My latest Toronto real estate market update for April 2018. In it I take a look at four trending news stories that hold valuable lessons for Toronto home buyers, sellers, and investors. I also reconcile the latest Toronto Real Estate Board's sales stats with what's happening on the street.
How does this report affect your own situation? Need a professional to help you on your journey through the Toronto real estate market? Get in touch with me anytime at 416-357-1059. Here is my latest Toronto real estate market update for March 2018.
(Wicked background photo is courtesy of Sean Galbraith.)
We are now 1 year past the Toronto real estate market’s peak frenzy and just as I’ve been warning, we have GTA stats that make it look like sales have stumbled off a cliff. , Out on the street, activity doesn’t match the image implied by the stats, with sales near the core from the last week including plenty of multiple and pre-emptive offers, resulting in two thirds of east end homes selling for $80 to 400 hundred thousand over the list price, and even a couple of multimillion dollar west end and central homes that went $500 and 900 hundred thousand over. In this market update I’ll reconcile the stats with what’s happening in the field, I’ll discuss four pretty terrible yet trending news items, and talk about the key takeaways for today’s home buyers and sellers. Hi, I’m Rebecca Laing with my April market update for the City of Toronto. I’m going to kick things off with a look at some not very happy, but educational news stories from the last couple of weeks. The first three are about deals going wrong, so before diving in, I must preface by saying these stories represent a very tiny percentage of transactions, and there were literally tens of thousands of successful buyers and sellers in the past year that have transacted without hiccup. It’s also worth noting that these nightmare scenarios from the headlines all took place in the 905 where there have been greater swings in the market. So, please keep this in mind as I go through these worst case scenarios, okay? The first story is about the developer in Vaughan who cancelled the agreements of 1100+ condo buyers because the developer claimed they were unable to obtain satisfactory financing. Buyers are justifiably outraged for a number of reasons, the main one being that during the two years the builder has been sitting on all these deposits, condos in this location have jumped up 30% in value. Are the buyers going to recoup that spread? Unfortunately, no. They’ll get their deposits back, but they will have missed out on these market gains. Whether this cancellation occurred for nefarious or legitimate reasons, it will either be this developer, or some other builder who acquires the property, who could potentially profit from that price appreciation. As I’ve mentioned in previous videos, pre-construction contracts are written very much in favour of developers, and allow various outs for the builder, with limited penalties. If you’re familiar with derivatives trading, it is almost like a developer writes a put option when they sell a pre-construction unit, thereby transferring risk to the buyers. In a perfect world, in exchange for taking on this risk, buyers should be getting a discount compared to current market values, but sadly, pre-construction pricing hasn’t worked that way in some time. Fortunately, cancellation occurs with far fewer than 10% of GTA condo projects, it doesn’t typically take years before it happens, and often there is opportunity to repurchase in the replacement project. Nonetheless, the lesson to be learned is that as a buyer, it is important to understand the role you are also playing as financier and risk mitigator for the developer, thereby making it all the more important to evaluate that developer’s character, integrity, and track record before jumping in. The second and third news stories take a look at the flipside to this, where it is a buyer who is unwanting or unable to complete their purchase. In Oakville, there’s a group of buyers who purchased pre-construction higher-end homes from a developer at peak pricing a year ago. Today, as these new homes are nearing completion, some of the buyers are saying they are unable to close on their purchases, with the main reason appearing to be that the buyers’ existing homes have devalued since last year’s intro of the Fair Housing Act, and now they won’t have sufficient proceeds to pay the needed down payments for their purchases. I’m empathetic to these buyers, as none of them appear to be intentional speculators, and they are now in a very difficult position. At the same time, the risk they were taking on at the time of buying from the builder should have been fully explained, evaluated, and mitigated. How does someone mitigate a potential loss in a home’s value when that value is essential for the future purchase? By selling at the same time as making the commitment to buy, and leasing until the new home is ready. This is known as buying and selling in the same market. To be super extra cautious, the proceeds of the sale can even be used to invest in a hedge against the risk of interest rate increases before closing. I know, this sounds rather unpalatable and almost unheard of, but otherwise, a buyer is locking in today’s price from the builder, and speculating that future pricing for their existing home will be the same or higher, for which of course, there is no guarantee. Lesson to be learned is what I’ve been saying in recent videos; before walking into a builder’s sales centre, ensure you have your own Realtor alongside you who has a fiduciary obligation to help protect your interests, and help you identify and strategize for risk exposure. Otherwise, in terms of risk analysis, all that a builder’s rep is going to ask you for is a basic mortgage pre-approval letter, which isn’t good for anything if it’s going to be months and months before closing. The next story comes via the courts who ordered a buyer to pay almost half a million in damages to the seller after they failed to complete their purchase of a home in Stouffville. The buyers offered without conditions and once the sale was firm, they were unable to secure financing. With knowledge that the buyers were going to breach the contract, the sellers proceeded to attempt to mitigate their losses by relisting the house. Unfortunately, this all transpired last April and May when high-end home prices in the area dropped rapidly, and so the sellers ended up taking an offer for $470,000 less than the original agreement. Consequently, the sellers sued the original buyers to not only keep the deposit, but also the differential in selling price, plus legal costs and other expenses. The judge ruled in favour of the sellers, and this whole unfortunate situation serves as a fairly straightforward example of what might happen if a buyer doesn’t follow through on their purchase agreement. You can imagine that if the seller was also unable to close on their own purchase, there may have been a messy domino