Welcome to this month’s installment of Dear Urbaneer, where I – a Toronto realtor for 30 years – answer real estate questions from my savvy readers. This time around, I’m offering guidance to a reader with a young family who will soon be relocating to Toronto. Given the current concerning economic strains and stressors – and a bleak forecast to boot – they want to pick my brain regarding prudent purchasing strategy and how the timing of their imminent move might inform their decision to purchase a property or rent instead.

Dear Urbaneer:

I have recently accepted a job in Toronto and will be moving my family – including two young children – to the city to start the next chapter of our lives. Given the current dynamics of the market with interest rates rising and prices dropping, we are wondering if we are better off seeking a rental in an area that would have us in a reputable public school catchment, or if we should take the plunge and buy a home. We hear rentals are expensive and sometimes rare in established neighbourhoods which could present some challenges, but what if I buy a home now and it slides in value? There is a lot of talk about an imminent recession. When is the right time to buy?

Signed,

It’s All About Timing

Here’s my reply:

Dear Timing:

Yours is a great question and a conundrum faced by a host of dwell hunters at the moment. We’re entering a period that presents a level of unpredictability I haven’t experienced since I started my real estate career in the early 90s when values dropped upwards of 35% over a six-year period. Then Toronto real estate prices began a gentle climb for the next two decades until, since 2010, shelter increasingly started to be considered a financial investment as much as it was considered shelter (and for additional reasons as I wrote in this 2017 post called 7 Reasons Why Toronto Real Estate Prices Have Skyrocketed Over The Past Decade). Since then, property prices have skyrocketed, and – outside of periodic government interventions and money market disruptions (like the sub-prime lending fiasco in 2008) – property values have been on a vertical trajectory. But will this be our future?

I’ll show you in more detail with a few examples of how property values have changed since the early 1990s and through that lens, I would recommend that your position on buying a home should be less about your timing – and more about your timeline. But more about that is below, as we do find ourselves in a unique situation in the context of the current market.

Right now we have the combination of inflation running at a 40-year high – making the cost of living skyrocket – and a quick succession of interest rate hikes to temper that inflation, making the cost of borrowing more expensive. The result? Property prices are falling. Compounding that, wages have not been rising at the same pace as the cost of living for some time. In fact, “house prices have been growing at a rate 41.9% faster than incomes since 2015, creating an overvalued real estate market. And even further back, house prices have more than doubled the pace of income growth since 2000” as reported in this March 2022 Canadian Mortgage Professional piece called “Canada Is Second Only To One Country For Highest House Price-To-Income Ratio“. What does this mean? Potential purchasers have been getting priced out of the housing market for some time, which has put a greater squeeze on rental inventory and pushed market rents higher.

What’s next? An increasing number of analysts and economists are predicting that the next rate hike – scheduled for September 7th, could be the proverbial straw that triggers a recession.

All in all, this is the very definition of economic uncertainty.

So – in a preliminary short answer to your question – what does one do during times of uncertainty as it pertains to your dwell hunt? You stop. You breathe. You consider your goals and priorities, and then you consider your options offered through a data-driven, process-oriented strategy. This includes aligning yourself with an experienced realtor who can see the bigger picture to help you navigate your future, not necessarily with the objective of purchasing right now or even soon, but by educating and informing you on all the real estate fundamentals so you can act on property purchase when the market makes sense to you and your long-term goals.

I gently steered a dwell hunter in this 2019 post called –> Dear Urbaneer: Should I Buy Property In A Climate Of Rising Interest Rates?  who was concerned about saddling themselves with too much debt just to buy a home, given the high price of shelter. Years later, we face a similar situation – but with a twist. While there is the concern with affordability and being able to get onto the property ladder, there is also the concern of purchasing a home at the crest of an imminent real estate valley, as you’ve expressed.

A Snapshot Of The Market

There have been lots of dire predictions of late for the housing market – particularly in Toronto – riding high from the pandemic-fuelled property boom. While the headlines are alarming about the softening of the market, a continued pullback is a reasonable assumption given escalating interest rates are eroding purchasing power, and Sellers – who have enjoyed decades of swift price appreciation – are having to reconcile that Buyers simply can’t pay as much as they did as recently as six months ago. In the last years, the market has ascended at a breakneck, unsustainable speed. Emphasis on unsustainable. And part of the machine that has facilitated this – access to cheap money with low-interest rates – has stopped. Affordability – which has eroded substantially for a long period of time – actually became worse as interest rates have increased. Something’s got to change which means real estate prices have to fall and wages have to go up.

