Despite a lack of listings, Buyers continue to pile into the market to start off 2022. We have seen prices increase dramatically in the past two years reaching which some would describe as frightening heights. Prices have soared another 28% in February 2022 after already jumping 22% in 2021. The Bank of Canada increased interest rates last week for the first time since 2018. However, many are expecting further government policy intervention (likely to come in conjunction with the federal budget) to be needed to cool current demand for Canadian Real Estate. With so much confusion in the market let’s take a look at a few Rent vs Buy examples and see who may be coming out on top in current market conditions:

Has the government unintentionally added fuel to the housing market? 

One of the bigger talking points going into the 2021 federal budget was the need to cool Canada’s housing market. Economists from multiple banks were actually encouraging the federal government to put new policy in place that will tame speculative investment in Canadian Real Estate. 

The government reacted by implementing a 1 % annual tax on non-resident owners holding vacant properties. A policy that is unlikely to have any impact on the market as the number of non residents holding vacant properties is insignificant. The government’s ability to identify and enforce the new regulation will also be very cumbersome.  

Additionally, in April, The Office of the Superintendent of Financial Institutions (OSFI) revealed changes to the stress test to take effect June 1, 2021. The proposed changes would see the qualifying rate for all uninsured mortgages to be the greater of their mortgage contract rate plus two percentage points, or 5.25%. It’s estimated that this proposal would reduce purchasing power for uninsured borrowers by somewhere between 4% and 4.5%. On the average Toronto home, this change could reduce eager Buyers spending by $40,000 – $50,000.  

However, the government spending in other areas could unintentionally add further fuel to the housing market in the interim. For instance, let’s take the government’s decision to lower daycare costs. As a parent of two who as recently as 5 years ago was paying $2,500 a month for daycare, I expect making childcare more affordable for young parents is something most Canadians can get behind. It’s easy to see the good this policy could do: help with inequalities, allow parents to get back into the workforce easier and free up more cash in their monthly budgets. 

It could also further fuel the housing market. Putting mortgage-size payments back into the pockets of young Canadian families could further drive up home prices. This is a segment of the population who are often eager to purchase or upgrade their housing needs. The government has to expect some of this funding to funnel into the housing market and consider its implications of putting more pressure in particular on suburban and rural real estate.

If interest rates are on the rise in the midterm, the policy move could also provide some financial breathing room at a time young Canadians need it most. Helping to stabilize house prices if rates do rise, avoiding a crash scenario many fear.   

The Liberal government’s recent deficit forecasts seem to indicate that they have bought into Modern Monetary Theory of Economics (MMT). A newer economic policy that encourages the government to spend on social initiatives. Identifying that unlike households, sovereign governments with their own money supply are not restricted by budgets because they can simply input more money into the economy, and their only guiding restriction is inflation. 

Whether you are an advocate or a critic of MMT, 2020 showed us that government spending can lead to housing appreciation under the most unexpected conditions. Despite falling rents and bleak economic conditions caused by the pandemic, low interest rates and government support programs, led to record price appreciation for Canadian housing. The Government’s plan to run record deficits for the foreseeable future means that funds are going to be funnelling somewhere. While it’s no guarantee that funds will continue to flow into housing, further inflation in housing is a potential outcome as the spending spree continues.

By now you have probably already heard how well the Toronto Real Estate market performed in 2020. Sales were up 8.4% from 2019, bouncing back from the slow down experienced in 2018 and 2019. The GTA’s average price rose to $929,000 – a new record, up 13.5% from 2019 and 13.1% from previous highs attained in 2017. 

However these statistics hardly tell the tale of 2020. The reality is the year was wildly volatile and 2021 could be in for more of the same. Market conditions changed so rapidly that it seemed irrelevant to write about them throughout most of the year. By the time you wrote, edited and published something with any thought, the market had already changed. 

The pandemic created an urgency to act when it came to housing. Here are the three major influences on the Toronto Real Estate market in 2020.

Housing Mattered More: While your home has always been an important space, not going to an office, restaurants, or basically anything fun you can think of, increased the amount of time we spend at home and, as a result, the importance of that space. For those whose employment wasn’t impacted, life under lockdown probably had a positive influence on their savings accounts. This, combined with a new found need for more functional space meant Buyers were both willing and able to spend more on their homes.  

Housing went from being an affordability driven purchase to a need for more and a willingness to push our budgets: our house became the place we live, work, teach, and our backyard is where we gather – at a safe distance – with friends and family. Toronto last experienced a trend correction of some magnitude in 2017. Then Buyers quickly shifted course from Buying Detached homes to more affordable condos that minimized commuting time and costs. In 2020, things changed course again. House size and property along with neighbourhood started to matter more, and people were willing to pay for it. Prices in suburbs, small town Ontario, and cottage country rose dramatically, and downtown condo prices fell.  