effect, or chain of claims that could land on the lap of that original buyer. This is definitely not a situation that anyone wants. While this story is in the news right now because of the large damages involved, even when prices were climbing like gangbusters, there was always a very small proportion of transactions that resulted in similar legal wrangling as a result of buyers not completing their obligation to close. I’m often asked if this means that the deposit automatically goes to the seller, and the answer is NO. This is because buyer deposits are held in trust, and can only be released either when the transaction closes, or when both parties agree to the release, or when a court orders the release of the deposit. Thus, in the event of an incomplete transaction, either the seller or the buyer may need to file a claim through the courts. While this story is useful for learning a bit about what happens in an incomplete transaction, it’s primarily a reminder to buyers to ensure that they have the full vetting and support of a skilled mortgage professional before submitting an offer. There is a big difference between a quick mortgage pre-approval from an advisor at a bank branch, and a thorough qualification and assessment from a true mortgage pro. This is also a lesson for sellers to take a moment to vet prospective buyers before accepting an offer, because even though deposits in Toronto are typically in the tens or hundreds of thousands, nobody wants to go through the time and process of having to make a legal claim. The final news story I’ll chat about isn’t quite as sad, and comes via a study released by CIBC economist Benjamin Tal regarding recent Toronto condo investors. They concluded that, of the 48% of condos bought by investors last year, 44% of these have negative monthly cash flow when they go to rent out their units. Many real estate critics jumped on this, questioning, what kind of investment is it where you have to essentially subsidize the living costs of your tenant by hundreds of dollars a month? The answer lies in the combination of four factors. First, the mortgage principal payed down each month is typically less than the monthly input by the investor, so in effect there’s a bit of forced savings taking place. Second, rents charged to tenants continue to increase, up an average of 11% per year for the past couple of years.. Third, there is the expected capital appreciation on the value of the property. And fourth, even if the capital appreciation rate of the property is only in the single digits, it is amplified thanks to borrowing leverage. This is a biggie, as, there just aren’t any other investments out there that allow 80% leverage, with a cost of this leverage coming in the form of interest rates still running under 3%. With that said, it doesn’t mean that you’re going to find me at the next real estate expo hawking condo investments for every man, woman, child, and kitten. There are a bunch of factors and scenarios to assess whether paying into a condo investment every month makes tremendous sense, or no sense at all for a particular investor, and to get the answer means the investor, and their Realtor, should be doing a bunch of math. Moving on to the numbers, Toronto had 2797 sales in March, down 34% over last year. Even if you disregard last year as exceptional, we are still well off the level of activity that I’d expect at this time of year, and across the GTA it’s the lowest March sales since 2009. A good question to ask is whether the total sales measurement is really good for anything, other than creating shocking headlines. The answer is that number of sales is meaningful mostly when compared to the number of new or existing listings. It’s this combination that gives us the months of inventory and sales to new listing ratios, which help identify whether it’s a buyer or seller’s market, and to help predict the direction in which prices may be heading. Doing this for detached homes, we get 2.3 months of inventory, and a 48% sales-to-new-listing ratio, which are numbers typically indicative of a market slightly in favour of sellers. For condos, we get 1.2 months of inventory, and a 71% sales-to-new-listing ratio, indicating a market that’s still strongly in favour of sellers. Worth noting is that because Easter weekend coincided with the last day of last month, these numbers are skewed a bit by sellers who delayed listing until after the long weekend. As a result, we’ve had roughly, a 10% spike in inventory levels in April for both condos and freehold, and these stats are actually trending slightly more towards the balanced range. Let’s move on to the more important questions of what prices are resulting from these transactions. For detached homes, the average sale price was $1,293,903 which is down 17.2% compared to last year, and now starting to climb slightly since the start of 2018. As I keep saying for detached homes, a good chunk of the year over year decrease is attributable to the fewer number of high-end sales, as evidenced by the Home Price Index, which is down only 6% in comparison. The good news for detached home sellers is that the HPI is continuing its 3-month streak of trending upwards, up another 0.9% month-over month. As for semi-detached homes, the average was $1,032,358, down 5.3% vs. last year. Where I am here in The Beach typically comprises 10% or more of the semi sales, and even though prices are up here, other pockets of town are weighing down the overall numbers. Looking now at condo townhouses, they came in at $651,092, down 1.6% versus last year. Finally, the average sale price for condo apartments was at $590,185, up 7.2% over last year. Downtown condos are up an average of 13%. The city-wide HPI for condo apartments is up 15.9% year over year, with a couple of pockets in the inner suburbs showing increases of over 30%, but comprising only a small proportion of the overall inventory. With all that said, what’s the bottom line on what’s happening? It’s still a story of the condo market, less expensive price points, and homes closer to the core finding more demand and multiple offers while the relatively higher-end and further out from downtown not experiencing as much love. While some segments are pretty tight and heated, and contrasting segments are taking time to sell, overall, I see buyers and sellers are motivated, yet not frantic. It’s a balance that will hopefully gain further traction as the market continues to shake off the craziness and disruptions of the last year. And on that note, I’m going to remind you to hit me up if I can be of any help with your residential real estate needs. You can reach me directly by phone or text at 416.357.1059, or online through rebeccalaing.ca. If you wouldn’t mind liking the video and even commenting below, I really appreciate the feedback. My apologies for the indoor filming location this month, but our ridiculous weather was a bit too violent for filming outside this weekend. Thanks again for watching, and until next time, I'm Rebecca Laing, Toronto Real Estate Broker.