The past year has been turbulent for the GTA’s real estate market. At the beginning of the year, homebuyers were forced into fierce competition as a result of rising prices. Toronto’s real estate prices even surpassed those of Vancouver, Canada’s most expensive city in the past decades.
Since then, both demand and prices have seen a significant drop. This sudden shift can be attributed to steadily rising mortgage rates. Since March, the Bank of Canada (BOC) has increased its benchmark interest rate five times, leading to an increase in the variable and fixed-rate cost of borrowing. However, things are looking up as we head into fall and market conditions start working in the favour of buyers.
The Fall Brings Falling Year-Over-Year Declines
Based on data from Toronto Regional Real Estate Board (TRREB), home sales went up 14% in August from July. Moreover, there were more new listings sold in comparison to the past three months. While the number of home sales is down 34.2% since 2021 with 5,627 homes sold through the MLS, August experienced the smallest year-over-year decline in four months. August’s statistics may show a great disparity from the year before, but it is a great improvement from July’s 47% year-over-year drop.
The majority of sales can be attributed to detached homes. Condo units were the second most popular, followed by semi-detached homes and townhomes.
House prices were roughly the same from what we experienced the year before, rising 0.9% from August 2021 and 0.4% from July 2022. While this rise is minuscule, it proves that the demand for GTA real estate is coming back strong.
Homebuyers are Eager to Re-enter the Market
Historically, homebuyers who held off on making a purchase during the roller-coaster in the spring and summer months returned to house hunting in the fall. Experts believe that the upcoming season will be no different, but suspect that the recent BOC rate increases will make jaded buyers more cautious than in years prior.
Nonetheless, Christopher Alexander, President at RE/MAX Canada, states that although this fall’s market will not mimic the sales seen in Fall 2021, the season will welcome a healthier buying demand than that of last summer.
“What I’ve heard — even since things really slowed down in April — is that people want to buy, they’re just waiting for the market to bottom out. But I think a lot of those people that needed to buy are like, ‘okay, I can’t wait anymore, so I’m going to make a buying decision,’” Alexander says.
Through market research, RE/MAX has found that people have a strong desire to own real estate in Canada as a result of its long term asset value.
Moreover, Alexander says that fall “is probably the second-best time of the year to buy.” The market usually gets more active in the fall as prospective buyers come home from their summer vacation and return to the GTA’s real estate market in September and October with a fresh pair of eyes. Many prospective buyers re-enter the market with the intention of making a purchase before the holiday season.
The New Season Shifts Bargaining Power Into the Hands of Buyers
As a result of decreased demand and an overall quieter market, buyers will finally have an opportunity to take their time and be more prudent when making important financial decisions.
They will now be able to negotiate and put conditions in their offers. Meanwhile, sellers will be forced to slightly lower their expectations.
“As far as being able to negotiate and buy on almost your own terms, it’s going to be a really good environment for that,” notes Alexander.
Signs of buyer-friendly conditions have been apparent since August. While some homes may receive several offers, it’s doubtful that last year’s vicious bidding wars will reoccur. Nevertheless, prices are likely to rise as competition builds with more and more buyers returning. That means that now is the best time to buy, while prices are still relatively low and the market is cool enough to let buyers calmly make informed decisions.
The BOC’s Next Move Will be a Determining Factor
June 1 saw a jump of 50-basis-points, while July 13 experienced an astounding increase of 100-basis-points. During the following rate hike on September 7, the Bank of Canada increased the key overnight rate by 75-basis-points to 3.25%. What the BOC does next will dictate the rest of the year for the real estate market. We believe the BOC will announce an increase of 75-basis-points during the upcoming October 26th hike and further increase of 25-basis-points in November, making it a buyer and investor market.
“This fall is going to be interesting,” says Alexander. “There is lots of speculation that this will be the last rate hike until the end of the year. If that is true, I think we’ll have a little bit slower… start to the fall than normal. But I think come early to mid-October, things will pick up in a big way.”
Adjustments in the stress test environment caused by the interest rate hikes have already reduced the borrowing power of consumers by about 8 to 9% this year. Elena Bogomaz, a mortgage agent and chartered professional accountant at Dominion Lending Centres has noticed buyers use a “wait and see approach” after witnessing the hike in July. While Bogomaz believes that September’s hike will also make buyers wary, she doesn’t think it will make them act as cautiously as they did in July.
“The market will slow down for a little bit, but after the shock is kind of observed, people who want to buy, they will buy,” she states.
Additionally, the new spike to the benchmark rate means that potential buyers will qualify for significantly lesser mortgage amounts. This drop will be about 20%, meaning that those who could have once received $500,000 will now get $400,000.
However, Bogomaz says that investors will be less affected by this shift. The main concern of traditional homebuyers is what they can afford. Therefore, the rate can determine whether or not they will decide to make a purchase. “But investors, they are just looking for the positive cash flow. Since the rental prices went up, investors are still finding cash-producing properties to purchase. So investors will be buying regardless.”
A Lack of Inventory Will Continue to Drive Prices
The GTA has historically had low inventory levels. To add fuel to the flames, the levels went down 5% from June to July. Despite the fact that August is experiencing an average level of activity, Alexander says we should take into consideration that elevated numbers of immigrants are escalating the need for housing. “We’ve got a tremendous amount of new Canadians coming every single year,” he says. “We had almost 20,000 in the first quarter alone and typically about 40% to 60% of those end up in the GTA. They’ll all need a place to live.”
In Ontario, there is a current shortage of about 500,000 homes. Moreover, the province will need 1.5 million homes in the next decade to meet the growing demand. According to a report by the Smart Prosperity Institute, it’s unlikely that the construction sector is capable of achieving this tall order within such a short period of time.
This high demand will not allow prices to steeply fall, meaning that buying real estate in the GTA is a surefire way to earn returns on your investments.
Smart Investing and Thinking Ahead
As we’ve entered into fall, buyers must determine if fixed- or adjustable-rate mortgages will suit them best. Both have pros and cons.
Choosing an adjustable rate mortgage means that every time the Bank of Canada changes the rate, your payment will increase or decrease. “To have a more stable cash flow, I would recommend clients to go with a variable rate with static payment. But if the Bank of Canada rate increases to the point where the payment is not covering the interest portion, they will be asked to increase the payment,” says Bogomaz. “The perfect product doesn’t exist. That’s always something property buyers have to consider.”
We at GTA-Homes always, first and foremost, advise our clients to buy what they can afford, whether it is a home for themselves to live in or part of their investment portfolio. The most important thing to consider in this fluctuating market is long-term growth possibilities. It is essential to look at the market as a whole — the rental rates, resale appreciation, employment, population, development growth, infrastructure, transit and lifestyle. Let's also look at the real estate market not just in terms of what's happening today or year over year but in terms of the trends we have seen in the past decades. Real estate is a long-term investment strategy, and history has taught us that it always appreciates. Since the 1960s, homes have been appreciating by 6% yearly.
Understanding the GTA’s ever-fluctuating real estate market is often a daunting task, but it doesn’t have to be. To learn more about current real estate and pre-construction market conditions, sign up for our Online Condo Investment Seminar below.
