Welcome to this month’s installment of Dear Urbaneer, where I take on real estate-related questions from my inquisitive readers and clients. This month, I am responding to one of our clients who noticed the market has slowed and wonders why.
Dear Urbaneer:
As you know, we’ve been actively seeking a property to purchase in one of the several downtown neighbourhoods we desire. Lately, however, the market feels slower. Plus, some grim things are being reported in the media regarding a slide. Is this accurate? And what is behind this shift?
Signed,
Sighting A Slowdown
Here’s my reply:
Dear Slowdown:
You’re right that the market is quieter right now. Although there is a seasonality to real estate – with the summer months traditionally being quieter – there are several other factors at play right now in the Toronto real estate market.
Even a cursory glance at the headlines reveals the story of a slowing market. In Better Dwelling: This Week’s Top Stories: Canadian Real Estate’s 90s-Style Recession, & Toronto Investors Are Losing Big. With both first-time owner-occupants and investors feeling pinched by higher interest rates (and vacancy rates climbing), the supply of condos coming to market for sale is fast outpacing the trickle of demand. In fact, since the beginning of May, the condo market pretty much went crickets with very few showings being booked by realtors, though the Open Houses for larger condos have had steady traffic as Boomers actively research potential places to downsize. Meanwhile, those condo sellers who have been holding out for the sum they want are beginning to change their tune when Nobody is viewing their properties. With investors vanishing and first-time Buyers skittish, we’re just starting to see significant price adjustments. I’m going to take a deeper dive into the mechanics of the condominium market here on Urbaneer soon. Stay tuned.
In The Financial Post: “Record Listings In Toronto’s Condo Market, But Families Still Struggle To Find Suitable Homes“. Listings in Toronto increased last month to reach the highest level since December 2017, when the market was adjusting to the October 2017 introduction of the Stress Test for Buyers with down payments of 20% or more (a Stress Test for high-ratio Buyers was introduced in October 2016). At that time, the Stress Test saw the maximum mortgage debt someone could qualify for dropped from about 7x income to 5x income. Because Buyers quickly saw their purchasing power reduced, by December 2017 they were sitting on the sidelines waiting for Sellers to reduce their list prices (some did, some didn’t). Sound familiar?
Since the Bank of Canada started increasing interest rates in March 2022, even though Buyers withdrew from the market, so did the Sellers of freehold properties, so the scarcity of supply relative to demand has remained balanced if not mostly in favour of Sellers in the original City of Toronto. This has made it challenging for Buyers keen on securing a family-friendly residence because there isn’t very much product to consider. By the numbers, a total of 6213 properties were sold in the first 6 months of 2024, which is 16.4% fewer than the same period in 2023, and 45% fewer than the first half of 2021 when the Toronto real estate market was firing on all cylinders.
This article from the Financial Post, “Toronto Condo Sales Fall 28% In June As Market Slump Felt Across All Types Of Housing”, discusses how the increase in listings has placed downward price pressure across housing types, although felt most distinctively in the condo market.
This Globe & Mail piece, “‘Mere Mortal’ Toronto Home Sellers Resist Waiting For Fall Market”, suggests that some Sellers are listing now to get ahead of the inventory already slated to come for sale in the Autumn when the property market traditionally gets busier. This is true. From the real estate trenches, I cannot confidently say a real estate recovery is imminent and that Sellers should postpone listing until the Autumn because they’ll get a better price.
It’s important to understand that many Canadians who would like to purchase a property are waiting on the sidelines out of need. They need both further interest rate relief and property prices to decline to meet their shelter requirements within the affordability thresholds of their incomes. Many would-be Buyers are also disillusioned because rising interest rates have made their dream of homeownership more untenable, and the market correction they were anticipating has yet to happen, mostly because lenders have done everything possible to keep owners in their homes, including extending mortgage amortizations. Here’s more info in my May 2023 post –> Will Extending Mortgage Amortizations Delay, Or Save, Toronto’s Real Estate Market From Further Price Declines?
Meanwhile, the Sellers who have been listing their properties for sale are choosing asking prices that don’t necessarily align with the market, but do align with their expectation of value. These Sellers would like to sell but don’t have to sell (yet). When Buyers and Sellers are not fully committed to the trade of property – respectfully – the market is slow.
