Welcome to the Urbaneer.com blog that explores housing, culture and design in Toronto, Ontario, Canada!
If you’re new to our blog, we feature local destinations to explore and discover; insights on urban planning, architecture & design; posts about the history, evolution and future growth of our city; and a whole lot of information, guidance and counsel about Toronto real estate, housing, and home. Plus, as active participants navigating all the colour and complexity of the Canadian housing crisis, we’ve been unpacking some of the bigger issues impacting the shelter industry, including the challenges to affordability in a climate of rising interest rates, the roles and responsibilities of municipal, provincial and federal governments, and how competing interests for property shape the movement and momentum of the market.
You’ll also find content showcasing the unique qualities and neighbourhood amenities of Toronto listings we’re actively promoting for sale or rent at any given time; each property – no matter its location, condition or type – has its own value-added benefits specific to its place in our urban fabric that we believe every prospective purchaser should know and understand. Want to see how we serve our clients doing this? Here’s How Urbaneer’s Toronto Real Estate Marketing Program Sold This Sun-Kissed Contemporary Loft In Riverdale’s Printers Row.
What’s Happening Right Now In The Real Estate Trenches
At the beginning of 2022, media headlines began touting the pressing need for the Bank Of Canada to implement a more robust monetary policy in anticipation of the rebound from the Omicron wave of the pandemic, to calm the country’s scorching hot real estate market, and to temper inflation which had hit 4.8% in December 2021 – the highest level in 30 years. Fast forward to today, at the opposite end of the year, and there have now been a total of seven interest rate hikes to cumulatively total a 4 percent escalation in interest rates this year.
SEVEN! (Addendum – which became EIGHT on January 25th, 2023)
The central bank’s policy rate is now at 4.25 percent (Addendum – now 4.50 percent as of January 25th, 2023) (it was 0.25% at the beginning of the year) which is the first time it has topped 4 percent since early 2008. To better understand this, consider reading my post called Rising Interest Rates & Toronto Real Estate.
If you’re a rational, educated consumer, you can understand how a series of interest rate escalations would naturally result in a decline in real estate values. First, as interest rates increase, purchasing power is reduced for those who need a mortgage to facilitate the buy. As such, those who need to borrow larger amounts (like first-time buyers or investors leveraging existing equity) may no longer qualify and, consequently, be sidelined as active buyers. Second, rising interest rates invite economic uncertainty; those who are risk-averse tend to retract from the market, therein reducing the buyer pool, market momentum, and the likelihood of bidding wars (which were a common occurrence in the spring). Third, as demand softens, existing property owners who are highly motivated to sell (due to financial duress, a change in household structure, unemployment or relocation, etc.) are more likely to accept a lower sale price under the threat that there is greater competition (i.e. more listings competing against a shrinking pool of buyers). This state exists in stark contrast to the scorching hot spring market, when the sheer demand for property (Remember FOMO?!) tended to push property values to new peaks, regardless of a Seller’s motivation or circumstance.
A Topsy Turvy Market
Here are some examples of how rising interest rates are impacting the real estate market:
- Buyers of Pre-Construction Condominiums & Freehold Dwellings. The new home market has been booming for over two decades by offering Buyers an easy near fail-safe investment program. Buy a unit(s) directly from the developer at the initial release, pay a series of deposits over an extended period of time totalling upwards of 20 percent of the purchase price (or less), and take title 3 to 4 years later when construction is complete and title can be transferred (sometimes even assigning the contract for the unit to another Buyer in advance of closing for a cash profit). Given the trajectory of the real estate market has been up for over two decades (with a bit of a flat line in 2008), the value of the completed unit has always been higher, and often financially lucrative, to Buyers for pretty much parking their money with the developer. However, the moment the Bank of Canada started increasing interest rates this market froze, leaving speculators scrambling to try to find Buyers by offering their units at substantial discounts and developers contemplating or canceling their projects outright. The new home market has a massive supply in the pipeline taking delivery in the next few years as reported by our friends at Better Dwelling –> ‘Canadian Real Estate Building Boom Hits Historic High, To “Be Tested”: BMO’. Hugely problematic. As I wrote in my post called When Dreams Of Domesticity Became Nightmares: A Recollection Of The 1989 Toronto Housing Market Crash, the oversupply of new condominiums completed in the early 1990s was a huge drag on the real estate market recovery.
- Poor Timing Through No Fault Of Their Own. Across Toronto from January through April 2022, the market was at its most frenetic; dozens of Buyers paid sums that are now considered ‘peak of market values’. With most property purchases having closing dates ranging from 60 to 90 days, during this window of time inflation + Russia’s invasion of Ukraine went from ‘not on our radar’ to ‘front page news’, prompting the BoC to increase interest rates. In a matter of weeks, hundreds of Buyers learned their lenders were not appraising the dwellings they purchased for their sale price, requiring them to make up the shortfall or go to alternate B lenders to arrange mortgages at much higher interest rates. Because of this, many Buyers could not complete the transaction, resulting in them being liable for defaulting on their contracts and the properties being relisted and sold for sums hundreds of thousands of dollars less. Case in point, this is the situation right now for several dozen Buyers in a suburb of Brampton right now – per this CBC report: “They Purchased Homes Right Before The Real Estate Downturn. Now, They’re Struggling To Close.” It’s heartbreaking to realize the circumstances that them to this spot were beyond the Buyers’ control. It’s simply a case of tragic timing.
