October sales at 9783 units were 8% higher than in September. While October sales were 7% lower than in 2020, they are still well above the long-term average of 8,000 units. While sales have been slowing from the start of the year, our forecast is that sales will run at elevated levels into the spring market (maybe not at 2021 numbers because this will be a record sales year).
Looking forward: here are the key factors influencing future (2022) sales and prices:
1. Interest rates
2. Inflation (which impacts replacement costs)
3. Resale availability (listings)
4. Immigration numbers
While higher interest rates will have a negative impact, buyers are already having to qualify at the ‘stress test’ level. A lack of product for sale will also slow down sales, but it will not reduce prices. Inflation also leads to higher prices and when we start to see higher immigration
numbers, we expect the market to continue at the 2021 pace.
Looking more specifically, ‘new’ listings in October were down 34% from a year ago and ‘active’ listings were down by 55%. We have less than a one month’s supply of listings. People who talk about a ‘supply chain’ shortage for durable goods can apply the same logic to real estate.
The condo market, which lagged the low-rise market for all of 2020 and for the first half of 2021, has started to outperform the overall market due to the growing price gap between these two property types. Listing supply again tells the story. The sale to new-listings ratio for the overall market was at 83% in October. For the condo market, it shows a sale to new-listings ratio of 74%. The 416 market was at 67%, and the downtown condo market was the lowest, at just 59%. While all markets favour sellers, the biggest price increases will still be in the low-rise market while at 59%, the best opportunities
for buyers will be with downtown condos.
Toronto has become famous for the ‘small condo’. Why do we build so many? The explanation is quite simple. Developers have to pre-sell 70% of the building before they get construction financing. The time to complete the building is at least 4 years. People making plans to live somewhere are
not going to wait 4 years. At most they will wait a year. Enter investors. Investors want units that they can rent out. If you do the economics, smaller units tend to be better. That is why we have so many small units. But that is not all bad. So, let’s examine the studio market.
Many businesspeople who moved out of the City are now finding that they have to work back in the office for 2 or 3 days a week. Already we are seeing some of these people looking to buy a ‘pied-a-terre’.
In terms of rental supply, there are currently 114 units for lease. They range in price from $1450 to $2480 per month but the average rent is $1780. (Last year it was possible to rent at $1600 per month).
If we take the average sale and rent prices, a purchase price of $480,000 with 20% down would result in a mortgage (at 2%) of $1626 a month. Add average property taxes and condo fees and you get total costs of $2069 versus an average rent of $1780. That produces a cash loss of $289 per month. But there is a repayment of principal on the mortgage starting at $989 and growing each month. That would result in a profit of $700 per month. Then you have to factor in price appreciation on top, and you can see the appeal for many buyers, whether they live in the unit or not.
The point to be made is that studios, or pied-a-terres for people moving back into the City on a part time basis can make a lot of sense.
September is usually the last of the peak rental months until spring. In the downtown market 1780 units were leased. There were 102 studios leased, 1076 one-bedroom units, 573 two-bedroom units and 29 three-bedroom units.
Tenants who stayed in the city and negotiated a new lease with their landlords are the big winners. Studios are almost $200 per month higher than in 2020. Bigger units such as the two-bedroom plus den are now over $3100 per month. They used to go for $2600-2800. Three-bedroom units are now at $4,000 per month.
Vacancy rates are trending down. For Toronto it is 1.7% versus under 1% for the 905 area. The number of condo units in the rental pool sits at 33% in Toronto versus 29% for Mississauga and North York. Looking at the vacancy rate and the small pool of rental condos, the best market is in Oakville and Burlington for investors!