Sorry, Not Sorry: The Toronto Real Estate Market is Not Crashing.

Markets will React & Will Do What They are Going to Do. The Toronto Real Estate Market is No Different.

The media loves to perpetuate the idea that we are all about to die or go bankrupt at any moment. Clickbait. “The world is about to end; follow me here or watch this ad, and we will tell you exactly why.” Their communication playbook finds a negative angle on a story, reports it, manipulates it, and then tries to prolong and spin it until the following “existential drama” begins the cycle again. Rinse and repeat.

According to the media, we live in a continual non-stop existential crisis 24/7. This constant barrage of fear-based story reporting will, over time, affect your physiology, state, productivity, emotions, and how you interact with the world. Whether you rent or own Real Estate, affordability and its impact on lifestyle and the financial future of Torontonians has always been and will always be a highly emotionally charged hot button topic.

In a Real Estate-Obsessed City Like Toronto, the Media-Induced Never-Ending Negative Loop Continues to Go Round & Round.

How many fear-based articles, blog posts and social commentaries have you been subjected to over the decades? And always alluding to the imminent demise of Toronto Real Estate. Funny how it never happens.

Yes, interest rates are rising off historic all-time lows but are the skies falling? Is the Toronto Real Estate bubble finally (for reals, reals this time) bursting, and is this the end of life in “The Six” as we know it?

Sorry, not sorry. I hate to break it to you, but the Toronto Real Estate Market is shifting from an extreme sociopathic seller’s market to a more balanced one. Why? Primarily the tightening of liquidity and a series of steep increases in interest rates by the Bank of Canada. Remember that we’re coming off historic lows with increases that now align with historical trend lines.

Nothing more nor nothing less. The Toronto Real Estate Market is simply reacting and doing what it will do.

It’s time to get off your condo balcony ledge, take a deep breath and chill out for a second. Let’s look at the cold, hard facts:

#1 Toronto Regional Real Estate Board August Stats:

Average Days on the market in August: 22 days (by definition, a balanced market is 120 -180 days, and a buyers market is 180 days plus)

The average August price year over year is: +0.9% (yes, that’s right – up!)

Inventory Absorption Rate in August: 2.36 months; previously, in July, it was 3.1 months (a balanced market is considered 4-6 months, and a buyers market is six months plus). Note: Inventory has tightened month over month.

*ratio reflects that if nothing else were to come on the market at the current sales rate, how long would it take everything on the market to sell?

To be clear, Toronto is still very much in a seller’s market; it’s just slowing down and moving into more balanced market conditions. Given the events of the last few years, this is a very healthy and welcomed transition.

#2 Mortgage Affordability | Data Provided by The Bank of Canada:

• 65% of Canadians households are homeowners
• 30% are mortgage free
• 35% of homeowners with mortgages have fixed rates. So their payments do not immediately re-set when interest rates move.
• About 10% of all mortgages are on variable rates (most of which were stress tested).
• Consequently, the vast majority of Canadian households are currently unaffected by the rate increases.
• In the foreseeable future, nothing will force both homeowners and investors to flood the market with inventory due to rising interest rates.

#3 Consumers:

• The unemployment rate is 5.4%.
• The long-term average is 8.14%.
• Wages have risen by 5%.
• Anyone who wants a job in Toronto can get one.
• And salaries are increasing in tandem with interest rates.
• Canadian Households are sitting on an excess of $300billion in cash (and continuing to rise).

Most households with mortgages have a large buffer that we haven’t seen in previous economic downturns, making Canadian households more resilient to interest rate hikes or a potential recession.

The Bottom Line:

Despite what you read in the media, the actual percentage of properties at risk in this environment is minuscule. In case you didn’t read it the first time, nothing in the foreseeable future will force or cause homeowners or investors to flood the market or cause the market to implode as the mass media will try to have you believe.

So What is the Opportunity?

“Every decade or so, dark clouds will fill the economic skies and briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”

— Warren Buffet

Projections:

• The Bank of Canada is projecting inflation to decline to about 3% by Q4 2023.
• Additionally, the Bank of Canada calls for a return to the 2% target by the end of 2024.
• While most economists expect rates to increase for the short term, they are projecting that rates will be coming back in line with the Bank of Canada’s projections in Q3/Q4 2023.

This scenario presents an opportunity to acquire a home or investment property in a more balanced market. Buy-in at a lower (and less competitive market) and refinance at a lower rate end of next year or when rates eventually move back down. Does that sound too aggressive? The best investments we have ever seen were the buyers who went out in their “Hazmat Suits” in April 2020 and purchased while everyone else was at home baking bread and watching CNN. In life, as in investing, fortune will always favour the brave.

While everyone is looking at the Bank of Canada and interest rates, we see other trends. For example, skyrocketing rental rates and escalating costs to build and, in turn, the cost of replacement. Both are favourable trends that bode well for the pricing resiliency of Toronto Real Estate. With Europe in chaos and the United States in political disarray, the Canadian immigration backlog has grown to over 2.1 million applicants. Upon entry, a significant portion (close to 50%) will have to compete for housing in Toronto, with well-healed millennials (1/3rd of the population) all set to become first-time buyers.

The underlying fundamentals of the Toronto Real Estate Market have never been more robust; once these dark economic clouds pass, the future for our city and its Real Estate Market will never look brighter. This, too, shall pass. Mark my words, my friends.

What to Expect?

When forecasting the Toronto Real Estate Market, the best place to start is by looking at how the market responded to ‘stress’ conditions of the past.

2008 – Global Financial Sub-Prime Crisis

2017 – Liberal Government Policy Induced Crisis

2020 – Global Health Pandemic

What happened in all three instances? The market experienced a period of lower activity (total transactions) and a softening of prices for some time. And then, in each scenario, the market shot right back up and with a vengeance.

As any student of history will tell you, history does and will repeat itself. Consequently, I would expect a similar story for 2022 – 2023. It’s already starting to play itself out.

Exactly how long the current slowdown will last is hard to predict, and not even the best investors of all time can ever time a market or pick its bottom. In most instances, a market bottom is never “called out” until the market is on an upswing.

In line with a market slowdown, we expect Real Estate transactions to remain at record lows throughout the rest of 2022 and well into 2023. Inventory will remain tight in tandem with waining buyer demand. However, the suburbs and outlying areas of the GTA will bear the brunt of softening house prices.

Also, we anticipate and welcome a reduction in the agent and brokerage population, with consumers making the flight to quality and only working with the most experienced and qualified realtors.

As home prices in 2021 bloated, the number of registered agents soon followed. Not the quick and easy money-making scheme many hoped for, in our opinion. We at Fox Marin welcome the upcoming purge as a clean-up in our industry has been long overdue, with the greatest beneficiary being the consumer.

What to Remember:

Owning bricks and mortars of Toronto Real Estate will never disappear off a screen like crypto or stocks in a period of economic uncertainty.

In current inflationary times, when cash depreciates at over 8%+ over an annum, there is no better safe harbour than owning hard assets with demand and utility. And we all know that Toronto Real Estate has the track record to prove this.

A silver lining is within reach for the few who can shut out the noise and use logic and history as a guide. With a long-term view and some old-fashioned business instinct, we only see winners. And those winners will be strategically acquiring Toronto Real Estate while others cowered in fear.

The question is, who do you want to be? Life is what you make it.

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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.