Just like the Canadian winter weather, the Toronto real estate market is off to a cold start this year. Dad joke aside, a slow start to every year in a normal real estate market shouldn’t be a surprise. Traditionally, both the number of home sales and prices start low in January, gradually rise into the spring market, dip again for the summer, then see a second bump in the fall, before retreating into lows again for the winter.
The only exception?
The peak 2022 real estate market, where we saw peak average prices reach record highs in February, followed by a drop. Sales spiked ahead of the peak. December and January 2022 were unusually busy with activity compared to previous years, leading up to peak prices and a subsequent price decline.
What should real estate buyers and sellers in the Greater Toronto Area anticipate, ahead of this week’s interest rate announcement by the Bank of Canada, the foreign buyer ban which has already been implemented, and the myriad of other factors affecting the dynamics of the real estate market? Let’s have a look.
Sales + Confidence
In the first 20 days of 2022, January saw 3,215 sales in the Greater Toronto Area. Fast forward a year later, only 1,614 sales have been inked. That’s a massive, 66% decline.
Sales for the entire month of January since 1996 average 4,268, with the highest sales being 6,886 (not surprisingly this occurred in January of 2021) and the lowest 2,533 in January of 1999. Although the GTA numbers don’t include the entire Toronto Regional Real Estate Board’s numbers, anything greater than a 50% decline in sales is significant (the biggest decline since TRREB’s reporting from 1996 onward was 47.43% which happened from January 2008 to January 2009 during the financial crisis).
A significant decline in sales shows lack of consumer confidence, weary about the prospects of higher mortgage payments, job insecurity and a fear of further price declines.
Contrast that to a jump of 86.08% from January 2009 to January 2010, and a jump of 51.47% from January 2020 to January 2021.
A steady year over year increase in sales averages around 6% to 7%.
January 2023? A cold start, hinging on what homeowners looking to make a move will think about the interest rates and the affordability of their next move.
Speaking of affordability, rising interest rates have drastically increased mortgage payments. My colleague Robert Ede (http://www.unclebobexplains.com) illustrates this perfectly on his blog post talking about the inverse relationship between interest rates and real estate prices.
As interest rates, variable mortgage rates increase along with it. The interest portion of the monthly mortgage payments increase relative to the principal payments, with the potential of a borrower hitting a certain trigger rate (the point at which a monthly mortgage payment can no longer cover the interest and principal amounts combined) at which point the structure of their monthly mortgage payment will be affected — i.e. payments will increase.
This in itself shakes confidence — and the sentiment is tied to the affordability of homes. Simply put: if you feel you can’t afford a home, you won’t buy it.
Part of the issue affecting the demand side is exactly this — buyers feel that the mortgage payment for the home they want are too high, and with other factors affecting their finances such as inflation, job security and the possibility of mortgage interest rates going higher, some buyers may not feel confident enough to make a big enough decision.
Even though prices have dropped, the amount of money a homebuyer will potentially pay every month to carry a mortgage has risen. Some say the monthly payment will actually be lower, but in certain cases the monthly payment is higher.
Let’s look at an example, starting with peak home prices in 2022.
A discounted variable rate mortgage in February 2022 was 0.90%. Let’s assume an average property purchase price of $1.334,062 with a down payment of $266,812. The mortgage is $1,067,250 and your monthly mortgage payment is $4,351.
Now let’s fast forward to the end of 2022.
A discounted variable rate mortgage by mid December 2022 was 5.30%. Let’s assume an average property purchase price of $1,051,216 (a decline of approximately 21%). With a down payment of $210,243, your monthly mortgage payment would be $5,637.
Despite a decline of 21% in home prices, you’re actually paying $1,286 more per month.
Now this example is based on the average home price reported by the Toronto regional real estate board. We all know there is no real thing as an average home. But in many cases you’ll find that the increase in interest rates result in higher monthly mortgage payments, despite a decrease in price.
Seeing these high mortgage payments is enough to stifle one’s enthusiasm to buy their next property – let alone going through the qualification process and seeing if you’ll actually qualify for a higher payment. This affects some buyers’ confidence in being able to make a move and buy their next home.
With the dwindling confidence in the real estate market, you’d think there’d be more listings on the market right?
Nope — let’s talk about the next issue.
One might guess that the current state of the market should’ve led to homeowners selling off their homes to cash in on the equity. But this kind of thinking is trivial.
If they sold their home, where would they move to?
Could they get a property that has at least the same level of utility as their current one, without losing money in the process? (Think about a homeowner who owns a bungalow and can sell it for $1 million today only to buy a two bedroom condo for $650,000…).
The reality is many homeowners are staying put. During the pandemic years, homeowners spent a lot of money renovating their homes, making work at home feasible, putting money into enjoyable luxuries such as swimming pools and entertainment centres and so forth.
Inventory has gradually increased, but not at the rate where there’s a healthy enough supply in the marketplace to avoid multiple offers from happening. In markets with a limited selection of marketable homes, multiple offers are currently happening driving prices upwards.
This means the number of homes available for sale is diminishing as demand outpaces supply as we approach the spring market.
What will motivate homeowners to list their home on the market?
Homeowners who have built up equity over the years and are finding their next move (whether to a larger or smaller property) viable will likely enter the real estate market over the next few weeks.
We will see listing inventory increase as we draw closer to the spring market, but if sales end up outpacing the introduction of homes listed on the market, inventory will become tight which will put an upward pressure on price.
The interest rate announcement in a few days, anticipated at a 25 basis points increase to 4.5%, will certainly push mortgage rates higher — but will this be in a market where consumer confidence returns, albeit slowly?
The next few weeks will be indicative of how strong (or steady… or weak…) the 2023 Toronto real estate market will be. One thing is for sure — we’re currently going through a window of opportunity where wealth is created. Interest rates will eventually go down. We’re 20% (or more) below last year’s peak prices. Prices are bound to rise again — and we may be looking back at this moment in time saying…
“I wish I had bought real estate.”Photo by Jason Ng on Unsplash
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