The Downtown Exodus and Halt to Immigration: The numbers are in and Toronto’s downtown core has fled to rural Ontario, the suburbs, cottage country, and smaller provinces. Can you blame people? Toronto’s desirable and vibrant downtown became a place people didn’t need to be and outsiders started to fear. New work-from-home measures eliminated commuting for many and the need or desire to live downtown plunged. 

As borders closed, both immigration and permanent residents slowed to a fraction of what Canada typically experiences. Further hollowing out Toronto’s core and turning Toronto’s rental market on its head. Toronto’s vacancy rate skyrocketed from its ultra tight 1% to 4.6% causing landlords to compete for the tenants they were used to turning away.

These impacts could be felt for decades. Purchasing a property is a long term decision for most people, so this could have positive economic impacts on smaller Ontario communities for some time. Toronto and other major urban centres will have to find ways to rebrand, and while cheaper rent and condo prices will help, clearly, building neighbourhoods and housing that suits our new lifestyle will be a priority. Covid will eventually pass, but its influence on how we live and work will be long lasting.  

Government Supported Close to Everything: Mortgage Deferrals, Commercial Rent Subsidies, Government Loans, CERB, Interest Rates Cuts, Bond Buying, among other efforts, left some Canadians feeling better off financially with the pandemic then without. Whether or not you support the government’s economic response to COVID, we are fortunate to live in a country that made efforts to support citizens in need. While I hope the government’s approach going forward is more targeted, unprecedented times call for unprecedented measures. 

Even with government intervention many experts were anticipating job losses and mortgage deferrals to have dramatic impacts on housing. One of Canada’s most influential housing organizations CMHC called for prices to drop 15% while the opposite actually took place.  

In a way Covid has turned decades into years. Trends like working from home, which were slowly gaining momentum hit warp speed thanks to the pandemic, allowing employers and their employees to see the pro and cons of this different arrangement. The pendulum has swung away from downtown living for now. An imbalance and shift in prices in one area creates appeal and opportunity in another. Prices increasing outside the downtown could cause condo living to look more affordable and so the pendulum will eventually swing back. Here are a few other lessons from 2020.

Lessons From 2020:  

Toronto’s Rental Market can go down! We quickly learnt that Toronto’s rental market isn’t impenetrable. Toronto experienced vacancy rates that most wouldn’t have thought possible for the city, with vacancy rates quadrupling and rents dropping in the 20% range. Though it feels like we may have found the bottom as we start 2021, investors who bought condos with negative cash flows may be regretting their investment strategy at least for another year or so.  

Don’t underestimate government intervention. The lengths governments will go in support of current systems were put to the test in 2020.  Whether or not you agree with the action taken doesn’t matter, its impact will be the same. Understanding its effect and how government is likely to react will lead to better decision making. 

Windows of opportunities aren’t going to be as wide as you think. The Real Estate market started to tumble as we went into lockdown in the middle of March. However, it only lasted a couple of months. By July the market was back with an unexpected amount of demand. Most would have expected a global pandemic to offer a larger buying window then 2 months. The lockdown this winter is actually having the opposite effect. Demand has been stronger then normal while many Sellers are reluctant to list their property. While fear should play a role in your decision making, it’s important not to let it overwhelm you. Things are not likely as bad or as good as we tend to make them seem. 

Appreciate the small and simple things in life. Having an outlet that isn’t dependent on anyone or anything else proved to be an important coping mechanism this year.  We were all forced to enjoy some of the simpler things in life in 2020 and I hope to carry this forward.

It’s a long winter and for many, our mental health is pretty fragile right now. If you are feeling low, please talk to someone, call me. Get outside, check out a new park, some great architecture, do something!

Now more than ever, active and informed Real Estate advice matters. Toronto’s Real Estate Market went from an overheating Seller’s market to a Buyer’s market in as little as two weeks. The market started 2020 with prices skyrocketing 10% in most neighbourhoods from the end of 2019 to early March 2020. Like many industries, as the reality of COVID-19 hit Toronto, demand sunk. Real Estate has been deemed an essential service by the province of Ontario and those needing to sell rent or buy, to secure shelter or finances have been permitted to do so.  

For Seller’s, marketing their property has become more complicated. Reducing the number of people who go through a home during a global pandemic is the responsible thing to do. However, some Sellers and their Realtors have continued to under-price properties to draw multiple buyers, a strategy which has succeeded for some and backfired for others. 

