What Is An Exclusive Listing?
2022, by all accounts, was a tumultuous year for all markets, including the Toronto Real Estate Market. Some readers may be surprised that the average selling price in December 2022 was $1,189,850, +8.6 percent year-over-year, compared to $1,095,333 in 2021 (TREBB Dec. Market Watch Report).
This growth can be attributed to 2022’s epic strong start, which began to wane in the face of rising interest rates as the year wore on.
However, given all the economic and geopolitical uncertainty in 2022, Toronto Real Estate performed relatively well. In fact, it outperformed almost every asset class, including stocks, bonds & crypto-currency.
The following article explores what lies ahead in 2023 for Toronto’s Real Estate Market.
If anything, we have learned over the last few years the near-term future remains volatile and challenging to predict. But in the face of great shorter uncertainty, when one zooms out, the long-term fundamentals and projections for the Toronto Real Estate Market remain as strong as they have ever been. And we cannot wait to see how things unfold in the coming months.
Let’s dive into it!
The smart money is in consensus that a recession in 2023 is all but assured. BlackRock (with 10 Trillion under management), Bank of America, JP Morgan, and legendary investors and entrepreneurs like Jeff Bezos and Stanley Druckenmiller all but concede that the US and Global economy are facing strong headwinds and heading into an undeniable slowdown in 2023.
According to Elon Musk (no background introduction required), “It does seem like we’re headed into a recession here in 2023; my best guess is that we have stormy times for a year to a year and a half, and then dawn breaks roughly in Q2 2024”. Musk suggests that after a largely uninterrupted 14-year expansion, the US economy is “overdue” for a recession.
Okay, are we “in” or “going into” a Recession? And what impact can we expect that to have on The Toronto Real Estate Market?
Historically recessions tend to last around 18 months, and as Elon pointed out, by historical standards, “we are long overdue.”
While the “R” word typically puts fear and panic into consumers’ hearts and minds, recessions are simply part of a business cycle and do not last forever.
The last time we had a recession in Canada was in 2008, and the Toronto Real Estate Market flatlined for about six months before skyrocketing again.
While this current recession is inherently and structurally different from 2008, we expect the Toronto Real Estate Market to remain resilient, with the bulk of the price correction taking place last year between March 2022 and July 2022.
Since then, and month over month, the market stabilized over Q3 and Q4 of 2022. And we expect this pricing stability trend to continue into the early months of 2023.
Given the historically low levels of unemployment, deep household savings levels and our prudent mortgage lending system, similar to 2022, there will not be any panic selling in Toronto which would flood the market with inventory this year.
Despite what the mass media is saying, most homeowners are not under duress, and the numbers don’t lie:
As per the Canadian Bankers Association, there are 2,196,117 mortgages across Ontario. Of those, only 1,318 are in arrears, meaning they must make 1-3 payment(s) to catch up but are not in default. This rate of arrears is 0.06%, the lowest province in Canada, with the national average sitting at 0.14%.
As a rule, markets like stability and certainty.
Once it appears that the central banks have wrapped up with rate hikes and inflation begins to subside, expect many buyers sitting on the sidelines to jump back in with both feet in 2023.
Expect a tipping point mid-year when things start to stabilize.
According to Benjamin Tal, the chief economist at CIBC, fifty percent of inflation is driven by supply-chain. And our supply-chain issues are just starting to come down.
Tal expects that inflation will be down by April 2023 from a 7% range to a 4% range, which in turn means we could see interest rates begin to ease off by the end of this year.
In a recent Globe and Mail article, Robert Carrick notes that; CIBC Economics on a Statistics Canada report shows stagnant retail sales in November 2022. Carrick quotes, “Today’s data suggest that goods spending is going nowhere fast, with inflation and higher interest rates denting households’ desire and ability to increase spending volumes.”
Additionally, TD Economics comments on the effect higher debt costs will have on spending: “We expect consumer spending growth to stall throughout 2023 and much of the excess savings built up during the pandemic to be drawn down by the rise in debt service costs.”
