Welcome to my blog on housing, culture, and design! I’m Steve Fudge and I’m celebrating over three decades as a realtor and property consultant in Toronto, Ontario, Canada.

First, did you know that any realtor in Toronto with 25 years of experience or less has never worked in a declining market outside of the hiccup in 2008 (when the U.S crashed & burned due to subprime mortgages), and in 2017 when the province intentionally intervened to cool the market with it’s Fair Housing Plan? That means about 97% of the realtors who are members of the Toronto Regional Real Estate Board have never worked in a housing market going any direction other than sideways or up. This begs the question: “Could the unknowing be leading the helpless?”.

In this month’s Dear Urbaneer – a series where I answer real estate questions from my readers on their property ladder journeys – I continue guiding a dwell hunter from last month who was uncertain about rising interest rates and whether others are also hesitant to buy property. As I unpacked their question, I realized that “understanding the mechanics of the market, including what Buyer profiles are actively pursuing property & what Seller profiles are actively listing creates some context to a market from which one can frame their own situation”.

As a result, this month’s Dear Urbaneer is devoted to exploring the Selling side in Toronto’s current real estate market conditions, which are oscillating under new dynamics.

If you haven’t read last month’s Dear Urbaneer: Who Is Buying Toronto Real Estate In 2023?, may I recommend you check it out? It accompanies this piece much like soup paired with a sandwich. They’re better together!

Dear Reader:

Since March 2022 when interest rates began to escalate, I’ve chatted to many potential sellers who decided to press pause on making a property move.

The decision for sellers to pause was not unique. In fact, many other realtors have had similar dialogues with their clients that resulted in their decisions to stay put for the time being. The by-product of this was watching the supply side of our market plummet like a stone, with even more sellers retracting from the market than buyers.

Since Interest Rates Went Up The Volume Of Sales Went Down

The increase in interest rates did cool the market. Well, kind of. The volume of Toronto real estate traded plummeted significantly.

For example, over the last three spring markets (here’s my post about The Seasons To Real Estate), the total numbers of sales for all housing types per TRREB – from January 1st to May 31st were 59,164 in 2021, 40,650 in 2022 & 31,322 in 2023. In other words, we’re clocking in about half the number of sales in the first five months of 2023 compared to the same time frame in 2021.

Why? First, a lot of speculators have been both withdrawing and extracting themselves from the market since interest rates began their precipitous incline. Some have cashed out. Some have mitigated their risk. Some are living in denial. Some are waiting to be saved. Some are crossing their fingers praying interest rates drop. Some are too cocky to believe they will, ultimately, crash & burn. Will it result in a trail of carnage and financial ruin? Might it happen to enough people that prices drop? Whatever the outcome, the drop in sales is in part because speculators are stepping out of the market. This is a contrast to recent years when speculators wore hats as both Buyers & Sellers quenching their thirst for profit and feeding their hunger for flipping which is part of the freneticism that fuels a FOMO market.

When The Volume Of Sales Dropped, Values Went Down & But Now They’re Back Up (For Now)

The increase in interest rates did cool prices, for a while. The fact that more sellers than buyers withdrew from the market helped stabilize real estate values and the city never slipped into becoming a buyer’s market.

But when the Bank of Canada did not increase interest rates in March or April of 2023,  a lot of buyers took it as a sign that all was well in the world and prices yo-yoyed back upwards. Check the graph above to see how, over the last three spring markets (sales from January 1st to May 31st), the average price of all housing types per TRREB was:

• $1,095,475 in 2021
• $1,189,850 in 2022
• and $1,196,101 in 2023.

Owner-Occupied Eclipses Speculators

What does this mean? It signals the demand for shelter by end-users – meaning buyers who have the intention and need to occupy all or a portion of the dwelling for themselves or a family member – is the predominant pool actively purchasing property while the speculators take a breather.

Furthermore, it took from March 2022 to January 2023 for the interest rate shock to wear off, and for Buyers to process and re-tool their shelter wishes, wants, and needs. Psychologically, the fact prices were ‘lower than before’ – even though higher interest rates meant shelter costs were ‘more expensive than before’ for those not paying cash – lured many buyers back to the circle in advance of sellers returning to the market. This is in part why prices starting to climb again in Toronto this spring.

