Happy New Year! I am excited to see what 2023 will bring.
And to all my friends who celebrate the Lunar New Year, this year is the Year of Rabbit!
It is a time for family gathering, eating special foods and treats, counting our blessings from the previous year and of course Red Pockets!! My wife, Claire, and I will be making dumplings, yum… okay okay, now onto GTA market info.
Speed read – TL;DR:
⚡GTA 2022 Year in Review
⚡2023 Outlook
GTA 2022 Year in Review
In the first quarter of 2022, the market was incredibly competitive with less than half a month of inventory and less than 10 days for listings to be sold. I have seen some homes receiving upwards of 50 offers on their offer nights because buyers were desperate and would buy anything.
Then the market shifted quickly…
Bank of Canada (BoC) started to increase interest rates, in fact they did it seven times to 4.25% in 2022. As a result, it significantly slowed down the ultra HOT GTA real estate market.
The average housing price had dropped 21.2% since the peak in February. Sales activity is down 38% from 75,140 sales in 2022 to the 2021 record year of 121,639 sales. New listings are down 8.2% from 152,873 listings in 2022 to 166,600 in 2021.
However, the average Year to Date price is still up 8.6% compared to 2021! A disproportionate number of sales occurred during the first quarter when prices were at their highest, sales fell dramatically after that. The amount of sales in December were only 29% of the sales in March!
Rather than home prices falling further, prices plateaued from July till the end of 2022. Sellers who didn’t want to sell for a ‘discount’ took their homes off the market. The drop in new listings has given the market somewhat of a floor for prices to meet the drop in demand.
High costs of borrowing have pushed buyers into the rental market. Tighter rental conditions have translated into double-digit rent increases. Rent for an average 1-bedroom condo is up 20.4% from 2021 at $2,481/month. Moreover, both low-rise and condo rents are up by over 50% since 2015.
2022 vs. 2017 Market Correction
In 2017, the hot market was slowed down by government intervention with the Home Buyers Plan, Foreign Buyer Tax and Stress Test. And the market managed to return by the end of 2019.
On the other hand, the 2022 market slowdown was due to rising borrowing costs. The housing crisis in the GTA is a fundamental problem, not enough homes (supply) for the demand.
When the market slowed down in 2017, it was similar to the 2022 market. The highest price drop happened in the largest homes. It was quite the opportunity for upsizers specifically. Families were upsizing and saving money while not being rushed into decisions. Selling ‘high’ from condos and townhomes and buying ‘low’ in the detached segment.
2023 Outlook
2023 looks to have quite a different outlook than in years prior.
Inflation
Inflation rates dictate where interest rates will go. Canada’s annual inflation rate was at 6.8% in November, and it’s still far from the 2% target. Therefore, interest rates are here to stay.
We will see at least one more hike when the BoC next meets on January 25, and it is not out of the question that we could see another hike at its meeting on March 8.
Fixed-rate mortgages made up 49% of all home loans in May, according to the latest data from the Bank of Canada. And 34% of homeowners have mortgage-free properties according to Canadian household debt statistics. On top of that, many variable mortgage holders are on a fixed payment, and the impact of today’s higher rates has not yet been felt by those.
Banks and CMHC have also been helping existing homeowners to stay in their current home by extending their amortization period when renewing their mortgages in order to lower the payment shock they would otherwise experience.
While some homeowners will need to sell their homes due to rising payments, I’m not entirely convinced that the number of distressed sellers will be high enough to materially impact the supply of homes. Unless our economy collapses…I believe there will be enough demand for housing that there will be a floor as to how much lower the prices can go (see next).
Population Growth & Immigration
Canada has exceeded its Immigration Levels Plan target and welcomed over 437,000 new permanent residents to Canada in 2022: the largest number in a single year in Canadian history.
The Canadian population is up 865,000 year-over-year and 360,000 last quarter alone. In comparison, our population was growing by less than 400K people per year before 2015.
By nearly doubling the number of immigrants admitted to Canada each year without making the necessary investments to support them, we are putting a huge strain on our housing markets.
Unemployment
Currently there is a risk of a recession in 2023, just look at all the news headlines. A potential recession will cause job losses as our economy takes a sharp slowdown.
If people can’t keep their job, they are unable to make their payments which is strongly linked to poor outcomes from the housing market.
However, the December job report looks very promising. Canada added 104,000 jobs, while the target was only 5,000 jobs, showing no signs of the slowdown many economists have been anticipating. Statistics Canada reported the unemployment rate fell slightly to 5.0%.
Remember, the BoC would choose a recession over inflation every day. Aside from interest rate hikes, higher unemployment will also help address the inflation issue.
Housing Start & Completion
The lack of supply of new housing in Canada is the primary cause of the high cost of housing we are seeing. Demand vs. Supply is the fundamental of pricing.
We are not building enough homes to accommodate the current population growth.
On top of our ongoing labour shortages, high material costs and other factors, we can only expect the new home starts and completion to decline in the coming years due to higher interest rates and economic uncertainty.
Homebuilders are not in business to flood the market with homes to drive down house prices, they aren’t doing this for charity. Without seeing a strong focus and money pouring into building more housing, the housing crisis is here to stay.
Assignment Market – Pre-construction Sales
It looks like 2023 will continue with high borrowing costs. This has had an effect on pre-con sales. A great share of pre-con is purchased by investors rather than end-users. Investors tend to be more leveraged than the average homebuyers.
Many investors who bought preconstruction units are having difficulty closing as new buildings draw near to market. They now need to qualify at an over 7% stress-test interest rate. Not to mention appraisal values are sometimes lower than what they bought the unit for and now they need to find bigger down payments to cover the difference.
It is estimated that 32,000 new condo units are slated for completion in the GTA in 2023, with more than 18,000 of those scheduled for the first half of the year according to real estate consulting firm Urbanation.
We are definitely seeing some awesome deals in the assignment market at this moment, if you have extra cash in hand, it’s time to scoop up some great deals. Some are selling below what they bought it for originally. (Ex: Rosedale Condos on Bloor st E and Sherbourne 1+den 600 sq ft for $585k) Book a call with me, I can share some great deals with you.
Looking for personalized real estate planning? Book a call with me today.
For daily updates and insights on the market and other investment tips, go follow me on Instagram @Mister_Sauga!