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 San Francisco, 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.
Economists broadly agree that higher interest rates and tighter mortgage rules will have a larger, longer-lasting dampening effect on home sales than we previously thought.
This article covers:
Where are prices headed?
Recent buyer trends
Should investors sell?
Is this a good time to buy?
Over the 3 years from 2014 to 2017, the price of a house rose 75%. That’s a compound annual increase 21% for three consecutive years. Over the same timeframe, people’s incomes increased by an annual average of only 1.5%. That tremendous run-up brought Toronto house prices to their peak and it’s also around the same time Vancouver house prices peaked. Since then house prices in both cities have dropped. Vancouver is seeing steep declines and the price of a benchmark house is hovering around $1.4 million while Toronto’s benchmark house prices dropped dramatically in 2017 and have held steady between $940,000 and $900,000. With no support from the federal government (CMCH) for purchases over $1 million, it is unlikely house prices have much more room for a bounce-back. There is more upside potential in condos, however this will shrink as condo prices creep nearer to house prices, so the better opportunities for speculative investors are in Ottawa and Montreal.
The chart above is the aggregate reading for the GTA but certain sub-markets tell a different story. Even though a “Metro Toronto” house was up 1% over the 12 months to April 2019 . Many sub-markets have seen year-over-year declines:
Richmond Hill -5%
Vaughan - 2%
Other sub-markets have surged:
City of Toronto 2%
This uneven performance in different sub-markets plus the reduced interest from home buyers leads us to believe that current price levels do not have strong support, particularly since Vancouver had a similar experience in 2018. This doesn’t mean prices will follow Vancouver’s precipitous drop but it highlights there is risk in the market. We explore Canadian real estate risks more fully in a recent report.
Condos have had a meteoric rise in 2017, similar to house prices but when house prices dropped in 2017, condo prices continued to rise. More recently condo prices increases have accelerated and this means the federal government is likely to leave the mortgage stress tests in place to protect homebuyers and mortgage lenders.
If you’re looking to buy or sell a home in the next three years, you’ll want to pay closer attention to recent local market trends (e.g., condo prices in the Durham region have dropped 2% since last year). There is no guarantee that buying “something” with a 5% down payment to simply get into the market is going to work out well.
Imagine when it’s time to upgrade to a townhome, you find that your condo has dropped 5% in value since you bought it and the drop has eaten up the equity you created by paying down the mortgage! Don’t let it happen to you. Make sure your realtor knows the local market and that they don’t have a “special arrangement” with a developer. Special arrangements usually benefit the realtor more than the homebuyer.
Unfortunately, first-time buyers who earn $100,000 a year and have saved up $50,000 can only afford a home priced around $425,000 so the run-of-the-mill Metro Toronto condo is well beyond their reach. Prices would have to drop $85,000 for these wealthier first-time buyers to get into the market without a substantial gift from the “bank of mom and dad” to make up the difference.
The markets for both houses and condos in Metro Toronto are trending toward a position where sellers can force buyers into bidding wars. This means buyers are more likely to feel they’ve paid handsomely for a home that doesn’t meet their needs and puts upward pressure on home prices.
Similar to 2018, this year began with plenty of houses for sale.
The chart below shows there is enough supply of houses to last only 3 months and that the house market is a seller’s market.
Buying activity has remained roughly in line with 2018 which was 32% less active than the peak.
If purchasers continue to wait on the sidelines and speculative investors finally decide to sell their empty homes, then the market for houses may head toward a balanced market. Time will tell which way the house market goes.
The condo market has been much tighter than the house market and it is nowhere near a balanced market. A balanced market is generally considered healthy but in recent years when Vancouver and Calgary tipped into a balanced market, prices soon began to drop. This implies that in previously tight markets, a normal balanced market will not support the current prices.
We expect 2019 to be a weak year for real estate the GTA. The brunt of price drops will likely be felt by higher priced properties (i.e., more expensive neighbourhoods and detached single family houses).
Condos likely won’t be unscathed in 2019.
Given the forecasts and the current market uncertainty, homebuyers and homeowners shouldn’t expect much price appreciation between now and the end of 2019.
2018 house purchases were the lowest in years, and 2019 has started just as slow. This April bested 2018 so May will be a critical month since the real estate “busy season” ends in July.
Last year's condo purchases were worse than most years going back to 2014, and 2019 has seen fewer condos bought in the first few months.
If this is the new normal Metro Toronto sales may not return to the frantic sales of 2014 to 2016 for some time. Even pre-sales have been dramatically lower as illustrated by this chart from Altus Group, a real estate research and analysis company.
Expect developer incentives and lower deposits to be on offer in 2019.
At Mortgage Sandbox, we break down our market analysis to five key factors: affordability, capital flows, government policy, supply and popular sentiment.
