Here is my latest Toronto real estate market update for January 2018.
I brave the cold as I bring you this in-depth look at how we finished off last year, what supply and demand forces will be pulling the market in 2018, where I think the market is heading in the upcoming months, and what it should mean for you.
As always, don't hesitate to get in touch with any of your real estate questions. Call or text me directly at 416.357.1059
Toronto real estate prognosticators are forecasting a fairly subdued 2018 housing market, after the roller coaster that was 2017.
In this video I’ll recap how 2017 finished off, discuss the forces at play in 2018, and give you my two cents on what we can expect in the coming months and what it should mean for you.
Hi, I'm Rebecca Laing, Toronto Real Estate Broker, and welcome to my January 2018 market update for the City of Toronto.
Before diving into economic forces and my forecast for the year, let’s kick things off by looking at the numbers that finished off December.
December ended with 3736 active listings, down 31% from November’s 5430, and up 86% compared to 2016’s level of 2012 listings.
A seasonal drop is always expected for this period since fewer people want to list their homes when the market is slower, and since some will actually pull their listings over the holidays and relist them in January.
However, this time around, what I was seeing is more sellers keeping their listings active through the holidays, in the hopes of snagging a buyer attempting to qualify their purchase prior to the expanded mortgage stress test that took effect on January 1st.
In fact, it seemed that since the B-20 announcement back in the fall, there were sellers who accelerated their plans to list in hope of either catching a pre-stress test buyer, or out of fear that the stress test was going to result in lower prices in 2018.
The very slow trickle of new listings thus far into January seems to support my theory, but for confirmation we’ll need to watch the rate of new listing activity over the coming weeks.
Buyer demand in December resulted in a respectable1970 transactions, which is down only 6.4% compared to 2016. Given that total 2017 sales were down 14.5% compared to the record-shattering 2016 totals, December’s year-over-year dip of 6.4% is not bad at, and ranks it as the 4th busiest December on record.
There is debate over how much demand was from buyers who were trying to beat the deadline for the B-20 expanded stress test. I’ll delve into the reasoning in a couple of minutes, but my impression is that there wasn’t the hyped-up buying activity like there has been prior to other mortgage rule changes.
I also know that this time around some buyers stalled making a move, thinking they might get a better deal by waiting for the post stress-test dust to settle.
Regardless, inventory and sales levels resulted in there being only 1.5 months of inventory overall, continuing the tightening trend since the summer's peak, and coming in awfully close to the 1.4 months we had a year prior.
Even if you don’t use the 12 month sales rolling average, it works out to there being less than 2 months of inventory, making it a moderate sellers’ market.
Of course, activity still varies by neighbourhood and price point, with an excess of North York luxury listings still languishing, while a downtown entry level condo might sell with 20 competing offers.
Unfortunately, thus far into January, a lot of the same inventory from December and prior months is still kicking around and/or being relisted.
With very few, truly new and fresh listings coming out, it wouldn't surprise me if January sales stats are lacklustre, merely because buyers still aren't interested in the bulk of what's out there.
Let’s move on to look at the dollar amounts that buyers were paying for homes.
The average sale price for all homes types in the City of Toronto was $ 741,684, up 4.4% compared to December 2016.
This number is deceptively low, because we are seeing a much greater proportion of lower-priced condos being sold, which pulls the overall average down.
Moving to detached homes, the average sale price was $1,250,235,
down 2.8% compared to the year prior, and down 2% compared to November.
The Home Price Index shows detached homes at a 1.8% increase over last year, and pretty much flat compared to November.
Seasonally, we expect average prices to dip in December with fewer $2million+ high-end homes typically being sold, and
this was definitely the case in December.
Moving on to semi-detached homes, the average was $903,658, up 11.7% over 2016.
Condo townhouses were at $577,115, up 1.3% compared to 2016.
And finally, the average for condo apartments was at $532,700, up 14.2% over 2016. If you're looking at only downtown condos, they're still up an average of $120K over the year, which is not too shabby at all!
Just a reminder, the stats that I talk about are only from the actually City of Toronto, the 416, from the lake up to Steeles, and from the outskirts of Etobicoke to the eastern edge of Scarborough. Most headline stats you see in the news include the entire Toronto Real Estate Board, which encompasses the 905 and beyond, and which includes towns and regions that are still sitting with months and months of inventory, and not much action.
With that said, that’s where we are coming from, so now let’s look at what will pull the market up or down over the months ahead. I’ll start by looking at supply factors, and then demand.
A potentially huge impact on listing supply in 2018 is new home completions.
Betterdwelling.com’s statistical sorcerers are forecasting over 57,000 completions throughout the GTA in 2018.
There are so many variables in construction that this estimate could be way off, but even assuming their forecast is 15% high,
this would still represent 50% more completions than we see in most years. 50,000+ homes is a huge injection of supply, but there are 4 things to keep in mind.