As National Sales data rolled in, media outlets like The Toronto Star printed headlines like “Prices Continue to Rise In Toronto Despite COVID-19”. This headline dated March 23 did not represent the reality of current market conditions, something that is difficult for any journalist to capture in this rapidly changing environment. By the time this Blog is written, communicated and read, other changes are likely to be in place. We are surrounded by sensationalized headlines on a daily basis and this crisis is challenging our ability to think and act rationally. Even computer programs driven by data will be hampered, as programmers are unable to react in step with market conditions to retool their algorithms. As monthly and yearly sales data remains important, weekly data and anecdotal evidence will increase in importance when trying to understand what is happening right now. 

What has changed to Toronto Real Estate Landscape since COVID-19 landed in Toronto:

Pricing and Prices: My last Blog post talked about how quickly prices had increased to start 2020, in the 10% range in most cases. As COVID took hold, Toronto’s prices in most neighbourhoods and segments have begun retreating just as quickly. Average year over year price appreciation came in up 14.5% in March, but the first half of March was a different story from the second half. The average price actually dropped from February ($910,000) to March ($903,000). While in most cases sale prices in April are coming in higher than 2019 prices, February highs are not likely to be reached again this year.  

Prior to COVID, properties were typically under-listed and sold above the list price. Some homes are still selling above list, but most are selling at or below the list price in current conditions. 

Conditional Offers: In a hot market, Buyers due diligence period is condensed to less than a week, firm offers are expected and conditional sales are typically not accepted. The market shift has increased Buyers ability to extend their due diligence period. New COVID specific conditions are being used, and if the market remains in Buyers favour, conditional offers are certain to become the norm.

Virtual Selling: More Realtors have embraced selling real estate virtually, with some deals being done without the Buyer ever stepping inside the home. Virtual tours and floor plans have always been an important part of many people’s marketing and now they will play an even greater role. Virtual open houses where an agent takes a video of the property have replaced in-person open houses which are currently prohibited.  

The Rental Market: As reported in this Bloomberg Article, 30% of renters didn’t pay rent for April. Understandably the demand for rentals has plummeted. Layoffs and border closings have all but halted this market for the time being. Tenants are still required to pay rent, but evictions cannot be enforced at this time. 

As listings in the rental market continue to build with little demand, prices are falling. Many landlords who are caught at the end of a lease term or who are new to market will have a great challenge finding a tenant at the expected price. Giving tenants new negotiating power they have not seen for some time in Toronto. Tenants are reminded they are still liable for any rent commitments while landlords are encouraged to work with their tenants to create a payment plan that reflects current realities.

A year ago, I wrote about the fact that condo rental supply was increasing. In fact, Q4 of 2019 represented the 6th consecutive quarter with double digit supply increases via TREBs MLS system. This supply has been supported by strong demand to live in Toronto. Urbanation recently reported that Toronto’s vacancy rate increased from 0.8% in Q1 2019 to 1.1% in Q1 2020. A continued increase in supply, tenants inability to pay rent and a drop in demand caused by COVID is quickly changing investor’s resilience in these challenging times.  

Litigious Environment: Fast moving markets typically lead to more litigation. Some Buyers may not be capable of closing because of job losses, inability to sell their home, and some will simply become litigious because they don’t like seeing that their recent purchase has dropped in value. The fact that your purchase is worth less now, or that you lost your job, does not negate the contractual commitment you made to Buying a home. It is important to have a good understanding of what terms you need to include in your Agreement of Purchase and Sale and the extra risks associated with Buying and Selling under current conditions.

Government Intervention:

Various levels of government have taken some extreme measures to help support the Real Estate and other industries in this crisis. Mortgage Deferral, Property Tax Deferral, Interest Rate Cuts, Mortgage Purchases, Tenant Protection, are some of the moves made by various levels of government and the Bank of Canada to help and prevent the market from collapsing. 

Housing Demand and Supply

Sales:

Demand has dropped drastically in a matter of two weeks beginning in mid March. Few Buyers are motivated to purchase a property in a global pandemic. In February, year over year sales were up a whopping 45% in the GTA. In March, year over year sales increased by 12%; however, the change between the first and second half of March were notable. Sales for Toronto in April are on pace to be between 850 – 900 down over 70% from April 2019. 

Active Listings:

The market started the year under-supplied for the surge in demand that took place. Active listings in February and March were more than 30% lower than the same time in 2019. Currently, active listings in Toronto are around 3,200, down about 40% from where April 2019 finished. 

Sales to Active Listing in April is likely to come in around 25% – a Buyers Market, down from 60% when compared to April 2019. In February, Toronto’s Sales to Active Listing was 91%  

Housing Completions: 

Completions are likely to be much lower than anticipated in 2020 as many will be delayed. Increased unemployment will complicate closings as finding financing through both traditional and non-traditional methods will be challenging.   