I’m not sure if you’ll agree, but I believe the market is slower in part because the collective consciousness permeating the ethers is that now is NOT the time to buy real estate. And let’s face it. It’s much easier to buy real estate when everyone else is. When the market is hot and oscillating on FOMO a Buyer can purchase and think that if things don’t work out (cohabitating with a new partner, trying one’s hand at flipping, concerned they’ve bought a money pit, etc) they think in their worst case scenario they’ll be able to exit the market if necessary and get all of their money back. In a declining market, making a purchase inherently becomes more risky because one is proceeding fully aware that the ability to exit quickly without losing capital is more difficult, especially given a property’s value has to increase about 7% in Toronto to recover one’s buying and selling costs. However, Buyers should also understand that the time to buy real estate is when no one else is. They’ll have much more negotiating power and potentially more choice.
In a shifting market, the sum any property sells for is based on the motivations of both the Buyer and the Seller, whereas in the scorching hot market of 2021, the sum most properties were selling for was based on the highest sum a Buyer was willing to pay blindly competing against other Buyers. What does this mean? First, properties that sold in 2021 that are being listed in 2024 are typically selling for less money, not more. And second, we’re seeing much greater variation in selling prices because the motivations of Buyers are not as heightened as FOMO in 2021 while the motivations of some Sellers are more elevated out of need rather than greed. A balanced market is not limited to the equilibrium between supply and demand but also includes the temperaments of Buyers and Sellers. They must equally be rational, educated, informed and realistic.
In times of collective optimism, it’s much easier to pull the property trigger than in uncertain times. When a market is turning from bad to worse, I think Buyers feel the reasons to buy must be more compelling or out of necessity. These Summer 2023 posts Dear Urbaneer: Who Is Buying Toronto Real Estate In 2023? – and – Dear Urbaneer: Which Property Owners Are Selling Their Toronto Real Estate Now In 2023? explains which folks are motivated to buy or sell in our current real estate market conditions and which ones are not.
Let’s explore these influences.
The Impact Of Interest Rates
We’re currently seeing headlines like this one in The Toronto Star: “Bank Of Canada Interest Rate Cut To Have Little Effect On Real Estate Market, Experts Say“. This is true.
For context, the Bank of Canada schedules 8 dates each year for the release of its policy interest rate decisions and quarterly ‘Monetary Policy Report’. Since March 2nd, 2022 when the Bank of Canada first began to increase interest rates, it continued to do so on each of the 7 remaining dates in 2022. In 2023, the Bank of Canada increased interest rates on January 25th, 2023 by 50 basis points to 4.50% but they did not make any change to the posted interest rates on Wednesday, March 8 and Wednesday, April 12th, 2023.
When this first happened in March 2023 many Buyers interpreted it to mean the BoC had finished increasing rates and they restarted their real estate search. When the BoC didn’t increase them in April 2023, it spurned more Buyers to jump into the market. As a result, real estate sales volume and selling prices jumped quickly. Statistically, the Spring 2023 market looked like a recovery was on its way for Toronto real estate when the total number of sales for the first 6 months of 2023 was 16.5% higher than the year before.
However, on June 7th, 2023 the Bank of Canada increased interest rates by 25 basis points to 4.75%. Within 30 to 60 days there was a retraction in the market. This, by definition, is called a “Bull Trap / Return To Normal” whereby a declining market reverses after a convincing rally or pent-up demand, and then stalls after that demand is absorbed and returns to its decline. In this case, it was the Bank of Canada’s interest rate increase that stalled the market, resulting in 16.4% fewer sales in the first six months of 2024 compared to the same period last year.
The Bank of Canada’s 10 interest rate increases from March 2022 to July 2023, bringing its benchmark rate to 5% – from 0.25% to 5% was one of the most aggressive monetary policy tightening campaigns on record. There have been rate drops since then, most recently in July 2024, with a modest drop to 4.5%. Indications are that more decreases will follow, based on inflation floating back closer to the safer zone.
