Metro Toronto Real Estate Insights and Predictions

 

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 Manhattan, Sydney, Stockholm, and London, where markets have recently weakened significantly and home prices have been dropping.

Toronto real estate has also weakened but not enough to benefit buyers. House prices are down from their 2017 peak, while condo prices have charted a steady upward trajectory.

Home Sales in Metro Toronto

Let’s first take a close look at the sales activity in Metro Toronto.

Metro Toronto Home Sales

Activity didn’t drop this precipitously in the 2008 financial crisis when mass-layoffs occured. Some analysts had claimed that the market began to recover in the second half of the year and although it caught up with 2017 activity it was still well below the previous three years.

If this is the new normal Metro Toronto sales may not return to the frantic sales of 2014 to 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. Keep in mind that the pre-sales sold in 2017 are currently under construction and will likely complete in 2019. According to CMHC, in October 2018 there were 71,000 homes under construction in Metro Toronto that are due to be completed in 2019 and 2020.

Although the Toronto CMA population grew by 69,000 people annually from 2011 to 2016, there are generally 2.5 people per household so that type of population growth should only require 30,000 new homes. It appears that Toronto risks an oversupply situation.

From a sales standpoint, 2018 has simply been a difficult year. The interest rate increase on October 24th and another rate increase likely by the end of March will further reduce home buying budgets and either push down sales or prices.

Home Prices

Detached Home Prices

The benchmark price for a Toronto area house peaked in May (the last mortgages pre-approved prior to new federal mortgage stress tests would have expired in April). Average and Median prices have both dipped at the end of 2018 and another measure of Toronto home prices, the Teranet-National Bank House Price Index™ has recently recorded 3 consecutive monthly price drops in Toronto at the end of 2018. This leads us to believe that the Benchmark Price reported by the Toronto Real Estate Board will follow downward.

In the broader context, the benchmark price is still down $150,000 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 a gross income of $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.

Even though purchases of homes are lower 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 recent municipal election, highlighting the supply problem and candidates approaches to tackling it.

Condo Apartment Prices

Condo apartment prices weren’t impacted as much by mortgage rules, interest rates, and foreign buyer taxes as detached houses. The benchmark condo apartment price has risen steadily. The fact that the average is price is trending well above the benchmark implies there is a lot of the activity 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 Spring. With new anti-speculation measures coming into force in British Columbia in January 2019, foreign capital may shift from Vancouver to Toronto and Montreal, applying upward pressure on condo prices. Speculative foreign buyers have largely left Vancouver and this should be a wake-up call for other Canadian markets. Foreign capital is fickle, can leave as quickly as it arrives, and makes real estate prices much more volatile than a home market driven by local economic fundamentals.

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.

Are we in a balanced market?

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.

Conclusion

Although Toronto realtors will be crying the blues because their revenue has dropped 26% (more than in the 2008 financial crisis). Nevertheless, the market still is not balanced and there are bidding wars. There is obviously still a supply shortage but prices have maxed out. No matter how much a buyer may want a home they can’t spend more than they have.

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. At to this the possibility that Vancouver and Toronto will be dragged down in a global real estate downturn.

On balance, current market conditions favour sellers however with high prices and a lot of risks, there are far fewer buyers interested in homes. 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 2017 and 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. Forecasters predict 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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