The consensus is that prices will continue to fall, although there are varying schools of thought on how far they have to go – and for how long. Click here to read this CTV article “Here Canada’s real estate market is cooling. Here’s what to expect this fall“. Click here to read “Toronto Home Prices Plunge 11.5 Percent To $1.02 million (July 2022)“. “Toronto Sales Plummet To All-Time Low As Buyers Recoil From The Market” by BlogTO shows a deep slide in Buyer activity in the single-family home market, but also an uptick in the condo market. Why? Because purchasers who choose to buy are bidding on less expensive properties which are typically condominium dwellings.

As alarming as the headlines are – some of which are calling for the greatest correction in history – it is important to take a step back and consider the context – and the language. Many analysts are calling for a correction – not a crash. A correction, although deep (with some places such as the suburbs and exurbs deeper than others, like the city centre) suggests a pullback and righting the course again. Whereas a crash – is more fiery and final. I experienced this in my early days as a realtor when an exhaustion movement – which is when almost every Buyer has already bought and no one else is forthcoming to keep the filtering of housing stock trading – occurred in Toronto in the early 90s. You can read about that in my post –> When Dreams Of Domesticity Became Nightmares: A Recollection Of The 1989 Toronto Housing Market Crash.

As this story from Better Dwelling “Canadian Real Estate Expected To See A “Historic Correction,” Biggest Drop Ever: RBC” discusses, prices are expected to correct through 2023. This pullback actually provides some relief from a long nearly-spinning-out-of-control frenetic Toronto housing market and will dial prices back to pre-pandemic times which will provide entry to many homebuyers who had been priced out. The real question, however, is that while shelter will be less expensive relative to the past five years, the cost of housing remains pricey and still unaffordable to many. Will people be willing and able to manage the higher costs of mortgage debt that is required today, now that it is more expensive? Will existing homeowners be able to renew their mortgages at higher interest rates? At the moment we should all sigh a breath of relief that the federal government introduced the Mortgage Stress Test in 2016 that ensures Buyers can afford payments at a qualifying interest rate which is typically higher than the actual rate in your mortgage contract. Here’s a great piece in Moneysense called “The Canadian Mortgage Stress Test, Explained.“

As I explored in my recent post –> Rising Interest Rates And The Toronto Real Estate Market, the higher interest rates require dwellings to sell for lower prices just to cost the same amount each month. Right now, the only situation where the new lower prices make housing more affordable is when properties that were typically selling for over $1,000,000 are now selling for $999,999 or less, which means Buyers with less than 20 percent down can buy through CMHC insurance and put as little as 5% down plus closing costs. The ‘affordability’ here isn’t really about lower monthly costs, but about ‘family-friendly’ dwellings being listed for sale that households who have less than 20% down payment (the minimum down payment required to secure conventional financing) can secure a high-ratio mortgage by purchasing mortgage default insurance from either the Canadian Mortgage and Housing Corporation (CMHC), Genworth Financial or Canada Guaranty. This is one of the most crucial factors in our housing crisis. Freehold housing for the ‘missing middle’ hasn’t been within financial reach in the original Greater Toronto Area for some time and it’s destroying our urban fabric as well as messing with our heads.

Seven Properties In Downtown Toronto

I want to share with you seven properties in the original City of Toronto and their listing history since the late 1980s so you can see how values have changed during my career in shelter. My aim here is to illustrate both how values for Toronto real estate have fluctuated over the past as well as how substantial the price gains in the past decade. Note how some of these dwellings have – at times in the last real estate bubble in Toronto – sold for lower sums than what they previously sold for. By and large, there was a 20-year time frame when Toronto real estate values increased incrementally rather than see the gains we have witnessed since around 2010. The question for you is, “Would you be prepared to purchase a property and see smaller gains (and break-evens) for the security of owning rather than renting? How about for the next decade?”