- More Poor Timing & The Ripple Effect. One of our clients paid $1,700,000 in October for a house in Swansea that sold in January 2022 with 23 offers for $2,165,000 and never closed. In just over 6 months this property dropped 27% in value. Does that mean all properties dropped 27% in value? The answer is “It depends”. In some suburban areas, the sheer number of competing listings forced Sellers to ‘chase the market’ and continually slash their asking prices in order to achieve – read: ensure – a firm sale. In other locations, like the central core of the city where we’re most active, although there are Buyers retracting from the market, the fact only half as many properties are being listed for sale as last year means freehold dwellings in the city are only 6 to 15% less than peak Spring values. Demand still outstrips supply for the right property, and the ‘Location Location Location’ mantra of real estate is serving Sellers right now. In fact, there are still hundreds of Buyers who want to purchase a property for personal use in specific neighbourhoods. And those (very lucky) successful buyers, once they’re ensconced in their prime core ‘hood, won’t be moving any time soon, thus perpetuating the cycle of location-specific listing shortages. But this won’t necessarily continue indefinitely. The ripple effect of shifting market values means that every sale hints at the direction the market is going with the most motivated of Sellers having to follow suit. The short ‘n sweet of it is that the closer your property is to the downtown core the more stable its value – particularly freehold, move-in-ready, family-friendly homes near desirable schools and on a main subway line in the downtown core in the $900,000 to $1,500,000 price range!
- Thank Goodness For The Stress Test? When the federal government introduced the Mortgage Stress Test in 2018, where prospective purchasers must demonstrate they can cover the payments for either the Bank of Canada’s 5-year benchmark rate or the customer’s mortgage interest rate plus 2 percent – whichever is higher, real estate Buyers had no idea how well this would serve them moving forward (even though the purpose, truth be told, was to protect Lenders rather than consumers). It’s one reason why the market isn’t cratering as mortgage renewals come due. Here’s a piece by The National Post that offers more info –> “Why The Mortgage Stress Test Is Likely Here To Stay, Even As Qualifying Rates Hit 8%“. And yes, there are many Buyers who are frustrated by this, but in this safety net is necessary. The byproduct of a real estate market that has escalated in value for two decades is having two generations who have never personally experienced a real estate calamity. The introduction of the Stress Test in 2018 will be the saving grace for many First Time Buyers moving forward. That said, should the Mortgage Stress Test become less strict it will immediately translate into an escalation in every property’s value.
- Where Are The Power Of Sales? In my opinion, we’re in the early days of a shifting market, because I’m only now just beginning to see ‘Power Of Sales’ coming to market. What’s a ‘Power Of Sale’? It’s when a property owner has defaulted on making their mortgage payments and the lender is initiating a sale to recover as much of its debt as possible. When a lender brings a property to market as a ‘Power Of Sale’, they’re legally obliged to try get the highest price possible by exposing the property to the market for a period of time. So while these sales don’t necessarily drive property values down, seeing more of them come to market indicates how much financial duress there is happening at any given time.
- I’m Watching The Boomers & The Financial Landlords. By and large, I’m seeing property values slide back to pre-pandemic price points but it doesn’t mean prices won’t fall further. As a realtor who has been representing Buyers and Sellers for 32 years, trying to get one’s finger on the pulse needs five fingers today as there are so many more competing interests than there were when I began my real estate career in 1990. For example, many of my clients who purchased 15 to 32 years ago are now cashing out their Toronto real estate, and whereas in pre-pandemic times they were unwilling to sell unless their property was assured a premium price point, they’re now less attached to the selling sum as being pleased they’re still reaping a lottery like win when selling their primary residence tax-free. Meanwhile, I’m also cognizant of The Growing Trend Of Financial Landlords who are quietly and actively picking up properties right now for land assemblies that are 20 years in the making for sums that are higher than Mom and Pop Investors are willing to pay. It makes the market less predictable.
The Toronto real estate market may be a tale of two extremes moving forward- it only takes one desperate Seller to completely shift the values on a street of similar houses or identical units in a high-rise condominium tower. I find this fascinating because it’s been a really long time since market conditions can be influenced by the actions of just one Seller. We’ve seen demand outstrip supply literally for decades, not knowing that all it would take to change this would be hiking interest rates. And yet, in retrospect, it’s an obvious means to regulate the market.
However, because of this, it’s really difficult to peg what any property is worth. It’s wholly dependent on the trifecta of location, condition, and size (and the myriad of variables under those three broad shelter criteria), in addition to the motivation of the Seller and the number of Buyers who express interest.
This is a good time to mention that the Urbaneer Team welcomes offering you an overview of market conditions specific to your property at no charge, so consider contacting us, ok?
Please come back and visit our blog often for the latest in Canadian real estate news, stellar properties for sale and lease, as well as discussions on all facets of House & Home!
Wishing you the very best for the coming Holiday Season, and a New Year filled with light, love & laughter!
If you enjoyed this insight, here are a few other essential reads!!
May we be of assistance to you, or someone you love?
Now more than ever, it is essential to plan a well-researched, data-driven, tactical strategy if you are in the market for a new home. Especially in changing times, when the pandemic has prompted many to shift their focus and objectives. Have yours changed? Please know The Urbaneer team is here to help!
The Urbaneer Team
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage – (416) 322-8000
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