However, as inflation begins to cool off in overall consumer demand and supply chain bottlenecks, many economists predict central banks will start easing rates as early as Q3 & Q4 2023.
Wouldn’t that be nice?
Here is what some trustworthy industry experts are saying;
“With many residents across the Greater Toronto Area (GTA) waiting on the sidelines to make any housing-related moves, Crigger predicts next year will be a turning point for many who want to enter the market or make changes to their housing situation.”
“I think based on the pace of life and growth in the market, you’ll certainly see more activity in 2023,” he said. We’re seeing a stabilization of price. We’re seeing a lower level of activity, but we’re also seeing a relatively lower level of new listings.”
“I think as people become comfortable with what the Bank of Canada’s next move will be and people become comfortable with the rate environment that exists now, you’ll certainly see more people step back into the market,”
“The price stability we’ve found towards the end of 2022 will carry through to 2023. Rental rates clearly will remain at an elevated pace. If we see an increase in demand as people come back into the market, I think that could provide a favourable direction to the price at some point in the market,”
Royal LePage forecasts a more modest 2% year-over-year decrease, with the average home price in the fourth quarter of 2023 hitting $1,056,734.
Karen Yolevski, Royal LePage’s chief operating officer, said in the company’s 2023 home price forecast released this month. “We believe the bulk of the price correction in the GTA has already occurred and that a return to more normal trends is on the horizon.”
Yolevski added that sales are set to rise again by the middle of next year, assuming interest rates stabilize and consumer confidence is restored.
“I expect buyers who have been waiting for prices to level off will encounter increased competition when they re-enter the buying cycle, specifically in the more affordable condo segment, although not at the levels seen in 2021 and early 2022,” she said.
“A significant boost in inventory will be needed in the coming years to satisfy sidelined demand and an increasing number of newcomers.”
An end to its rate-hiking trajectory could bring a degree of stability to the housing market – although Hogue emphasized that it could be a few months before it’s clear that the Bank is definitely done on hiking rates.
“But I think most of the increase is done, and most of the decline in home resale activity is probably behind us as well. So there’s probably a little more room to go down in the coming months, but probably not that much. And then eventually the market will kind of stabilize.”
RLP, stated in their report. “In an era characterized by the unusual, this correction has not followed historical patterns. While the volume of homes trading hands has dropped steeply, home prices have held on with relatively modest declines. We see this as a continuing trend.”
Low unemployment and many unfilled job openings mean that only some families are likely to be forced to sell their homes, contributing to the lack of homes on the market.
This contrasts with a traditional recessionary environment, in which job losses snowball into missed mortgage payments and foreclosures, leading the market to be flooded with new listings. However, most people have kept their jobs in Canada’s post-pandemic period.
“In fact, they have seen wages and salaries rise. “We have a tightly managed national mortgage portfolio, with historically low default rates, supported by homeowners who have been required to qualify for a loan under the strict federal stress test for the last five years. We simply don’t see the factors at play that would result in a large drop in home values.”
Affordability will continue to be the story in Toronto. The short-term issue currently is interest rates; as inflation starts to wane and interest rates soften, the root problem (our inability of supply to meet demand) will again be front and centre. Even though prices may be down in some areas and certain types of homes, the price reductions are mainly due to increased interest rates and associated carrying costs. Therefore even where prices have dropped, affordability has not really been positively impacted.
Low pre-construction sales and project cancellations will affect future supply. In the short term, there are concerns about pre-construction buyers who purchased several years ago and will need assistance to close. There are no “hard” numbers (yet), but this could put some pressure on pricing and open up some inventory levels. There will be some pre-construction buyers that won’t be able to qualify at the current rates, plus the stress test. For example, they now need quality at 7% vs the 2% when purchasing several years back.