First, this number is for across the entire GTA. Second, the housing that does fall within the city boundaries is almost
entirely multifamily dwellings i.e. condos and townhomes. Third, these projects are dispersed throughout the city. So while Kingston Rd from the Beach into Scarborough has plenty of buildings well underway, there isn’t exactly a slew of towers that are topped off and ready for finishing in the hotter downtown hoods. Fourth, investors are the bulk of buyers for these condos that are underway, and in order to maintain their new home HST rebate eligibility, many will either family occupy or lease their units out in the first year.
So for 2018, this heightened level of condo completions could give a needed injection of inventory into the rental supply, and help rein-in some of the renter bidding wars that were all the rage in 2017.
However, on the resale side, this boost in supply might come more into play at a later date.
Another source of resale supply could come via condo investors wanting to exit the landlord business given the tightened rental regulations, expanded rent controls, and Toronto’s new Airbnb rules.
Starting July 1st, only principal residences in Toronto will be allowed to be rented short-term, and there are estimates that 3200 current Toronto rentals could be freed up from Airbnb starting in July.
While this added supply should help keep rent increases in check,
it might also boost the late 2018 resale condo supply if investors are unsatisfied with abiding by the newer provincial landlord rules, and more importantly by the lower income they will receive from non-Airbnb type tenants. Whether the supply stays rental or goes resale, it will be slightly expansive, particularly downtown.
The last point I will make about supply is that there are 7200 purpose-built rental apartments under construction right now, which is more than has been underway in the last 25 years.
Although only 2500 are likely to be completed this year, the boost to rental supply will still be a bit more competition for low and mid-priced condo rentals.
My reason for highlighting this is that if growing rental supply helps slow rising condo rents, the behaviour of investor buyers and condo renters who aspire to be buyers, could be affected. This segues nicely into my next topic, buyer demand.
On the demand side, population growth is always the main talking point, and for this year foreign immigration growth is likely bringing at least 30,000 new residents to Toronto, the majority of whom will rent at first. Migration from other provinces tends to ebb and flow, but this year is also likely to bring another 30,000 people.
On the demographics side, millennials are increasingly becoming of home buying age, are growing tired of living in parents’ basements, and are receiving down payment assistant from parents.
With millennials still showing bias against car ownership and towards all things urban and convenient, their demand is largely focused on well-serviced core locations.
As the parents of those millennials age and lose their basement dwellers, some are looking to downsize and also be close to the amenities of the city.
Combine all these factors, and we will probably end up with at least 30,000 new households needing some form of housing this year, with a skewing towards rentals, affordable price points, are core neighbourhoods.
When it comes to investor demand, last year’s government action against foreign investors and landlords is certainly not supportive of expanded investor activity.
While some will be lured by the trend of rising condo prices, rising rents, and low interest rates, the tightening of credit availability to smaller investors and the wild ride that was 2017,I would say, is going to keep much expanded demand at bay from this segment.
Continuing on the demand side, let’s dive into some of the macroeconomic factors at play.
Unemployment is low, GDP is growing around 2%, and consumers are confident and positive about the economy.
On the flipside, we have all levels of government taking action that inhibits real estate price growth, which in itself hurts GDP.
Believe it or not, real estate related trades, fees and land transfer taxes alone make up more of the Canadian economy than agriculture, fishing, and forestry combined.
Further on the negative side, Ontario’s new higher minimum wage might take a bite out of employment rates and exports, while the US President’s mission to upend NAFTA has created a cloud of uncertainty that could dampen Canadian economic growth for who knows how much longer, and then ultimately take a further swipe if NAFTA collapses.
Putting it all together, economists are nonetheless forecasting decent economic performance this year,
good enough that the Bank of Canada will need to hike its
benchmark rate by 0.5-0.75% in order to keep inflation in check. The first Bank of Canada quarter point rate hike for 2018 was just announced, putting the BOC rate at the highest it has been since 2009.
Unfortunately, higher interest rates are bad for housing affordability, which lowers demand, and thereby housing prices.
If the predicted further rate hikes do all come to fruition, a 0.75% increase translates into a $200 increase in monthly payments on a $500,000 mortgage.
Although mortgage rates are still historically very low, such rate hikes are definitely enough to take a nibble out of demand, as it cuts the average buyer’s budget by 50-60k.
With all that said, while the economy is good, if it continues to be too good, demand could be undercut or further concentrated at the lower end of the market by higher mortgage payments hurting affordability and borrowing capacity.
Speaking of borrowing capacity, I of course need to mention the influence of the B-20 expanded government stress test.
As I discussed in previous videos,
what I personally see from my clients and from speaking to colleagues and mortgage brokers is that the vast majority of buyers are unaffected by the 2018 rule change since they were already being stress tested under the 2016 rules,
or they are not purchasing near their mortgage qualification limits and their budget remains unchanged.
For those who are affected, some have secured mortgage qualifications from a handful of lenders who are giving them a few more months to make a purchase under the old rules,
some are looking to mitigate the impact with longer amortization, and some are willing to pay the premium to go with an alternative lender.
Home buyers who wanted to buy are still wanting to buy, and will find a way to do so.
