The Bibby Group | July 2022 Newsletter

As higher borrowing continued to impact property sales in recent months, the overall volume of transactions in the Greater Toronto Area has declined by 41% compared to this time last year—a 20-year low. And while the average selling price has remained 5.3% higher than in June 2021, it continues to trend lower monthly.

In fact, the Toronto Real Estate Board recently reported that property values could be down by roughly 14% in the Greater Toronto Area since peaking in February this year. Record low interest rates have allowed buyers to stretch their budgets and buy more expensive homes during the pandemic. Recently, however, many active buyers have adopted a wait-and-see approach, believing that property values have further to fall.

The Bank of Canada is focusing on inflation rather than the housing market, and just raised rates by 1%—the largest rate increase since 1998. This could cause additional strain for those applying for mortgages. While many central Toronto homeowners have a strong equity position, we are in the midst of a standoff (slower marketplace) where showings are down—yet resilient sellers who do have a requirement to transact are prolonging their sale process when possible. As days on the market continue to drag on, however, the current market conditions will likely remain in place for our typical slower summer months and potentially intensify this fall. And as some buyers attempt to wait for pricing to stabilize and time their entry into the marketplace, many will eventually have to re-enter the market at some point despite higher borrowing costs.

While risk has always been present within any asset class, real estate has treated most Torontonians exceptionally well. At the moment, we are being reminded that values do not always go up—something most homeowners are unaccustomed to hearing. Uncertainty has impacted consumer confidence. With the ongoing pandemic, the war in Ukraine, interest rate hikes, and stubbornly high inflation over the last year, we have been reminded that downturns—even severe ones—are inevitable. Many industry experts, however, felt this change would be more gradual.

There are some indications that inflation is approaching a peak, and if the future is anything like the past, holding long-term could safeguard any panic selling as it is likely our economy will continue to grow, with the real estate market producing handsome returns in the long term. While our previous pace of growth was not sustainable, the run we have had in recent years has provided excellent protection to everyone contemplating a move—providing more flexibility than, let’s say, the marketplace of late 2008 and early 2009. If you are a seller in the short term, the conditions are uncomfortable and more drawn-out than what we are previously accustomed to. To make the process easier, you will need to be flexible, be willing to negotiate, and adjust pricing and expectations.

While home sales and pricing cool off, the rental market is again catching fire, surging past our pre-pandemic records. This is a stark contrast to the housing market. Buyers are being pushed out of the sales market, thus increasing pressure on the rental market. And as rents climb, fewer tenants will move, and landlords will be enticed to hold on to inventory through these uncertain times.

While timing the market is impossible, exceptional opportunities in first-class neighbourhoods and buildings are out there for buyers who need to make a purchase. Despite rising interest rates, these will prove to be wise long-term acquisitions. While the media is focusing specifically on declines and a doom-and-gloom scenario, yes, we are seeing price declines. But given the prevailing economic and geopolitical situation, this dynamic shouldn’t be a surprise. However, the general position of the central Toronto sellers is quite strong. Most sellers can be patient or transition into a rental scenario, postponing their sale for more appropriate timing.

As we move forward, new listings will be a key indicator to watch over the next few months. My belief is that the current conditions may drive away some looking to test the marketplace, providing additional supply constraints. If would-be sellers take a wait-and-see attitude over the next few months, active listings could trend lower as well. This could cause market conditions to tighten somewhat, providing some safety for home prices. When inflation peaks, mortgage rates will peak. In the short term, though, because of the uncertainty, the next 6–12 months will likely see prices fall softly rather than collapse. In my view, prices are likely to go into hibernation.

For now, the days of double-digit percentage price increases are over. If you are a buyer today, your monthly payments might be higher, but you are in a far better position than a year ago from a negotiating standpoint. If you are a seller, most of you have seen exceptional gains throughout the years and likely have the ability to weather this uncertainty or afford to take slightly less than the number you had in mind. The market has been rewarding to everyone. To succeed, additional patience and time are required—as well as some price flexibility—as our peak market has long disappeared.