The Bibby Group | 2023 Year End Market Review

December 23, 2023

As another year comes to a close, the 2023 real estate market has taken us on quite a roller coaster ride. Although many experts predicted a sluggish start to the year and declining prices, we saw the opposite: record low inventory and pent-up demand that fuelled price growth early in the year. Indeed, it appeared the Bank of Canada had finished raising interest rates, and many buyers and sellers who were on the sidelines re-entered the marketplace. However, the early summer brought two more interest rate hikes and a surge in resale inventory, thwarting a relatively strong start to the year.

Since then, our Central Toronto real estate market has faced significant challenges and volatility. Similar to the back half of last year, values have declined across the board, as consecutive interest rate hikes impacted affordability in our rate-sensitive housing market, decreasing a limited buyer pool. The only significant change from this time last year is the amount of supply the marketplace is trying to digest—which in some areas is up by 56% year over year. Yet again, many buyers have retreated to watchful and strategic positions as they await equilibrium, causing sales volumes to decline by as much as 53% since the springtime.

The BoC’s Role in the Year Ahead

There is mounting evidence that the Bank of Canada’s benchmark interest rate is high enough to bring inflation back to its 2% target. That said, it has repeated warnings that another hike could be in the cards should inflation fail to drop. On December 6, the BoC opted to hold its policy rate steady at 5% and expressed concerns that the resurgence of Canada’s housing market could keep inflation elevated should it cut rates too quickly. While there may be some relief for prospective buyers and homeowners renewing mortgages in the coming year, some experts worry that lowering the cost of borrowing could reignite inflationary pressures.

With concerns that the economy will continue to slow in the new year, most Big Six economists expect that we could see rate cuts in the second or third quarter of 2024; however, the BoC has indicated that it is still far too early to talk about easing monetary policy. While it would be irresponsible and unlikely to hear language of aggressive rate cuts from the BoC, this is precisely the kind of talk buyers need to hear in our marketplace, as the last year and a half of increased borrowing costs have sent our housing market into unfamiliar territory for most.

Regardless of where rates end up, households should prepare for an era of borrowing costs higher than the last 15 years. The low rates over the last decade and a half helped feed a real estate frenzy that is now in crisis. These rates were not only unusual but, in some cases, unhealthy. Re-establishing a more normal range will return balance in household finances. As many buyers and sellers are doing their best to strategize, the coming months will provide more clarity on mortgage rates, and buyers will gain confidence on how to proceed and budget accordingly.

Condominium Data

The Central Toronto condominium market experienced a volatile year, with both supply levels and pricing fluctuating. A strong spring market fuelled recovery and price growth, which quickly levelled off by the summertime. Inventory levels have increased by nearly 51% since our peak spring market in 2023, while the number of transactions has decreased by 53%—an indicator of how slow our fall and early winter market has been. Prices have adjusted downwards from highs earlier in the year by approximately 9%, as affordability and abundant supply have clearly impacted both investors and end-users.

Freehold Data

Once an untouchable asset class, the Central Toronto freehold market has shown signs of weakness during these turbulent economic conditions. Detached-home supply has increased by 9.2%, yet transactions are down by approximately 53% since the springtime. Meanwhile, the semi-detached market has seen supply increase by 17.9%, while transactions have declined by 42%. Given its ferocious pace of growth earlier in the pandemic, the housing market has become more vulnerable. After an era of over-exuberance, a transition was imminent, particularly in those regions that saw the most acceleration over the past few years.

Luxury Market

The Central Toronto luxury marketplace has experienced a period of reconsideration and recalibration, as transactions fell approximately 32% from the previous year. While those operating within this marketplace are generally less impacted by interest rate hikes, consumer confidence in long-term market fundamentals remains robust. My research indicates that would-be downsizers and luxury condominium buyers in particular are trying to time their purchases and sales accordingly before making any commitments.

