afford a new home worth $540,000. At the time of the last census, the median total household income in Toronto was $65,829. Only 19% of the 2.1 million Metro Toronto households earn a gross income of $150,000 or more.
A household earning $150,000 would need savings of $500,000 in order to buy a new house priced at $915,000, and as interest rates continue to rise home buyers will qualify for smaller mortgages. They would need to make up the difference from savings.
There is very little condo apartment supply available for re-sale. There may be more available in the pre-sale market given the results in the Altus Group report above but we can’t know for sure because new construction pre-sales and prices are not reported publicly by the Real Estate Boards. Statistically, a condo listed in Toronto should still sell within a month or two and that means sellers can be selective in accepting an offer.
Condo apartment prices weren’t impacted as much as detached houses and benchmark prices have risen steadily. The fact that the average is price is trending above the benchmark implies a lot of the activity is in the luxury segment rather than purchases of basic units to be rented. We’ll have to see if the luxury buyer trend is sustained in the winter months. With new anti-speculation measures coming into force in British Columbia in January 2019, foreign capital may shift from Vancouver to Toronto and Montreal.
No, house supply hasn’t reached 5 months, which would mark a balanced market. This is in stark contrast to the Metro Vancouver detached home market where there is almost 11 months worth of homes for sale. That’s a deep buyer’s market.
The Toronto apartment market is nowhere near balanced either. More supply will be needed to reach a healthy balanced market.
Over the past few years, a combination of federal and provincial policies have reduced the number of buyers (demand) in the market.
With the demand concerns addressed, from a policy standpoint, one would hope various levels of government would continue to encourage home building until the market reaches balanced territory. This would put both buyers and sellers will be on an equal footing when Toronto achieves 5 to 10 months worth of home supply. That would be fair to everyone.
At present, there is a lot of uncertainty in Canadian real estate markets. It’s troubling that some analysts are painting an overly positive picture of the market because the government still has a lot of work to do in order to balance the market and there are still pent up risks. UBS, a bank that invests for 50% of the world’s billionaires reports that Toronto and Vancouver have a higher degree of risk.
On balance, current market conditions favour sellers however there are far fewer buyers interested in homes at current prices. House prices seem to have weakened materially and the October 24th interest rate hike puts additional downward pressure on prices.
You could try to time the market, but nobody knows the best time to buy. If buyers wait, rising interest rates will erode their home buying budget yet further price reductions would allow them to buy more home for less money. Based on the slow sales in 2018, it appears most prospective buyers are taking a “wait-and-see” approach. From a seller’s perspective, if you were planning to sell within the next 3 years, then now may be an opportune time. The Bank of Canada has indicated that further interest rate increases will follow in 2019.
If your family is growing and you need a larger space, simply a place to call your own, or you believe timing the market is pointless, then take advantage of these tips to reduce your risk.
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