Cabbagetown Victorian Rowhouse

This former 3bed Victorian rowhouse in Cabbagetown – which has the largest collection of Victorian dwellings in North America – was renovated in the late 1990s into a 2bed with a large washroom, which was very much the fashion of the day. It’s had upgrades since, so do keep in mind as I illustrate these listings they have had upgrades and renovations (some recently) which is reflected in the asking price.

– Sold 1986 $175k – Sold 1988 $279k – Sold 1997 $280k – Sold 2004 $397k – Sold 2010 $529k – Sold 2018 $1,05mil – Listed For Sale –> $1,625m –

Summerhill Worker’s Cottage

This 2bed worker’s cottage in Summerhill has been upgraded and renovated over the years, and recently. It’s being promoted as a condo alternative which makes sense. Instead of having a high common fee one can qualify for a larger mortgage and buy a more expensive freehold dwelling.

– Sold 1990 $205k – Sold 1996 $222,500 – Sold 1998 $295k – Sold 2003 $400k – Sold 2009 $529k – Recently Sold Summer2022 –> $1,45mil

Yorkville Condo On Bloor Street West

This city vista CN Tower peak-a-view 1600 square foot condominium is in a premier 41-year-old building on Bloor Street West in Yorkville with an entrance near Yorkville Park, which I love. As you may know, Yorkville has become one of the epicentres for the global elite seeking a mise-en-scene pied-a-terre – a trend that is reflected in the asking price for this swish 2bed suite.

– Sold 1996 $245k –  Sold 2004 $475k – Sold 2009 $750k – Listed For Sale –> $2,950,000 –

A Leslieville Victorian

A semi-detached 2.5storey Victorian built-in 1888, located just east of Broadview north of Queen where Riverside transitions into Leslieville. My love for this location spans decades, as I wrote in –> Realtor Steven Fudge Has A Nose For Leslieville, On Toronto’s East Side.

– Sold 2001 $190k – Sold 2007 $362k – Sold 2009 $470k – Sold 2014 $679k – Sold 2017 $1,275mil – Now Listed for sale for –>$1,495mil

King Street East Condo

A spacious 2bed+den 31-year-old condominium at King&Church with a pretty church vista view + deeded parking steps to St. Lawrence Market.

– Sold 2003 $239k – Sold 2006 $299k – Sold 2008 $379k – Sold 2015 $498k – Sold #Summer2022 For –> $760k

What this underscores is that when buying property, your timeline is more important than your timing.

So when is the right time to buy? It’s when you find a property in satisfactory condition with a suitable space plan in an acceptable location that intuitively feels like home, is within the budget and can accommodate your household’s needs now and for the years to come. When that occurs it may be the right time to buy – for you. (Btw, my posts –> Maslow’s Hierarchy Of Needs For Toronto Real Estate Buyers & Dear Urbaneer: How Do I Know This Is The Right Home To Buy? offer additional counsel).

Furthermore, the seven property examples above illustrate that Toronto’s real estate values have had their roller coaster ups, downs, and flatlines over the past 35 years, and ironically illustrate our property market – after a decade + of price escalations is ripe for a period of volatility. Certainly, the interest rate hikes by the Bank of Canada since March 2022 have all but eliminated speculators (which we desperately needed) and tempered real estate investors (who may be sleuthing for sellers caught under financial duress) but are otherwise sitting on the sidelines trying to time the market in order to maximize profits. Because of this, it may be an opportune moment to act on a purchase if your priority is to have a safe secure shelter for your family to occupy. Why? Because as long as you’re purchasing a principal residence that is within your financial means that you are willing to occupy for at least the length of your mortgage amortization period, then it doesn’t really matter if its market value goes down before it goes up. The real value of the dwelling is that one day the mortgage will be paid off, your equity position will be substantially more than if you had rented, and you will enjoy a security of tenure that only comes when you own your property free and clear. History demonstrates your property investment will provide a return unless you have to sell. Because shelter is a necessity and demand will continue in Toronto because of our vibrant local economy, robust employment growth, immigration, and anticipated population growth. Specifically, for those seeking freehold dwellings in the downtown core, there is and will continue to be demand. There is only so much land in the central core, and eventually, many existing freehold houses will be torn down to create higher density living environments, whether that be multi-unit houses, condo stacked townhomes, or other dwelling types. 

Another one of my tidbits of wisdom? The best time to buy a home is when no one else is buying. Fewer buyers mean less competition.

