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Toronto real estate market already starting to cool: How far can it go?

by Corben Grant on 02 May 2022

As home prices have been on the rise, the City of Toronto and the surrounding areas have gotten a lot of attention for reporting some of the highest prices in the country. For quite a while now, buyers have been questioning just how high prices could go. Now, amid changing conditions in the market, upward pressure in Toronto has finally started to wane, a new report from HouseSigma indicates.

HouseSigma is a brokerage that uses a technological model to track home prices in real-time. By doing so, they are able to monitor market conditions as they change in near real-time as opposed to things like the Toronto Regional Real Estate Board’s (TRREB) Market Watch report, which is only reported on a monthly basis.

According to the firm, in just two months from February 2022 to April 2022, there have already been significant decreases in the price of homes in Toronto and the GTA.

In February of 2022, detached homes in Toronto sold for an average price of $1.65 million. Now, the average price has fallen to $1.45 million, a drop of about 12%. A similar decrease was seen in the semi-detached market with a 13.5% reduction in price while condos went down by just 6.8%. The hardest hit of all was the segment of townhouses which have seen a 22% decrease in price in just under two months. At the same time, the report also shows that available listings were up by 76% and the average number of days a home spent on the market has doubled.

The phenomenon isn't just limited to the City of Toronto. Almost every other area in the GTA (with the exception of Burlington) has seen price decreases. Mississauga and Brampton were both down 11% on average. Areas closest to the downtown core have retained value the most while regions further out have fallen further, such as the Municipality of Brock which saw prices fall almost 30% in the period analyzed.

Why are things changing now?

There are multiple new developments that could be contributing to this new turnaround in the housing market. Most impactful is the Bank of Canada’s (BoC) gradual increase in interest rates. As rates go up, so does the price of borrowing. With high mortgage rates, fewer buyers are able to reach sky-high asking prices and home prices must adjust if they hope to sell. In addition, some who may have been considering getting into the market may be changing their minds as analysts predict the BoC to raise interest rates significantly by the end of the year.

Other factors such as changing lifestyle choices as we recover from the pandemic and newly introduced government initiatives like a ban on foreign buyers will also likely have a smaller influence on the Toronto market as well, though the size of these impacts are harder to nail down.

How far down can it go?

It is difficult to say just how far prices will fall in Toronto and how quickly. There have been reports in recent months that the Toronto housing market is overvalued and the current correction that we may be witnessing is simply an inevitable return to “normal”.

RBC economist Robert Hogue recently forecasted prices in Canada to grow by just 8.3% in 2022, compared to 2021’s 18.5%, and for prices to actually go down by about 2% in 2023. However, the national picture is not the same as in Toronto itself. According to Hogue, RBC expects “downward price pressure to be more intense in Vancouver, Toronto, and other pricey markets. This will translate into larger annual price declines in 2023 in British Columbia and Ontario.”

What does it mean?

For those now celebrating a housing market crash with the intention of buying a home for cheap – not so fast. Home prices in Toronto have not been considered affordable for a long time now, and even a worst-case scenario decrease of 30% or 40%, an average price would still leave the market where it was just before the pandemic – not to mention the potential greater economic fallout of a housing crash.

Even with prices falling, there is still the need to actually compete with other buyers for the low supply in the city. All considered, we are far from affordability and still deeply in the seller’s market territory. While interest rate increases are clearly having their effect to help cool the market, more action needs to be taken in order to truly remedy the housing crisis.

Should I buy or sell now?

Sudden changes in the market are often met with much emotion from both asset owners and potential buyers and some may now be feeling a bit of anxiety about just where things are headed, particularly those who bought at the recent peak prices. This can even lead to hysteria which can even make things worse for the market.

Ultimately, while recent buyers may feel the pain of decreased value for the time being, the outlook is still pretty good for the Toronto housing market. Strong market fundamentals such as high employment, a growing population, and high housing demand should see Toronto rebound after a time and continue to grow in value in the future. Further, TRREB reports that rent values continue to increase in the city, which should be at least good news for rental investors.

After a completely unexpected and unpredictable two years in the Toronto market, it seems we may be in for another year or two of surprises, though they may not be in quite the same direction. There is a very good chance that the market at the end of 2022 could be very different from the one that entered the year – only time will tell.



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