Canada may be headed into a recession: A recession would reduce employment and lead to forces home sales and that puts downward pressure on home prices. The Canadian economy shrank in December 2018 as a result of slowing home sales. In a terrible self-reinforcing problem, the economic slowdown could cause the housing market to slow further.
Reduced borrowing capacity has pushed out family homebuyers: Mortgage stress tests and rising interest rates have effectively reduced the maximum amount people can borrow by 20% while condo prices rose by 20%. Perhaps home prices have surpassed people’s ability to pay? In July, CMHC, the government agency charged with helping Canadians achieve home ownership, reported that prices in Toronto “are higher than incomes, mortgage rates and other fundamentals can justify.”
Home prices outpaced people’s ability to buy: There are very few markets in the CIty of Toronto with houses available for less than $1 million, but only 10% of income earning households in Metro Toronto can afford a million-dollar home. Is it possible that the constrained supply has meant that only the top 10% wealthiest people in Toronto have been buying, and now that they’ve filled their boots, there’s no one left to buy at the current prices?
A Synchronized Global Real Estate Market Correction has dampened Foreign Buyer activity: Home sales have slowed in Manhattan, Sydney, Stockholm, London, and the list goes on. Perhaps global real estate investors have lost their appetite? Has the Chinese government been successful in their campaign to prevent citizens from taking money out of the country? If there were a global real estate downturn, how would this impact Toronto?
If Toronto is simply caught up in a global real estate correction, then at least there is no one to blame for the turn in the market. If this is the case, then it means that Canadian policies and government intervention will be powerless to change the global flow of capital and investment, and that’s a scary thought.
Foreign direct real estate investment is leaving Toronto: Seeking better value in other cities because Metro Toronto house prices are some of the highest in the world (i.e., foreign investors believe you should buy low and sell high). Evidence for this shift in investor interest is seen in the dramatic drop in real estate investment and simultaneous upswings of activity in Montreal and Ottawa.
All levels of government are coordinating to bring about a “soft landing”:
Whether it’s federal mortgage, provincial foreign buyer taxes or local empty home taxes, the government will not rest until prices drop another 10 to 20%.
Some industry advocates blame the January 2018 stress test for causing a slowdown in the market but the slowdown began well before the stress test.
While fewer people are buying homes, the Metro Toronto population continues to grow:
There is still a chronic undersupply of housing. As a result, we are left with an inherent contradiction. How can we accept so many more people but sell fewer homes? The problem is we didn’t build enough to satisfy the wealthy and the middle class, so the wealthy (and their bankrolled children) are the only ones buying homes.
Even though the market is undersupplied, the situation has been improving . 2018 and 2017 have seen more houses for sale that previous years.
Supply of condos has been tight since 2016 but that can change quickly. The chart above shows the number of houses for sale tripled between 2016 and 2017. In recent years, industry experts have often underestimated the potential for volatility (i.e., risk) in the real estate market conditions and home prices.
In 2018, 34,000 new homes were built in Metro Toronto and a record 71,000 homes were under construction at year-end. Those new homes will help alleviate the extreme supply shortage in Toronto. Keep in mind, rental vacancy needs to reach 3% before Metro Toronto can be considered to have enough supply, and vacancies are currently below 1%.
A change in buyer sentiment has led to a Wait-and-see Strategy: Another theory is that homebuyers can buy at today’s prices but are playing-it-cool until they see a turn in the market. Low sales volume means the prices of most recent homes are a less reliable indicator of where the market is headed. This is because prices set under heavy sales volume are more representative of the consensus of many buyers. Low volume implies that many buyers believe properties are mispriced and are sitting on the sidelines. Declining volume in a market with rising prices is usually a leading indicator that a price drop will follow.
Here are some recent headlines and a video you may be interested in:
Home ownership elusive for young Canadians who fear going broke (BNN Bloomberg)
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 scenarios.
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:
How much you can borrow.
How easy it will be to meet all their conditions by the closing date.
How quickly you can pay off your debt.
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.
If you are investing to earn rental income, then your risk is lessened, but if you are not earning enough rental income to cover expenses, and you have greater reliance on a price rise in the property, then you should move with an abundance of caution. Buying in a dropping market is risky because it can be difficult to get financing. Banks lend based on the current market value verified by an independent appraisal and don’t consider the price you’re paying.
From a seller’s perspective, likely now is a better time to sell than in two years.
Buyers of houses certainly have more negotiating power. So long as you aren’t taking on an uncomfortable amount of debt and this is your “forever home”, 2019 will be a good time to buy but 2020 may be even better.
At the end of the day, a home is a place to live more than it is an investment. If you feel you need a home to have the lifestyle you’ve always wanted, then now is the best time since 2008 to be a buyer. Just be sure to drive a hard bargain and keep in mind that prices will likely continue to drop after you buy your home. It’s impossible for everyone to perfectly time the peaks and troughs of the market.
We recommend also you also read this article on the current risks present in the real estate market.
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. Add to this the possibility that Toronto and Vancouver may 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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