However, while these rate decreases are welcome to dwell hunters, mortgage holders and debt holders of any kind, the material impact on affordability is negligible. It’s not enough to incite action from Buyers on the sidelines in any meaningful way, and Sellers – well, that gets complicated, hinging a great deal on property type and on the motivation to sell.
Pundits and analysts are mixed in their views on how much impact this recent rate cut will have. They agree it stokes optimism, but that borrowing costs remain too high for many would-be Buyers. This report from BNN Bloomberg entitled “How Will The Bank of Canada Rate Cut Impact The Real Estate Market?” looks at the various opinions – and levels of optimism – from industry experts.
The exception to this is Buyers with deep pockets. Anyone who is less reliant on financing and, therefore, less affected by interest rate fluctuations, is taking advantage of this market shift. However, we can anticipate Buyers to remain on the sidelines until rates or prices have both dropped. First-time buyers are saying ‘No Way!’. This happened in the 89 crash too, which I experienced first-hand from the real estate trenches. You can read about that here –> When Dreams Of Domesticity Became Nightmares: A Recollection Of The 1989 Toronto Housing Market Crash.
Prices Fall When Supply Exceeds Demand
At this moment in time, it’s crickets in the condo market because the two largest Buyer profiles of condos, first-time Buyers and investors, are sitting on the sidelines. We anticipate seeing significant price declines for condos (in March we posted –> Over A Recent 90 Day Period, We Discovered 1 In 4 Sellers Of Downtown Toronto Lofts Lost Money) whereas the freehold housing market will continue to be wonky.
This is something, incidentally, I have been writing about for years – what happens when so many similar units are held by investors, and then they collectively decide to sell? A casual glance through the headlines these days will tell you that prices plummet with oversupply, especially when the other significant Buyer Profile are single and 2-person first-time Buyers who are too nervous to act given the uncertainty of our market.
In the housing market in general, when you factor in the freehold market, what’s been fascinating to witness since interest rates began to increase over two years ago in March 2022 is that by and large, Sellers retracted from the market as much if not more than Buyers moved to the sidelines, which is why we’re seeing more stability in the freehold market.
We’ve also seen more price stability in expensive markets because the wealthy have more capital and less reliance on lenders – so they’re less sensitive to interest rates.
For context, let’s look at the trajectory of the market, in the context of the interest rate environment over the last several years.
4 Years In Review: Tracking Toronto Housing Prices & Sales In The Month Of June
These three Housing Charts summarize the number of sales, listings and prices for the first six months of each of the past four years:
First, the blue bars above represent the number of sales in 2021 when the real estate market was bonkers. You can also see how the market rebounded in May and June 2023 when the Bank of Canada didn’t increase or decrease interest rates.
A bar chart is a great way to illustrate how many new listings are being listed for sale in 2024l
Note in the Spring of 2022 before interest rates starting increasing how stratospheric sale prices were in 2022.
It’s Really About Mortgage Renewals
A really important factor in our real estate market is the number of mortgage renewals that are imminent. Although interest rates started going up in March 2022, when a mortgage holder is impacted depends on the term of their mortgage and its renewal date. At this moment, nearly half of Canadian mortgage holders still have to renew their existing mortgages. For many homeowners, if interest rates don’t drop substantially they may have no choice but to sell because their debt load is untenable.
When the Toronto real estate bubble burst in 1989, prices declined for 6 years and then flat-lined for 4 years before they rose from the ashes to begin their next cycle of escalation. I wrote about this in my post called Toronto Real Estate Then & Now: The Lost Decade Of The 1990s and I’m mentioning this because if you’re a Buyer, be patient. Even though interest rates started increasing 28 months ago, we’re still not even halfway through this market correction. Although the banks are doing everything they can to prevent homeowners from mailing in their keys, their permissive lending practices may still result in some financial carnage.
According to CMHC, in 2024 and 2025, an estimated 2.2 million mortgages will be subject to renewal, which works out to 45% of all outstanding mortgages in Canada. Many of these homeowners within this data point took their mortgages out in 2020-2021, when rates were ultra-low, and prices were pandemic-high.
That worked out to large mortgage sums to pay the high prices, made “affordable” with lower interest rates. It’s a reminder that for many Canadians our principal residence is a leveraged investment, and the viability of that investment is subject to variable influences including interest rates.