A Note About The Rental Market

Would you be better served to seek a rental right now and defer your purchase?

The rental market in Toronto is tight – and getting tighter all the time as interest rates rise, and more people are stepping away from dwell hunting as the cost of living makes homeownership less affordable. With an already low vacancy rate, and a lack of available stock- particularly in desirable areas (like close to good schools as you indicated was a priority to you), the rental market has become the new property type to incite bidding wars. This means that you will likely pay a premium for a rental that meets your needs. So although there is fear or a perception of overpaying to buy a home as the market is cooling, it truly depends on whether you can find a suitable rental and if it makes economic sense to you. Seeing as you’re relocating to Toronto, you may be well-served securing a one-year lease with the option to renew and see how it goes. After all, we are not in a property market where we have to live with the ‘fear of missing out’ keeping in mind that if the perfect property to buy comes for sale you can likely sublet your rental or live in it if you need to complete upgrades or renovations prior to moving in.

However, that requires you to be comfortable with making another future move, potentially living in limbo waiting for the market to bottom out and ultimately creating another level of insecurity for your long-term plans – in a market that is already quite volatile. Again, it comes down to having a practical list of wishes, wants, and needs, setting a realistic budget, and being prepared to purchase and own the dwelling for an extended period of time so that your family can comfortably live in a residence that grows with you should the real estate market temper (at the very least you are paying down your mortgage debt and building equity). We recommend this Toronto Star article, titled, “Bidding Wars And Soaring Prices: Toronto Renters Face A ‘Perfect Storm’ In Tight Market“, and this piece by the Financial Post: “Great For Landlords, Horrible For Renters’: How A Runaway Rental Market Has Become Toronto’s Latest Housing Nightmare“.

In fact, according to an Urbanation report, “Toronto Rents Are Rising At Fastest Pace In More Than A Decade“. Moreover, rental prices are forecasted to keep climbing rapidly in concert with further looming interest rate hikes. Some pundits are predicting an additional 15 per cent increase on top of the record-breaking rent hikes we’ve seen to date: “Toronto Rents Expected To Jump By Another 15% Over The Next Six Months, Experts Say” (TheStar).

Is There A Recession Coming?

Again, a little context is important when taking stock of the headlines.

Even as recently as a month ago, the jury was fully out regarding an impending recession; many pundits acknowledged the possibility of a recession but thought that the probability was less likely. However, recent data from Stats Canada – and a telling op-ed piece from Bank of Canada’s Tiff Macklem – has abruptly seen analysts changing their view of a recession from possible to probable.

Macklem indicated that inflation was running way too high, insisting that policy measures to date, while making some inroads, have been insufficient for slowing the ‘runaway inflation train’ (and bringing inflation back to the target of 2 percent.) The truth is that, while raising interest rates creates an additional burden on cash-strapped Canadians, high inflation is far more harmful across a broader section of society in the long run. As such, Macklem communicates that it is necessary to raise interest rates – again- and that it is possible these rate hikes will be here for an extended period.

However, not all recessions are created equal, and there are some indicators that – should one occur – it may be short-lived.  One hallmark of recession is job loss, but while the Canadian economy lost jobs last month (which would ordinarily be criteria for the BOC to pause on rate hikes) unemployment is still very low. And the unemployment rate is actually at a 50-year low. And there are reports that many of the jobs lost are actually due to retirement, which will continue to be the case as Baby Boomers will do that in great numbers in the coming years.

Recent data from Stats Can showed that the number of job vacancies keeps hitting new peaks: “Statistics Canada Says Job Vacancies Reached Another New High In June“. With so many employers still trying to fill positions left vacant during the pandemic,  if a recession does appear, it might be shorter than average.

Tips For Dwell Hunting In A Declining Market

As far as your dwell hunt goes, whether we do enter into a recession or not, the housing market is likely going to continue to decline for the short term, as long as interest rates continue to rise, placing downward pressure on prices. That said, even in economic uncertainty there are steps to take when buying a home to mitigate risk and minimize vulnerabilities.

-*- What is Your Budget?

Budgets seem to get thrown to the side in a hot housing market, where bidding wars are the norm – and paying huge sums is seen as the cost of homeownership. However, while setting and staying within budget is always important, it is even more crucial in a downward market. This is in part how you avoid “overpaying” for a home. And nothing will fuel buyer’s remorse quite like overshooting your budget and watching your home value drop.

