Andrew's Musings - June 2022

Let's keep a positive outlook

Just as we emerge from the quagmire of COVID, and as we look forward to warm breezes and sunny skies ahead, we’re again whacked with bad news on both political and economic fronts. The Canadian and US economies are being hammered by rising inflation, and compulsory interest rate hikes, the likes of which we have not endured since the infamous Jimmy Carter years of the late 70s. 

However, it's never all doom and gloom, we just have to take Scarlett's lead and hang on tightly until all this blows over, all the while, enjoying the warmer weather, and looking for opportunities that arise in shifting markets. The Toronto real estate market has been on a nearly unfettered upward tear since 2019, and is just now leveling out into something more balanced between buyers and sellers. Sales activity dropped 40% in April, and prices have started to decline slightly month over month, around 6% in 416, and circa 9% in the 905, however, given the amazing gains of 2021, they remain 15-25% up year over year.   

Buyers are becoming more cautious given their rising borrowing costs as interest rates ratchet higher.  Purchasing power is reduced roughly 10% for each 1% increase in rates, and this combined with inflation, will only exacerbate the affordability crisis. 

The days of listing at prices below market, and holding offer nights to create irrational bidding wars are for now a thing of the past. There is likely to be more inventory and more choice, with less buy-side urgency in the months ahead. If interest rates continue to rise as we now anticipate, we are likely to see exciting buying opportunities. Some economists call for a circa 25% reduction in GTA housing prices in 2023, while others foresee something much more moderate, around 5%, but basically nobody knows for sure.

I advise my buy-side clients to be patient and look for deals, and to keep their mortgage pre-approvals current, so they're ready to make a move when the time comes. The market is impossible to time, and maybe as a buyer you’ll overpay today, but it’s highly likely that you’ll underpay for tomorrow’s market. Supply will always be at a premium given the GTA’s limited desirable land. This combined with 400k+ new immigrants every year, most wishing to live in proper cities, of which we have few, will keep prices high, perhaps forever more. Also, primary residences are still the greatest tax free capital gain safe haven, making them more of an investment than an expense. Basically, on the buy-side, you’re going to do just fine, so get in. As my father always says, in real estate, if you don’t like the price, wait. I add, “but not too long!”

On the sell-side, I look 6-18 months out through the lens of the particular client. It’s shocking the difference a few weeks can make to achieving optimal value for homes, and how fickle and sometimes arbitrary the market seems to be for a given property. Let’s first distinguish between condos and homes (semi and detached).

Condos are much more homogenous, almost commodities, and for which metrics like $/sq ft are easy to generate and useful to compare one to many others. Because many of these units are essentially the same, and more being built every day, condos are much more likely to suffer in down times; there aren’t buyers waiting for that one particular condo as there are for houses.

Houses, by contrast, are unique both by geography and almost always design. They are thus better insulated to changes in the market, because it does truly take only one buyer seeking his/her perfect home to make a sale, and he/she’s often willing to (over)pay to get it. Also, houses in 416, as in other major cities are more price-protected than the suburbs of the GTA.

In practice, when one client asked me last month for guidance on selling versus renting his condo, I explained that we sell it today or a year from now, and so we did, and got a record price!

I’m happy to discuss real estate anytime, please get in touch.

Warmest Regards,

Andrew