Those who stretched themselves to pay sky-high prices in a low-interest-rate environment years ago are now facing higher payments when their mortgages renew in the coming months. In some cases, the difference in payment is substantial, and for some, possibly prohibitive. In this Financial Post piece dated May 2024 “OSFI Flags Mortgage Renewals And Real Estate Lending As Top Financial Risks” it says “Payments have already increased for about half of all outstanding mortgages since the central bank initiated a series of interest rate hikes in March 2022 and borrowers renewing over the next two-and-a-half years will face even larger payment increases”. According to the Bank of Canada, Most Mortgage Borrowers Will See Payments Rise 34% to 54%.
Although people may be transparent about how their stock or Bitcoin portfolio is performing, those same people won’t utter a word if they’re having trouble making their mortgage payments. Losing our home still has a lot of shame associated with it, so many homeowners aren’t even sharing their circumstances with the realtors who have been called in to provide an estimate of value. Furthermore, most property owners in this situation have crossed their fingers hoping interest rates drop sufficiently to allow them to stay in their property, so they’re playing the waiting game, often listing at the earliest 6 months before their mortgage renewal date. It’s a bit of a race against the clock for these Sellers so their motivation can come into play as the anniversary date of their mortgage approaches.
These factors are happening to owners of both freehold and condominium housing across the city. And I am finding circumstances when an imminent mortgage renewal can factor into a potentially lower sale price. For example, I was recently looking at the sales of two 2.5 storey Edwardian dwellings in Seaton Village that had sold about 60 days apart with a price differential of over $300,000. I thought this sum was arguably greater than the differences between the two houses.
The property that sold for the high sum had been purchased 10 years earlier, while the house that had sold for the lower amount had been bought 5 years prior. I dug a little deeper into its closing date and found that come December, had those homeowners not listed and sold their house, they would be renewing their 5-year fixed mortgage. Five years ago a 5-year fixed mortgage had a 2.29% interest rate, whereas this December we anticipate it may be in the range of 4.99%. It’s a discernable difference that would compel a couple to exit the market. Interestingly, the Sellers must have been very motivated to sell because they accepted a preemptive offer 4 days after coming to market for sale and four days before the scheduled Offer Date. I’ve never understood why Sellers do this, and their realtors allow it. If you come to market with a set Offer Date, just wait it out and see what happens. Chances are the blind bidding war will drive the price north of the amount of the preemptive Offer. Furthermore, I love it when a listing realtor says their Seller will consider a preemptive offer because it gives me an opportunity to potentially secure a property without competing in blind bidding for a sum that is lower than what my Buyers are otherwise prepared to pay in competition.
A side strategy note: one of the advantages for a Seller using the List Low Holdback Approach is that it’s nearly impossible to know the motivation of the Seller. By listing low the Buyers competing set the value and the Seller doesn’t have to disclose how financially thin they are.
It’s not just mortgage renewals that are motivating Buyers and Sellers. For example, we recently sold a listing in Davisville Village for a very good price because the Buyers needed a specific closing date. Their need to lock down this specific date made it obvious they had already sold their current home which provided the Seller sufficient ammunition to hold out for a higher price. Buyers (and Sellers) naturally push a deal based on what their priority is. In this situation, the Buyers had to pay a premium to achieve their closing date priority.
In February 2024 I posted It’s A Different Toronto Real Estate Market, Folks! which explains some of the challenges of navigating a shifting market for both Buyers and Sellers. It may provide you with more insights.
Navigating a market as it shifts takes a specific strategy, both for Buyers and Sellers. With decades of experience guiding my clients toward their real estate goals in all kinds of conditions, I’m here to help!
Some further reading for you:
It’s A Different Toronto Real Estate Market, Folks!
Dear Urbaneer: A Question About Letters Of Opinion And Estimating Fair Market Value
Over A Recent 90 Day Period, We Discovered 1 In 4 Sellers Of Downtown Toronto Lofts Lost Money
Dear Urbaneer: Which Property Owners Are Selling Their Toronto Real Estate Now In 2023?
Dear Urbaneer: Who Is Buying Toronto Real Estate In 2023?
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