Will there be opportunities for buyers to acquire Assignments? From Fox Marin’s perspective, there may be great opportunities to acquire a brand-new condo on Assignment this year at a competitive price. Many original purchasers will have to qualify for a mortgage at higher interest rates PLUS the mortgage stress test. Additionally, pre-construction condos sold at record-breaking prices per square foot 2-3 years ago. With this in mind, many original Purchasers may be scrambling to close due to closing costs, potential carrying costs & mortgage qualification issues.
Lenders are also appraising units at lower prices, meaning that the buyer has to come up with extra funds to make up the difference between the smaller mortgage for a unit, based on the lower appraised price, and what the buyer agreed to pay.
a) More Homes, Built Faster Act – Basement apartments, garden houses or laneway homes can be built on a property and rented out to tenants without permits. Duplexes and triplexes could also be made on single residential lots, regardless of municipal zoning laws.
b) Ontario to Abandon Fees – including development charges, parkland dedication levies and community benefit charges—for affordable housing, non-profit housing and “inclusionary zoning units.”
c) Non-Resident Speculation Tax on homes purchased by foreign nationals raised from 20 percent to 25 percent.
d) Greenbelt – The Ontario government has officially done away with environmental protections for approximately 2,995 hectares of Greenbelt land in Greater Toronto and Hamilton. In its decision, the Government said opening the land up for housing will lead to the construction of 50,000 new homes — part of its plan to build 1.5 million homes over the next decade to alleviate Ontario’s severe housing shortage.
These aggressive policies from the Ford Government may take some pressure off on long-term supply issues but will have little to no impact in 2023.
Headlines will continue to cover the pandemic, the war in Ukraine, inflation, US politics, China’s slowdown and its move to greater state control, de-globalization and continued and increasing tensions between US & China. All splashy topics with the ability to affect the volatility and/or strength of market conditions in Canada and Investor confidence and sentiment.
Expect the outskirts and suburbs to struggle, with pricing strengthening in the downtown core first. Home buyers need the convenience and lifestyle of city living, with many given the option to work in a hybrid model between office & home.
Expect inflation to come down in 2023 but will remain stuck in the 2-4% range, which long term, will positively impact Real Estate prices upward. Government money printing and inflationary policies will continue to stimulate inflation beyond the 2% mark for some time.
An annual tax will be levied on vacant Toronto residences beginning in 2023. The City of Toronto’s Vacant Home Tax (VHT) goal is to increase the housing supply by discouraging owners from leaving their residential properties unoccupied. Homeowners who choose to keep their properties vacant will be subject to this tax. According to the City of Toronto, Revenues collected from the Vacant Home Tax will be allocated toward affordable housing initiatives.
After five years of the Empty Home Tax (EHT) being in effect in Vancouver, the total number of vacant properties had fallen to 1,398 homes or 36% fewer properties compared to 2017, when the tax first launched. To date, the City of Vancouver’s EHT has raised a total of $115M in revenue, largely directed towards grants for non-profit organizations to build new affordable housing buildings.
However, all the focus on speculation & foreign buyers did not prevent housing prices in Vancouver from rising significantly throughout the COVID pandemic. It’s difficult to measure what impact this may have in both metropolitan cities.
Assume you’ll see Scary & Shocking news headlines in the first quarter of 2023! When the numbers come out, the media will be able to compare last year’s numbers against this year’s data. It’s safe to predict that we will see headlines reporting a 20-30% drop in prices year over year. In fact, we anticipate February 2023 to be the most hair-raising, given that February 2022 was the height of the market. In a rapidly changing market constantly reacting to outside pressures, month-over-month data will become more relevant than a year-over-year comparison. Remember that the media does not often report month-to-month, and it’s easy to make a headline look gut-wrenching when comparing last year’s record-breaking first quarter to this year’s anticipated slowdown. Expect this to balance out in the late spring.