I also would not be surprised if some lenders see sinking new mortgage originations and conjure up new ways to generate business by making qaulifying easier.
Thus, I don’t think we’ll be seeing a significant or prolonged impact by the expanded stress test.
Furthermore, towards the end of 2017 I was hearing from several buyers that they wanted to wait and see what the impacts will be of the expanded stress test, which leads into the next influence, buyer psychology.
While Canadians do feel positive about the economy and are traditionally very much in favour of home ownership, the next few months are going to be a bit of a resilience test as headlines turn negative about year-over-year market performance.
It was at this time last year when prices became overly exuberant, before beginning their decent in April, and so upcoming headline stats are bound to be ugly, even if we have month over month stability.
While I argued in my last video that last year’s decline is now old news, headlines that continue to reinforce the negative are probably apt to give some buyers pause in the first couple of quarters.
And while there is also a segment of buyers who have been waiting on the sidelines hoping for a deal, such wait and see market timers have a hard time pulling the trigger to buy, expecting things to still keep getting worse.
Psychology could be a fickle influence on demand this year, particularly for the first while.
Before getting into my predictions, the final influence I’m going to discuss is government meddling. After yesteryear’s mortgage rule changes, landlord rule changes, foreign buyers tax, expanded rent control for existing tenants, and now an Airbnb clampdown, what else could any government have in store to for 2018?
Fortunately, nothing specifically seems to be on the horizon, although you can never count out the government if they do not see the desired soft landing taking place in the market.
That said, there is one tool available to our city government that could draw more attention if rents continue to soar, and that is a Vancouver-style vacant home tax.
Vancouver implemented it as an attempt to increase rental supply, but a side benefit is that it could decrease market speculation.
Unfortunately, Vancouver's implementation is costing them millions more than expected, and enforcement will likely prove challenging as it gets rolling in 2018.
It is estimated there are 15,000-28,000 vacant homes lurking in Toronto,
so implementing it here could bring a good portion of these into either the rental or resale supply,
or if they stay vacant, help offset some of the city’s diminished land transfer tax revenue.
Given that there haven’t been any whispers about this coming about, I suspect Toronto city staff and councillors are watching to see if Vancouver can get it figured out.
I hope you’re still with me, and are ready to finally hear where I think the market is heading in 2018.
I'm going with what seems to be the consensus on the street, that there is some pent-up demand,
that it will be enough to build some modest positive price growth by the end of the year, but the levels of activity will be more moderate and even-keeled than the last couple of years.
I expect it will take a few months for months for activity to warm-up as many wait for the B20 stress test dust to settle, so we might see a later than normal spring market.
Right now there is ample demand to hold prices strong at the entry level and in currently desirable locations due to demographics, immigration, and constraints on borrowing capacity.
Despite their incredible rise last year, condos are still affordable and attainable for buyers who either because of stress tests or interest rate hikes, are being compressed into lower price ranges.
While this also sounds very supportive of condo prices, the added completions and other sources of supply that I mentioned earlier are apt to keep prices in check, especially outside the core.
Furthermore, the overall run-up of condo prices in 2017 may have converged a bit too closely to the prices of single family homes, which are increasingly looking like much better value than the many $900 per square foot non-luxury condo apartments.
Entry level homes with amenities that serve as reasonable substitutes for condos should also continue to do well given this concentrating of buyers in this price range,
and the price of condos bumping up against the prices of these freehold houses.
Because of this, I foresee that the more affordable houses will perform better than condos, as they have always done prior to last year.
When it comes to higher price points, I’m not feeling as much love, as there are still too many owners who want to sell in this category, whether or not they are currently listed.
Unfortunately, some owners who really really needed to sell after only a short holding period have set some rather unpleasant low price precedents by locking in their losses.
Don't get me wrong, there will still be plenty of $3-5 million sales, but their diminished numbers and prices will likely weigh down the broader market stats.
Overall, when you combine everything together, it points to single digit price increases for the market overall, which is consistent with what most economists are forecasting.
So what does this all mean to you? As I always say, it is important to look at your personal circumstances first and foremost instead of trying to time the market.
The fear of missing out that was a theme in previous years in Toronto should not be guiding purchasing activity, nor should fear that a market crash is around the corner.
While my forecast, along with every other forecast from industry experts, will probably be wrong, it is very reasonable to expect more stability and less frantic activity this year, which is conducive to more rational decision making.
If you would like some help formulating a plan to achieve your home buying or selling objectives in this year or beyond, please get in touch for a buyer's or homeowner's consultation.
It doesn't need to be formal, it can be done over coffee, and the feedback I get from clients is that it can really help put all the noise about the market in perspective, and help them focus on what needs to be done to achieve their objectives.
Get in touch with me at 416.357.1059 to set-up a consultation.
That finally wraps things up for this marathon of a market update. My promise for the rest of the year is that the market updates will be much shorter. Whether you are watching on Youtube or Facebook, please please please leave me a comment, and give me a thumbs up.
Thanks again for watching, and until next time, I'm Rebecca Laing Toronto Real Estate Broker.