So Where Are The Sellers?

There are some emergent circumstances when a cohort of Sellers wait and watch rather than actively engage. Although there have been more properties coming to market in recent months (although still historically low), listings are still in short supply. Check out the most recent data from TRREB.

In my 2017 post –> Dear Toronto Real Estate: Where Are The Property Listings?  – just when the market was ramping up hard in advance of the introduction of the Fair Housing Plan – listings were also far and few between. At that time a lot of Sellers were staying put due to the high costs of childcare and other living expenses; including the shocking sums that are Toronto’s double land transfer taxes.

Furthermore; it was the beginning of small-scale developers replacing renovators who were tearing down, rebuilding, or redeveloping properties to cater to the executive class. Basically, the product second or third-time move-up buyers would have purchased to renovate and occupy as they career-pathed their way to executive class got snatched away for redevelopment. In other words, the sum developers were willing to pay for the land was more than the gentrifiers were willing to pay for the dwelling that it sat on, especially given Toronto has a lot of 80 to 150-year-old deteriorating housing stock. Furthermore, this reality also made Toronto a playground for speculation for over two decades, because market buoyancy are ideal conditions to make easier profits. In fact, just a month after posting the April 2017 Dear Urbaneer I wrote this piece called Toronto Real Estate: Are You Investing Or Speculating?

While speculation has shrunk, a lot of the older housing stock has been gobbled up and reinvented, making it harder to find a move-in-for-now-&-renovate-later freehold dwelling in a family-friendly neighbourhood in the original City of Toronto for under $1,350,000. Meanwhile, there is an increasing amount of property catering to the executive class. For example, in 2022 I shared 10 Precedent-Setting Sales In Toronto’s Oakwood Village Neighbourhood that sold between $2,000,000 & $3,000,000 & more recently 7 New Build Sales In Toronto’s East York Neighbourhood This Past Year that sold for as much as $2,500,000. Because of this, we’ll continue to see a perpetual shortage of ‘affordable’ freehold dwellings for the middle-class professional class in the central core. On that note, this could be your rabbit-hole Toronto real estate read –> As-Of-Right Multiplexes Create Missing Middle Options For Toronto Real Estate

Ah yes, there are a number of other reasons that are prompting sellers to hunker down including interest rates being higher than everyone anticipated (given the Bank of Canada indicated they’d be low for “a long long time”); most Canadians’ incomes are decreasing rather than increasing in these inflationary times; most everyone’s household debt is higher than they’re comfortable with; the recent experience of living through a pandemic altered our relationship to shelter; and our perceptions around value – predicated by spiking housing prices during recent market peaks – compared to moderate (but still high) housing prices today.

So – with this in mind, and in the greater context of these influences, why are Sellers wary – and who are the folks that are choosing to sell right now? Here is why some Sellers are pressing pause:

1) Sellers Want To Know Where They’re Going

Unless you own multiple properties or you’ve already secured your next purchase, you’ll need somewhere to go after you sell your home, right? For a lot of folks, the thought of that is daunting. Understandably. With only half the number of properties being listed – and very few Sellers accepting Offers conditional on the sale of the prospective purchaser’s property in central Toronto – do you really want to take the risk and sell your serviceable dwelling in the hopes you find your ‘Forever Home’? What if you don’t? The truth is, not many Sellers are prepared to take that risk. I don’t blame them, especially if they’re seeking something really specific in terms of size, location, or architectural style (cue needle in a haystack).

With the unbelievable pressure on the rental market, and the cost of rents skyrocketing 20% this past year alone, securing a rental in the interim while the house hunt continues is an option. But it’s not a step up. It would be like enjoying a hot tub with champagne and then plunging into a cool pool and treading water.

Nope, Sellers are opting to be content with the home that they have – for now  – until more listings come to market. Of course, it’s a Catch-22 given reluctant Sellers are hoping for more listings to come to market while they wait and watch on the sidelines from their listing.

2. Sellers Are Wary

Plain and simple. Moving is already one of the more stressful events one encounters in their life. And compounding that stress is uncertainty.

