Toronto May 2023 Condo Market Report

“RESILIENCE AND PATIENCE ARE KEY”

In April 2023, there were promising reports about the resurgence of the residential re-sale housing market. As we entered mid-May 2023, it appears the optimism may have been mildly overstated. Nonetheless, there are positive signs worth considering. More properties are expected to enter the market, and there is pent-up demand. While we recommend exercising caution in light of macroeconomic pressures, there are reasons to be hopeful.
 
Inflation experienced only a slight increase in April, primarily influenced by rent and mortgage interest rates. To further alleviate inflation, it is likely that the Bank of Canada will implement a 0.25 basis-point rate increase. Some market economists argue that such a measure is necessary in the ongoing battle against persistent inflation.
 
We anticipate that a further 0.25 basis-point hike will have only limited impacts on the housing market. We also do not anticipate that a hike alone will not resolve the issue of inflation immediately. During the pandemic, the Government of Canada implemented monetary policies to stimulate the economy. The injected money has contributed to a persistently “sticky” inflation.
 
So, our previous predictions from last month’s newsletter remain consistent: interest rates are likely to remain at current levels until 2024. This is something to bear in mind when making investment decisions.
 
Canadian financial institutions have responded to the situation by substantially increasing their loan-loss provisions. For example, RBC raised its credit loss provisions to $600 million, up from $342 million last year. This prudent approach by the during times of financial stress is not unprecedented. We believe it is wise for our clients to exercise a similar level of prudence, ensuring they have sufficient cash reserves for potential buying opportunities while being mindful of the risks present in today’s market, particularly regarding financing.
 
Although headwinds should be expected and evaluated, we maintain that the GTA’s real estate market will not suffer long-term. Each client’s portfolio and risk appetite are unique, and it’s important to assess these factors accordingly.
 
As always, we are here to assist you in understanding the market and identifying real estate investment opportunities that align with your goals.
 
Our team completed a number of purchase and sale transactions in April 2023, so we have an active market perspective. In our view, the market in the GTA is resilient, as are our clients, and we believe opportunities will abound in the near future.

TORONTO REAL ESTATE MARKET REPORT

SALES COMMENTARY

Sales reached 7,531 on TRREB for April. This number was 5.2% lower than April of 2022 but 9.3% higher than March. We will start again to compare year-over-year numbers. Why? From April of 2022 onwards, when markets corrected, real estate markets have now become comparable. For sales in May, you can be certain that 2023 will be bigger than for 2022.

While sales have been increasing, they are nowhere near the levels of previous years. In fact, our best guess is 75- 80,000 sales for the year. This is at the level of sales in 2002 when the GTA was 26% smaller in terms of population. The primary cause is not a alack of buyers but a lack of listings.
This month we compared average condo prices for Downtown
versus Humber Bay.

While average prices are lower in Humber Bay, here is what you need to know. Humber Bay units are larger and most have parking included. Outdoor space is better too. The drawback is poor public transportation to Downtown. With real estate there are always trade offs.

WHY NO LISTINGS?

There are two reasons. First, history shows that homeowners will do anything to keep their home. They will miss payments on cars and everything else. That is why ‘power of sale’ listings are still low.

Secondly, investors have little rea- son to sell. If the property has positive cash flow, and most properties purchased a few years ago do; then why would you sell and pay capital gains tax. In the U.S., there are rollover provisions that if you sell and then buy in the same asset class, there is no tax until you dispose of the last property in that class. If we had that rule in Canada, you would see investors sell a lot more properties and that would increase the supply to the overall market.
 

WHY ARE PRICES FASTER THAN SALES?

Even with higher mortgage rates, buyers (in many cases with family help) are entering the market and are pre- pared to pay higher prices. People are fast realizing that you need hard assets and not paper money to prepare for the future. Your principal residence is the last ‘tax free’ asset you can own.

 The real estate to gold ratio measures the amount of gold it takes to buy a single family house. Based on the pioneering research of Robert J. Shiller and Karl E. Case, the Case-Shiller Home Price Index is generally considered the leading measure of U.S. residential real estate prices
 

INTERPRET THE SALE TO LIST PRICE RATIO

When you look at the ‘sales to new listings’ ratio over three years it is consistent from January through April. Anything above 60% is a strong ‘sellers market’. In 2022 the ratio dropped significantly after April and prices dropped as well. It is obvious that without a jump in new listings that prices will continue to rise for the balance of 2023.

RENTAL COMMENTARY

Our commentary is focused on just the Downtown and Humber Bay markets for rentals. The leasing and available units are basically unchanged in April from March at 2057 units leased. Activity in the rental market is over 3 times as busy as the sales market.

The good news for tenants is that rents also have plateaued.

With the construction activity downtown, many renters are giving up their cars. This month we looked at the cost of a parking spot. For a two-bedroom unit, the average rental increase for parking is $300 per month. Also 80% more units were
leased with parking than without in the two-bedroom category. For investors, parking only becomes critical for larger units. But do the math. The breakeven cost for parking is about $60,000 max.
 
 
 

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