Toronto December 2023 Condo Market Report

It’s beginning to look a lot like…the start of interest rate cuts.

After the US Federal Reserve (the “Fed“) took its foot off the “interest-hiking” pedal on Wednesday December 13, 2023, following a similar decision by the Bank of Canada (“BOC“), inflation seems like it is well in hand. Now, the Fed seems to be suggesting that they may lower interest rates in the U.S. three times in 2024.
 
Is the same going to happen in Canada in 2024? That remains to be seen. The Governor of the BOC stated on Friday December 14, 2023, that it is “too early to consider cutting our policy rate.” But, is not following or preempting a rate cut by the US something that the BOC can in fact avoid? Time will tell.
 
However, it seems that the time of rate increases has passed. Rate cuts are likely to come in 2024. So, what is now a “buyer’s market”  may quickly morph into a “sellers market”.
 
As financing is key for buyers, obviously, if rates are set to drop (at some point), perhaps buyers are well served by locking in deals now with longer closing periods to allow them to capture the potential for lower rates later in 2024. Or alternatively, buyers may want to look for shorter term financing arrangements to lock in lower home/asset values now, so that they can take advantage of lower rates down the road – when asset prices will no doubt climb.
 
We have said this before, and many have echoed this, the housing market in Canada, and particularly in the GTA is likely to turn around quickly and with ferocity. There is a pent up demand and a lack of supply. When financing begins to flow more freely and cheaply, that demand is going to eat up whatever supply there is, causing prices to increase. 
 
It seems that buying in this market allows buyers/investors to be more selective and diligent in considering the location of the asset, the price, and type. It also provides more negotiating power, whereas once the market returns to a seller’s market, that power will evaporate. 
 
With a price difference on average around 25% between the re-sale market and the pre-construction market right now, perhaps it is a good time to look into the offerings on the re-sale market for some great deals. 
 
As always, the Dash team is here to help you along your real estate investment journey. Please reach out to us with any questions or thoughts. In the meantime, we wish you a Happy Holiday Season! 

UNDERSTANDING WHAT HAPPENED IN 2023

2023 was actually two markets in one. First when mortgage rates stabilized in January, buyers jumped back into the market and prices rose by about 2-3%. In June the Bank of Canada started increasing rates again. Uncertainty about rates and not just the level of rates caused buyers to move to the sidelines. The result was drastically lower sales and prices declined again in the second half of the year.

WHAT TO LOOK FOR IN 2024

1 Again, this will be year of two markets. The first half will be slow, with prices dropping by a further 2-3% on average. When mortgage rates start to fall, not all buyers will re-enter the market, as some will wait for rates to fall further.

2 Five Year fixed-rate mortgages are currently at 5.6%. Expect these rates to end 2024 at 4.5%. Variable rate mortgages are currently at 7%, buy should also drop to 4.25%.

3 Unemployment is now at 5.8% (it was 4.5% in 2022). We are heading into a recession. Just look at our Yield curve from year-end to 2022 to the current one.

4 Continued population growth of one million people a year (500,000 immigrants and the rest refugees and international students) will increase the demand for housing. 50% of these people are coming to Ontario.

5 Housing completions are averaging 220,000 per year and Ontario makes up only 35% of this total.

6 Don’t expect a surplus of listings from sellers to solve the housing shortage. The Mortgage arears (over 3 months) number in Ontario is higher (.10%) than the last two years, but it represents only 2200 houses in total.

7 Don’t hold your breath for ‘affordable housing’ to have any impact in 2024. Government over promises and under delivers (think Eglinton LRT Crosstown). The only way to get ‘affordable housing’ is for governments to buy housing at market prices/costs. Then sell or rent them out at 50% below market and pay for it through government deficits.

YIELD CURVE: THE ECONOMY IN A NUTSHELL

A Yield Curve compares interest rates of the same risk level (Government Bonds) over various terms. In a normal market, long-term rates are higher than short term rates for the added risk factor. When interest rates invert (short term higher than long term) it is a strong indicator that a recession is near. Previously we had an inversion in 2008 which forecast a recession and a minor one in 2018. This time the inversion is quite substantial, indicating a bigger recession. We tracked the Yield Curve for December 2023 versus December 2022. The deficit this time is 2.2% versus 2.03% last year and unemployment is increasing.

SALES FORECAST FOR 2024

Historically sales are a lead indicator for price increases. Over the last 9 years, we have averaged 92,200 sales. In 2023 the number was 65,000. For 2024 we are forecasting 80,000 sales. This forecast is in line with 2018 when we experienced our last minor recession and market correction. Look for sales to accelerate in the latter half of 2024.

Source: Toronto Regional Real Estate Board

REAL ESTATE PRICES

Historically, real estate prices increase by 4% per year. Two factors are responsible for this: the cost of new housing which is always higher than resale due to inflation; and Immigration which increases the demand for housing.

From 2019 to 2021 we have seen price increases of 30-40%. This was followed by a decrease of 15-20% in 2022. In 2023 average prices declined by another 4-6%. The net effect is an average annual increase of 3%. We are forecasting that price increases will continue to fall in the first half of the year. The indicator is the sales to-new listings ratio which is currently in a ‘buyers market’. They will rebound in the second half of the year and prices will be 2% higher than currently.

Source: Toronto Regional Real Estate Board

THE BEST PERFORMING PROPERTIES WILL BE:

  1. Detached
  2. Properties on side streets not main streets
  3. Properties with bigger lots
  4. Condos with superior public transportation
  5. Condos with preferred views and outdoor spaces

Source: Toronto Regional Real Estate Board

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