Rental Market

While the supply of units for lease has outpaced transactions over the past year, demand for quality rental products in the central marketplace has remained steady. Supply levels have increased by over 22% year over year. As for demand, it has been sustained by a growing number of potential first-time buyers priced out by higher interest rates and new permanent and temporary residents.
Average lease rates have increased year over year, with one-bedroom suites in the central market currently trading at $2,633 per month, while the average two-bedroom suite is trading at $3,430 per month. That being said, it appears as though rental rates are plateauing as we reach a ceiling in terms of affordability. This could spell relief for tenants but makes a case for investment less attractive given these current conditions.

Pre-Construction Market

Heightened market uncertainty and higher interest rates have impacted the new condominium sector as well. A once-unstoppable investment vehicle and attractive first-time-buyer solution, this real estate class has seen many projects shelved, as developers cannot make an economic case for proceeding under the current conditions. Allowing resale inventory to become absorbed will help renew confidence in the new construction market. In fact,  year-to-date, sales are at their lowest level in ten years and down 47% from this time last year. One phenomenon I have witnessed only once before in my career (2008–2009 Great Financial Crisis) is decreasing sale prices of new projects. The central markets saw average per-square-foot prices decline precipitously from $1,485 psf to $1,216 psf ( 18%). What will be interesting to monitor as we move into the new year is the ability of some purchasers to formally close on their suites due to their inability to service debt.

Where Are We Headed?

It’s not all bad news. As Toronto’s population continues to grow in the coming years, immigration and employment opportunities will keep demand high for urban properties and assist in eventually lifting the housing market out of its current slump in the long term. As many sellers appear to be looking towards the springtime to list in hopes that declining interest rates will bring confidence back to buyers, a window of opportunity may open in the coming months due to some decreasing supply. Of course, we need to be cautious regarding timing strategy because if everyone waits for the springtime to sell, supply levels will impact performance in an already sensitive marketplace.

What will be interesting to monitor in the new year will be the Toronto Real Estate Board’s year-over-year data, which will paint a sobering view of price erosion from the rewarding spring market we had earlier this year. While many properties currently listed have taken declining pricing into account for their pricing strategy, these data might be the concrete catalyst needed to bring potential buyers back into the market. Not surprisingly, many would-be purchasers are looking for a great value proposition and are being conservative strategically. Time will tell.

While this is merely a forecast and not guaranteed, the moment we see language of rates coming down, the marketplace will start moving again, as this dynamic will create more urgency among buyers. While there is absolutely no expectation for a booming market in the new year, and the days of double-digit price growth are long gone, in my opinion, we will slowly see buyers come off the sidelines confidently in the new year into a more balanced marketplace that is busier than what we are experiencing today. Good news will stimulate optimism. For sellers, however, the idea is to get into the market before everyone else. Timing and supply will determine your success.

To Conclude

Similar to last year’s conclusion, prices will fall in the short term. The sooner the market comes to terms with this adjustment, consumer confidence will eventually restore and an inflection point will appear as affordability pressures improve; however, even if interest rates come down slightly, there will still be affordability constraints for most. Some sellers will become more motivated as we enter 2024, and if inventory builds, it will likely lead to further flexibility and price cuts by those fully committed to the selling process.

I applaud the discipline, endurance, and creativity of many Toronto homeowners who have been able to endure a lengthier and more arduous selling experience. In this climate, all of our sellers are advised to remain resilient yet realistic in their expectations and ensure their strategies align with the reemerging market trends. Buyers stand in an advantageous position now and have the upper hand due to a broader spectrum of inventory and increasing negotiation leverage.

For the informed and confident buyers in the marketplace, there are some exceptional opportunities. Just this week, we worked closely with a couple who, over a month-long period, slowly yet successfully negotiated an outcome for a detached home at a price point 19% lower than comparable homes in its specific neighbourhood since the spring market. Their timing was perfect. As mentioned in November, if all parties involved can work together to understand the trends and take strategic action, this will hopefully lead to success in the coming months. Simply put, the markets do not dictate our outcome; they dictate our strategy.

Finally, as this is the season of gratitude, I want to thank my team members, clients past and present, and our colleagues! Thank you for your continued confidence—I am grateful for the responsibility you have entrusted me with. My family and The Bibby Group wish you all wonderful holidays, good health, happiness, and the very best for the new year!

All My Best,
Christopher Bibby