Face it, inflation is high – stubbornly so – and the cost of everything is eye-popping expensive. The cost of living is biting hard into household income such that Canadians are earning less and paying more. The Bank of Canada is clearly not done hiking interest rates, which will erode affordability even more. And there is still a low-level buzz around the possibility likelihood of a recession, which could impact employment.

Many would-be Sellers are choosing to stay put until they are more clear and comfortable with the path ahead.

3. Prices Are Down & Expectations Are High

The stats are only just showing Torontonians know that real estate values, particularly for freehold houses in central locations are back to where they were in Spring 2021 (or higher, like this Handsome Executive Heart-Grabber In Sweet Swansea we offered for $1,899,000 that sold for $2,710,000 with 19 offers at the end of April 2023). Until the Spring market really took off, many Sellers were unhappy that the sum we realtors anticipated would be as high as it was during the pandemic.

After all, it’s natural that Sellers would compare their recent experience of the pandemic price highs and marry that to the byproducts of owning something called the Endowment Effect, whereby the owner falls prey to the basic principle that because something is yours, you attach a higher value to it than anyone else. They truly believe they’re selling their homes at a “discount”.

While that is a psychological response, it is important to remember that the value of shelter is always oscillating every waking moment depending on market conditions. In more basic terms, this means what the motivation of a Buyer is and the motivation of a Seller to agree to a sum at a specific moment in time. As a result, being attached to a sum shouldn’t be one’s only focus. The focus should also be on what one will do with the capital realized after a sale, including potentially putting the money into other investment vehicles that will realize a higher return or be more liquid than being tied up in bricks and mortar.

4. Many Sellers Can’t Buy As Much Today As They Could In The Recent Past.

Here’s the scoop. Sellers, like Buyers, could have afforded more at the time interest rates were lower compared to what they might qualify for now. As a result, with the decrease in property values over the year, the amount of equity people had dropped. Take that into account and add the costs of selling and buying, and many homeowners wouldn’t be better off. They’d actually be downgrading their quality of life.

Furthermore, the moderation in prices wasn’t enough to offset the extra costs of borrowing in order to facilitate climbing the property ladder. The moment interest rates and prices stabilize (both of which are moving targets in my opinion) a lot of Sellers are going to stay put. Click here to read Dear Urbaneer: Does It Make Sense To Buy A Home In A Declining Market?

5. The Stress Test Is Impacting The Ability To Climb The Property Ladder

While Buyers may be able to afford the purchase price for their prospective home, the stress test, which now looks at a pretty substantial rate (7 percent or higher, potentially) will limit the ability of Sellers to sell their existing residence in order to buy a better dwelling.

For current homeowners with an eye to move up the property ladder, this may prohibit movement, as they can’t qualify for the mortgage they require to facilitate this because of the Stress Test Interest Rate. As a result, they’re going to wait on their current rung on the property ladder, which impacts the natural cycle of housing supply coming onto the market. Here’s my 2019 post –> Dear Urbaneer: Is It Time For Us To Climb The Property Ladder?

6. Sellers Wanting To Port Their Existing Mortgage

The reality of a higher interest rate environment is that owners who have an existing mortgage with a great interest rate and a longer term before their renewal date want to hold onto that mortgage rate for as long as possible. As a result, any Sellers who want to sell and port their financing with them face a risky proposition.

They either have to secure their next property purchase, then sell their existing residence, and close the two within 120 days of the closing date or, if they don’t have a property lined up, they have to sell and then find the next property and close within 120 days in order to meet the typical requirement for porting an existing mortgage. Either way, it’s a roll of the dice.

If the Seller finds themselves outside of those 120 days, they may be obliged to pay the mortgage penalty to collapse the one they intended to port and arrange a new mortgage- for 3+ percent higher. This could be a substantial expense. Would you take that risk?

So, Who Is Selling?

1. Sellers Who Choose To Sell

There are always sellers who are selling because of circumstances not directly tied to the real estate market. For example, because of a death in the household, health issues, or downsizing. It may be due to life choices like relocating, marriage, divorce, or having a child. These circumstances prompted the sale. The Seller may have to adjust their selling strategy due to market conditions, but they will still sell nonetheless.