Most Canadians are now familiar with the Liberal Government’s new immigration policy. In essence, the Government has increased the country’s annual goal to 500,000 new residents yearly. To anyone who follows real estate in the GTA, it is apparent that this will significantly affect increasing demand in an already undersupplied marketplace. To give context to the significance of this policy, economist Ben Rabideaux, founder of North Cove advisors, recently Tweeted that after a record year of Canadian population growth, when taken into context, these numbers are staggering:
*includes newborns, deaths, migrations and foreign students
These numbers equate to an increase in the Canadian population of 1,920 people per day. That’s a mindblowing number! And a significant percentage of new immigrants opt to live in Toronto due to its multiculturalism, welcoming communities, wealth of jobs & abundant opportunities.
Do you think that immigration & growth may influence housing supply and demand? And that, in turn, would affect prices? You can bet on it!
We recently attended an event where CIBC’s Chief Economist, Benjamin Tal, spoke about the market at length.
Tal spoke directly about the upside to the Toronto housing market housing over the next five to ten years, referencing the city’s market fundamentals and the pricing pressure long term.
Tal pointed to; a flood of high-income earning new residents immigrating to Toronto and substantial internal demand driven by millennials (7.9 million Canadians), all compounded by the fact that in the GTA, one-third of new projects this year have been cancelled.
Undoubtedly, the issue of being undersupplied will continue to be a significant factor and storyline over the coming decade.
Just give this some food for thought:
A report published in June 2022 by the CMHC (Canadian Mortgage & Housing Corporation) estimates that Ontario needs to build 2.4 M to 2.6 M new homes in the next nine years to restore housing affordability.
Yes, you read that correctly, 2.4 to 2.6 million! To provide some additional context, the province of Ontario completed only 670,00 new homes in the preceding decade. If you want to read more about this report, take a peek at my October 2022 article that dives deeper into this topic!
At the Benjamin Tal speaking engagement, someone in the crowd asked, “Benjamin, if your son or daughter was buying, what rate would you advise them to take”? Benjamin said he would recommend they go with the two-year fixed rate. He would suggest locking in for two years and then riding the variable rate train at the time of renewal.
And we at Fox Marin could not agree more.
This advice aligns with the adage that you marry the house but date the mortgage.
Make no mistake; there will be great opportunities for those in 2023 ready to take the plunge! Think about it – you will buy at the “market bottom” and, in a few years, ride the variable train ‘down’ while simultaneously riding the appreciation train ‘up.’ In fact, it’s brilliant.
It’s not so much that interest rates rose 400 basis points in 2022; it is more about the speed at which rates rose, inducing market paralysis.
Over the last decade, the GTA’s MLS System reports an average of 95,000 transactions per annum. In 2022, there were 75,000 transactions reported, down from a record-breaking year in 2021 at 125,000 transactions. An increase in demand will help to give way to greater price stability.
1/ Even at higher rates and anticipated price fluctuations, we project 85,000 total transactions. So, slightly up from last year but still below the 10-year average.
2/ We expect more of the same outlook for total available inventory (active listings on the market). Expect real estate listings to remain tight throughout 2023, especially in the back half of the year. Why would you list in a down market if you’re not forced to sell?
3/ By year’s end, in Toronto, we project resale prices to remain relatively flat, with a plus or minus of 3 percent over 2022 in both the housing and condo segments.
The last few years have taught us that in volatile times it’s challenging to predict the near-term future; however, the further one can “zoom” out, the easier it becomes to see things more clearly. The bigger the picture you take, the easier it is to tune out the noise. We always go back to the basic fundamentals of supply and demand – and Toronto will see some sell-out shows & rockstar ticket prices in the not-so-distant future. Just wait.
Legendary investor Warren Buffet once stated, “If you wait for the robins, spring will be over.” We can’t help but think he was predicting the very future of the Toronto Real Estate Market!
What do you say?
This article was written by Ralph Fox, Broker of Record and Managing Partner here at Fox Marin Associates. Ralph is a Torontonian native who recognized from an early age that the most successful people in life apply long-term thinking to their investments, relationships, and life goals. It’s this philosophy, along with his lifelong entrepreneurial drive and exceptional business instincts that help to establish Ralph as a top agent in the real estate market in downtown Toronto.