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  • Writer's pictureAndrew Unsworth

Navigating the Complex Terrain of Canada’s Real Estate Market

In the whirlwind of the Canadian real estate sector, 2023 has unfurled a tapestry of nuanced data, odd policy shifts, and market dynamics that offer a fertile ground for analysis. As we straddle the cusp of 2024, it’s imperative to sift through the layers of statistics, regulations, and market sentiment to chart a course for the future.

The Lure of Specific Markets: Delving into the specifics, neighborhoods like Rosedale in Toronto have defied broader market trends. The average price for detached homes here soared to an unprecedented $4.68 million in 2023, signaling not just resilience but a thriving pocket within the larger fabric that demands a closer examination.

Though this record price was largely driven by the impending tyranny of the scaled Toronto property tax increases on “luxury properties”, where owners consumers scrambled to transact high value properties before the impending doom of Jan 1, when the law was put into force. Not surprisingly, there was an uptick in sales over $5m in December, followed by no such transactions in Jan, again, if you tax something, you get less of it. Naturally, this skewed average home prices upward for 2023, where we should expect a commensurate cooling for 2024.

Another quick note on average prices is the mix of sales between condos and higher priced detached homes, which fluctuates throughout the year, and less obviously, the renovations and improvements made to properties prior to sale; our baseline is ever-shifting, so it’s tough to isolate organic price growth from the growth attributable to real enhancements to properties with newly installed $100k kitchens and the like.

But wait there’s more: the ugly truth about inflation is the impact it’s had on real wealth, average price decline notwithstanding. The cumulative inflation since 2018 is at least 18%, meaning that all else equal, homes are worth 18% less in that period in terms of purchasing power parity – the reality of value; inflation really is a wealth destroyer.

Staring in to the abyss, searching for answers

The Mortgage Regulation Pivot: The Office of the Superintendent of Financial Institutions (OSFI) has decisively addressed the burgeoning issue of consumer debt with a strategic cap on high Loan-to-Income (LTI) mortgages. Starting Q1 2025, lenders will be confined by a threshold, limiting mortgages that exceed 4.5 times a borrower's annual income. This move aims to curtail the risk stemming from Canada's escalating debt, which had alarmingly reached $805 billion by 2023. It's a policy crafted in the crucible of necessity, designed to pre-empt a debt-induced market squeeze

The Central Bank’s Balancing Act

In an economic environment teeming with uncertainties, the Bank of Canada’s stead at a 5% interest rate has been a beacon of stability. This pause is juxtaposed against a backdrop of an overall decline in home sales by 11.1% from the previous year, underscoring a complex interplay between policy interventions and market responses.

The OSFI’s new regulation, although not immediately impacting the surge in sales and prices, illuminates a path toward more sustainable lending practices. Despite a substantial decrease in mortgages with an LTI ratio above 450% from 26% in early 2022 to 12% by the end of 2023, this cap signals a future where borrowing is more closely tethered to financial realities, potentially rerouting some buyers towards the higher interest rates of private lenders. This is a space we have therefore developed for my clients with DevNorth Capital.

The Canadian Economy in Comparison to the U.S.

In analyzing the economic backdrop that has significant bearings on the real estate market, it's crucial to consider Canada's position relative to its southern neighbor, the United States. 2023 has been a testament to the intertwined yet distinct paths the two economies have charted.

The U.S. economy, as observed, has been buoyed by a resilient growth trajectory, projecting a robust 5% expansion. This contrasts with Canada's economic landscape, which, despite upbeat revisions to GDP estimates, showcases signs of stagnation, barely maintaining pace without regressing to levels reminiscent of 2021; that’s seven years of no growth, ushering in fears of a lost decade for growth. This stark comparison underscores the divergent economic health between the two nations, influenced by factors such as government spending, immigration rates, and job market conditions.

Furthermore, unemployment trends in Canada have slightly worsened, ticking up to 5.8%, primarily attributed to an imbalance between the influx of immigrants and the lack of availability of jobs. This factor, amongst others, contributes to the broader economic challenges facing Canada, including a looming consumer debt crisis, particularly in the real estate secured lending space.

Peering into 2024: Anticipations and Strategies

As the year unfolds, the real estate market is anticipated to recalibrate in response to the cumulative effects of policy adjustments and economic fundamentals. The projection for a modest 2.3% increase in the national average home price to $657,145 in December 2023 reflects a stabilizing yet variegated market landscape, where regional disparities will likely continue to manifest.

The looming renewal of mortgages, particularly those clinched during the low-rate boon of 2001-2003, poses an impending challenge. Homeowners bracing for renewal at significantly higher rates could find themselves at a financial crossroads, with the potential for increased mortgage payments by approximately 30-40%. The painful irony here is that without the elevated interest rates to curtail inflation, mortgage costs would decline sufficiently to reduce inflation back to the 2% target, and we would have no issues. However, the BOC is also determined to reduce housing costs (consumer wealth for homeowners), and reduce demand from the housing market’s many ancillary offshoots. One such offshoot is construction, of which we desperately need far more to meet our insatiable housing demand, largely driven by unsustainable immigration levels. The internal contractions are too obvious to explore any further without becoming embarrassing.

Sales Performance of Detached Homes in February 2024

Average Price Growth Annually

MOM Average Sales Growth Monthly

A Roadmap for Navigating Uncertainty

Advisory Insight: In the labyrinth of market dynamics, strategic insight transcends mere statistical analysis. The coming year demands a nuanced approach that considers neighborhood trends, the impact of renovations, and the shifting sands of supply and demand. As your advisor, my commitment is to illuminate these nuances, guiding you through the intricacies with data-driven acumen. To that end, I will soon publish rich customizable reports on my website, so please stay turned. I’ll include some examples below, and please reply if you have specific areas of interest.

The Silver Lining: Despite the headwinds, opportunities abound for the astute investor and the diligent homeowner. Market corrections often unveil value propositions that, when strategically seized, can yield substantial long-term benefits. And hey, the stock market has roared to all-time highs, so there's plenty of potential. I remain bullish on the Toronto real estate market over the next five years, and contend that if you can qualify for a mortgage and service the elevated costs for the next few years, there's gold to be found now at reduced prices.

The Horizon of Hope: As we venture into 2024, the real estate market, with its blend of challenges and opportunities, requires a discerning eye and a strategic mind. Let us navigate this journey with a blend of caution, optimism, and the wisdom gleaned from the year past.

Wishing you a year of insightful decisions, prosperous investments, and a harmonious blend of caution and opportunity in the ever-evolving narrative of real estate.

Kindest Regards,


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