Other:

When April statistics are referenced they should be taken with a grain of salt. The city is adhering to social distancing and quarantine measures imposed by governments which makes April 2020 nearly incomparable to any other period in recent history. What we do know is that demand has been immediately lowered and people’s ability to purchase a home has been significantly impacted. The unemployment rate jumped 2.2% from February to 7.8% in March the highest increase on record with comparable data. Bloomberg has reported that there were over 600,000 mortgage deferrals (12% of the big 6 banks) and 6 million Canadians applied for income support as of April 9th.  

The government of Canada has yet to release any statements indicating that COVID has impacted immigration. However, with international borders closed, there will be a delay in the number of new immigrants arriving in Toronto to fill empty apartments and purchase available housing. 

Mortgage deferrals and income subsidy will provide needed relief for many Canadians; however, even with a quick recovery unemployment rates are not likely to return to pre-COVID levels for a long time. When mortgage deferral periods run out, for some, mortgage defaults will become a reality and some will be forced to sell their home at a time when demand is unlikely to have rebounded. 

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Some will use the information at hand to see the worst, while others will see it as providing them the opportunity they have been waiting for. Nobody knows exactly what is around the corner.

It makes sense to look back to help understand what might be to come. Many are referencing past financial calamities for comparison. Some are making comparisons to the great depression. The COVID crisis will be challenging for most of us, but we should also try to keep some perspective when making comparisons. Prior to the Great Depression, the average Canadian certainly wasn’t taking an annual vacation to the Caribbean, grabbing Uber Eats on the regular, or even participating in organized sport. If a global pandemic forces us to shift our priorities to care for the vulnerable, reduce our impact on the natural environment, and spend more time with those who play the most prominent role in our lives, then so be it. 

The Toronto Real Estate board has forecasted that Toronto home prices are likely to increase 10% in 2020. We are just 6 weeks into 2020, and in many of the city’s neighbourhoods, this price growth may have already been realized. As demand has jumped over the past 6 months, supply has trended lower. Sellers who have come to market early in the year have already set a new bar and Sellers coming to market this spring will be looking at recent sales for price justification. Buyers are out in droves in popular neighbourhoods and homes are obtaining an increased number of offers to start the year, causing sale prices to exceed listing agents expectations.  

It’s not uncommon for Sellers that come to market early in the year to see big price gains from the fall. The average sale price will normally grow in the first 4-5 months of the year, then level off at peak spring months and typically falls as we reach the summer months. You can read more about this trend in my previous blog post on when to sell your home. 

The frenzied activity is reminiscent of 2016/2017 when prices grew rapidly as inventory hit all time lows hovering around 1 Month of Inventory (MOI). That was until government regulations and a jump in listings led to a drastic change in market conditions. New inventory is needed to meet the increase in demand we are seeing in the market. Hopefully the jump in prices to start the year will encourage more people to sell. Here are some of the metrics to consider:

Sales: Sales have continued to trend higher since the middle of 2019 and TREB is forecasting 97,000 sales in 2020. A big jump from 2019’s 88,000 sales. January sales are up over 15% from last year. Lower interest rates and strong migration to the area seem to be trumping government regulations like the Stress Test and leading previously sidelined Buyers back to the market.  

Prices:  If sales are up and new listings are down, you can guess where prices are going. The limited supply is putting significant upward pressure on price. The average price in January increased 12.3% from 2019 and the HPI index is indicating a 8.7% increase in prices. 

Rental Market:  Q4 of 2019 saw supply in the rental market continue to increase jumping a whopping 36% from Q4 2018. The number of leased units increased by 11.8% as well. This is the 5th straight quarter of double digit supply increase and has led to more moderate rental price growth in the 2.5%-3.5% range. New clarity and enforcement on Air BnB regulations in Toronto could also provide a minor bump to long term rental supply.

Inventory: December and January are typically low months for inventory, but the number of listings on the market has trended lower since the summer, with the GTA currently sitting at 1.7 Months of Inventory. New listings dropped 17% from January 2019 and Active listings are down 35% in the same period.  

GTA New Condo completions are increasing. In 2017/18, completions hovered just above 15,000; in 2019, it was expected to round out closer to 20,000; and the forecast for 2020 and 2021 is expected to be closer to 30,000 units. An increase in condo completions in conjunction with an increase in purpose built rentals should provide some relief to the rental market and eventually the resale condo market. However, increased immigration and migration justifies an increase in new home supply. The supply relief is also likely to be short lived New Home Sales dropped in 2018/19 and will lead to a lower number of completions down the road. 

Rent vs Buy Analysis:  Unsure whether to rent or buy in 2020? Keep an eye out for our upcoming rent vs buy blog post covering a few different GTA neighbourhoods. In the meantime, here’s a sneak peek of rent vs. buy comparisons for a Leslieville Condo and an Etobicoke Detached. If you have a specific purchase in mind, we’re always happy to do a personalized rent vs. buy analysis, just drop us an email at andrew@relativerealty.com.