Sticking to budget means staying on course with your long-term plan.

-*- What Is Your Timeline?

Buy and hold, hands down is the way to ride out the highs and lows of the market. If you think that you may require a quick turnaround to sell your home, buying in a deflating market is a risky move- particularly if you are highly leveraged. We saw that in great numbers in the U.S during the subprime mortgage crisis and the Great Recession, where highly leveraged homeowners saw the values of their homes plummet below what they had borrowed against them, and were forced to sell at a loss – or worse. Power of Sales is never ideal.

Regardless of market conditions, buy and hold is the prudent position. Click the following link to read my post–> Dear Urbaneer: How Much Profit Should I Expect Climbing The Property Ladder?

-*- How Financially Vulnerable Are You?

Tied into your timeline, what factors exist in your life that might make you financially vulnerable and cause you to sell sooner than you had planned? Is your job secure (relatively speaking)? Is there anything that might interrupt your income in the near future (i.e., having children and going on maternity/paternity leave etc.)?

How much other debt do you have? Don’t forget that rising interest rates will make all of your debt more expensive- not just your mortgage. If you are heavily debt-laden, you will feel the pinch of rising interest rates even more.

How much down payment are you prepared to put down? The more the better. Don’t forget a home is a leveraged investment with interest rates being the variable. The higher the rates and the higher your debt, there is erosion against your ROI.

-*- What is Your Risk Tolerance?

There is what makes sense on the balance sheet, but then there is your comfort level with your purchase. If the price of your home does drop substantially, will that bother you significantly? Is it something that you can see through to the big picture, or will the idea keep you up at night?

-*- Develop Your Wishlist – And be Patient

Where do you want to live? What amenities are most important? What type of home and features are you after? How much are you willing to compromise on these items?  Align your priorities with your own personal house hunting matrix, which I outlined here in this post Dear Urbaneer: How Do I Know This Is The Right Home To Buy?.

Be prepared to be patient to find your perfect place – especially if you are location-dependent – but be mindful of your budget and your comfort level of compromise. My past post –> Demand For ‘Forever Homes’ In Toronto’s Downtown Family Neighbourhoods Persists Despite COVID-19,  reflects that many people still want to move forward with having the right shelter for their household’s needs, regardless of the headwinds. And delaying a purchase – if a family-friendly home in a specific neighbourhood is a stated goal –  adds a layer of insecurity (not owning a house) leaving you in limbo.

Furthermore, a great time to climb the property ladder is when prices are dropping. Why? Because if values drop in a location by 20% the cost of a $2,000,000 dwelling drops by $400,000 whereas a residence that costs $1,300,000 drops by only $260,000. Here’s my post –> Dear Urbaneer: Is It Time For Us To Climb The Property Ladder?.

Remember, you are not trying to time the market. You are trying to gauge the right time for you to gain your foothold based on your personal circumstances. It’s important to really think through your strategy, consider all the variables, and weigh your options. With decades of expertise, wisdom, and insight to guide you, we’re here to help you articulate your strategy and see it through! 

Anxious about affordability and further rate hikes? Of course, you are! Worried about what a significant downturn could mean for your finances as well as your homeownership goals? That’s only prudent!  Ready to become as informed as possible in order to make smarter, proactive (not reactive) real estate decisions? Excellent – we can help!  I’ve been analyzing and forecasting the swells and dips of Toronto’s real estate market for decades, and have built my business on a foundation that favours thorough research, thoughtful insight, and well-executed selling and purchasing strategies. Here are a few of our recent posts that provide further insights:

• Rising Interest Rates And The Toronto Real Estate Market

• Dear Urbaneer: What’s Being Done To Create Affordable Housing In Toronto?

• When Dreams Of Domesticity Became Nightmares: A Recollection Of The 1989 Toronto Housing Market Crash

• The Affordability Conundrum For Toronto House Buyers: Location, Condition & Costs

• How Canada’s 3 Levels Of Government Shape Housing Policy & Programs

Thanks for reading!

~ Steven

Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage – (416) 322-8000

– we’re here to earn your trust, then your business –

Celebrating Thirty Years As A Top-Producing Toronto Realtor

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