Why Isn’t This Buyer’s Market Attracting More Buyers?
Rewind just 6 months ago and Buyers were climbing on top of each other to offer on any available home in the GTA, with the average price reaching $1,334,000 in February – a 27% increase from the year before. The market highly favored Sellers throughout 2021 and early into 2022 as Months of Inventory (MOI) was stuck at or below 1. Fast Forward to today and we are in a completely new world.
The average GTA home price in August was $1,074,000, down 1% year over year. You’d have to go back 20 years to find sales numbers equivalent to what we saw in summer 2022. Currently, the MOI is trending closer to 2.5, and the Sales to Listing Ratio has been hovering between 40-55% since March, typically 40% feels like a favourable Buyers market in Toronto.
So what’s the deal? Why don’t Buyers markets attract more Buyers? The reality is that Buyers markets don’t feel like you might expect them to. Buyers are often pumped full of anxiety and fears about future market conditions and further price pull backs. They enter negative feedback loops about job markets and economic uncertainties. Alternative risk free investments become appealing, and increased affordability constraints become a reality. They are also up against Sellers who are still coming off high sale expectations. Many of whom are often unwilling to sell for a dramatic reduction compared to their neighbour’s sale price earlier in the year
But the reality is that someone buying today will come out $200,000 better than someone who bought in February 2022, despite an increase in debt servicing costs. Granted, homes today are costing far more than they did pre-pandemic. The average home price in February 2020 was $910,000 and 5 year fixed rates were under 3%. Leaving both end users and investors reason to believe further price drops could be in store.
| November 2022 Potential | August 2022 | February 2022 | May 2022 | September 2021 | February 2020 | |
|---|---|---|---|---|---|---|
| Average Price | $1,020,300 | $1,074,000 | $1,334,000 | $1,212,000 | $1,135,000 | $910,000 |
| 20% Downpayment (DP) | $204,060 | $214,800 | $266,800 | $242,400 | $227,000 | $182,000 |
| Mortgage | $816,240 | $859,200 | $1,067,200 | $969,600 | $908,000 | $728,000 |
| 5 Year Fixed Rate % | 6.00 | 5.24 | 2.89 | 4.14 | 2.19 | 2.79 |
| Monthly Payment | $5,220 | $5,113 | $4,989 | $5,176 | $4,197 | $3,367 |
| 5 Years of Payments (5YP) | $313,249 | $306,839 | $299,370 | $310,577 | $251,818 | $202,036 |
| Interest Portion | $230,302 | $210,943 | $142,442 | $187,037 | $97,618 | $93,756 |
| Mortgage Balance End of Term | $733,052 | $763,104 | $910,072 | $846,460 | $815,801 | $619,721 |
| Land Transfer Tax | $33,750 | $35,910 | $46,310 | $41,430 | $38,350 | $29,350 |
| Invested (DP+LTT+ 5YP) | $551,059 | $557,549 | $612,480 | $594,407 | $517,168 | $413,386 |
| Invested + Mortgage Balance | $1,284,112 | $1,320,653 | $1,522,552 | $1,440,867 | $1,332,968 | $1,033,106 |
Investors seem to have more reason to take a pause given they are being offered stable investment options outside of real estate, like a GIC which can be easily purchased online with a few clicks.. The appeal of a guaranteed 4-5% return for doing nothing other than lending money is certain to keep many investors sidelined, at least until rates are no longer looking likely to rise and cap rates regain some sense of appeal.
What about end users though? With high Canadian immigration targets and rising rents, will would-be Buyers jump back in when the market is in their favor, or will they wait for lower rates to guide them back when competition for homes becomes fierce again?
Here are a few reasons why Buyers might not jump back in too quickly:
Monthly payments: Everything people buy lately seems to be driven by the monthly payment instead of outright purchase price. From cars to steak knives, consumers have the ability to purchase based on a monthly payment instead of the actual purchase price. A home purchase is certainly no exception. While the average GTA home price dropped 19.5% from February, the monthly mortgage payment required with 20% down has increased by about $120/month due to higher interest costs. Not to mention that today’s Buyer can expect to pay 52% higher monthly payments for the average house than they had to pre-pandemic in early 2020.
Stress Test: The stress test is limiting borrowers capacity. Until recent months, borrowers would have been stress tested at the 5.25% minimum rate (qualifying rate +2%) that banks used for stress testing. Buyers looking to take a 5 year fixed rate these days are being stress tested at 6.5%-7.25% range. Those opting for a 5 year variable are in the 5.5-6.5% range. Every rate increase these days is limiting borrowers capacity and directly impacting their maximum purchase price. Buyers borrowing from September 2021 to February 2022 saw an increase in fixed interest rates, but their capacity to borrow was not impacted as they were still being stress tested at the minimum rate, maintaining an environment for price appreciation.
Demand was pulled forward: While investors have stopped Buying, and some Buyers have been sidelined by affordability constraints, another reason for less demand could be because some of today’s Buyers already bought. Meaning the high sales volume of 2021 ate into 2022 sales. However, if 2022 (and 2023) sales go too low, we could quickly have the reverse effect again provided the ability to purchase is there.
With rates continuing to increase, it’s possible and even likely we could see further price pull backs. Increasing interest rates is directly impacting how much Buyers can borrow and spend. It’s important to keep in mind that this will impact various areas and home types differently.
Home prices are being put to the ultimate test with rates increasing faster than they have for multiple decades. While we have been given many reasons to think our home is worth more today than it was before Covid, capacity to purchase can’t be underestimated. It’s important to consider how much interest rates will continue to impact today’s Buyer. After all, 2020 prices ($910,000) at a 6% interest rate instead of 2.79% takes your mortgage payment from $3,367 to $4,657, an increase of 38% in just 2.5 years. Something nobody was expecting at that time.