Here’s an interesting discovery I made when I was analyzing who sold their homes to High-Ratio Homebuyers in 2022 for sums between $999,000 and $999,999 (even if they were listed for as high as $1,200,000) A surprising 50% of the Sellers had owned their properties for 20 to 55 years of which 30% had inherited their residences! Were these sellers risk averse and – seeing the current shift in the market and reading all the doom and gloom – decided to cash out? I suspect these Sellers may have sold sooner had the market not been escalating so frenetically. Their financial advisors may have previously been encouraging them to hold onto their dwelling, but with the interest rate increases they pulled the trigger and sold.

2. Sellers Who Are Financially Underwater

There is a segment of Sellers who need to sell because of financial duress, which is in fact growing in the current environment of high-interest rates. Being overleveraged and financially underwater falls into the “must sell” category.

In a city like Toronto, where maxing out your mortgage is commonly seen as a means to an end to get onto the property ladder, there isn’t much wiggle room for maxed-out households to absorb interest rate shock. As a result, there are Sellers who overleveraged their debt and can’t afford their high cost of living, now compounded by the higher cost of borrowing.

In particular, one in four Canadian households extended the amortization on their current mortgages from 25 years for periods as long as 90 years (per this Toronto Star article “Lenders Now Seeing 60-, 70-, Even 90-Year Mortgages As Canadians Struggle With Rocketing Interest Rates“) are treading water.

While there have not yet been widespread mortgage delinquencies in the wake of the interest rate hikes, delinquencies are starting to climb. And mortgage delinquency rates are usually a lagging indicator of debt failures. This is because when a household is stretched thin and payments are prioritized, shelter is usually the top priority which means that they may default on other debts first.

Furthermore, mortgage collection cycles run a little differently from consumer credit defaults, with homeowners generally having much longer to get caught up on payments/make restitution before they default on their mortgage loans, so it is a process that takes time to get absorbed into the market.

This report from Equifax showed that homeowners are missing more payments on non-mortgage products, which increased by over 15 percent, year-over-year in Q1 2023.  This amount is almost double what it was in the quarter prior (in the same year-over-year comparison). Indications are that, as rates rise and more people come up for renewal, this Seller segment will likely increase in the coming months.

Here’s my post called Will Extending Mortgage Amortizations Delay, Or Save, Toronto’s Real Estate Market From Further Price Declines?

3. Property Investors Being Bit By Higher Interest Rates

Interest rates are a variable that can erode the ROI for property investors, felt even more deeply if an investor holds one or more properties (which many do. Check out this past post: The Number Of Owners With Multiple Properties Is Increasing In Toronto. Here’s Why!)

As a result, more property investors – or should I say Speculators – are selling their properties because interest rates are much higher than when they initially purchased. Of course, this all depends on how leveraged an investor is – and if they own multiple properties – these higher interest rates are increasing their negative carry (the amount of money the investor has to contribute to serving the debt costs over and above the rent generated) while eroding the value of the property. It’s a double hit that cannot be sustained indefinitely.

At a certain point, it makes sense to cash out and invest the funds elsewhere, which is why we are seeing more of this seller profile actively extracting themselves from the market.

In all market conditions, selling successfully (which means, quickly and for top dollar) requires a well-thought-out strategy. This is even more prevalent in our current market because success hinges on diving more deeply into the details and framing expectations around goals specifically.

May we be of assistance?

Be assured we’re here to help you discreetly define your goals and to develop a strategy to get you there!

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Since 1989, I’ve steered my career through a real estate market crash and burn; survived a slow painful cross-country recession; completed an M.E.S. graduate degree from York University called ‘Planning Housing Environments’; executed the concept, sales & marketing of multiple new condo and vintage loft conversions; and guided 2 generations of clients through the purchase and sale of hundreds of freehold and condominium dwellings across the original City of Toronto. From a gritty port industrial economy into a glittering post-industrial global centre, I’ve navigated the ebbs and flows of a property market as a consistent Top Producer. And I remain as passionate about it today as when I started.