In our forward-looking statement issued at the end of 2021, we mentioned that the Bank of Canada would be initiating a period of “sustained rate increases” through 2022. We also mentioned that the effect of these increases would be a “moderate cooling” on value appreciation across the GTA. The first two quarters of activity have provided enough data that we felt it necessary to adjust our guidance as it becomes apparent that the market is reacting quickly to this new environment of higher interest rates, continued supply chain disruptions and increased living expenses.
On June 1st, the Bank of Canada administered its third interest-rate increase of the year, a move of 50 basis points, while stating that they were prepared to “act more forcefully if needed.” It is now widely believed that another 50 points (or even 75) may be on the table for July. The policy rate currently rests at 1.5%, with four more announcements to come and an anticipated settling point of between 2.5 and 3%. These increases have a direct impact on affordability. It’s estimated that the recent adjustment could impact the average Toronto buyer by as much as 15%. Beyond cooling the real estate market, the central bank is also eager to influence consumer sentiment by demonstrating to Canadians that inflation isn’t yet intrenched. When contemplating the economy and our finances, what we believe to be true has a direct impact on how we self-govern. According to Robert Kovacic, Senior Economics at BMO, just under 50% of Canadians now assume a weaker economic outlook for the remainder of the year. The dominant narratives of buyer fatigue, runaway inflation and increased living expenses are now top of mind. The recent rise in property values across the GTA owes much of its trajectory to human emotion, with early indicators suggesting that sentiment has changed.
One particularly illuminating metric for tracking this change is the sales-to-new-listings ratio. At the beginning of the year, prior to the first rate-increase, the ratio in Toronto hit 90%, suggesting that for every 100 new listings, we should expect around 90 sales. Buyers were frantic, sellers were ecstatic and property values surged. Nothing about the market felt sustainable to those participating; the era of low-interest rates and low inflation was nearing its end. By May of this year, following two consecutive rate increases, the number of active listings in Toronto increased by 26%. It became evident that buyers were actively re-strategizing in response to the rising cost of debt, while sellers, determined to capitalize on the fading frenzy, poured more listings into the market. As the number of transactions slowed by almost 40%, the sales to new listings ratio flipped to 39% – landing firmly within buyer’s market territory.
While it’s easy to get lost in the rhetoric about a housing market collapse, some historical context is helpful: remember, market value appreciation leading into the pandemic from 2015-2020 averaged 8.6% on a year over year basis (the average is more like 3% if we stretch back to the 80s). During COVID, a unique constellation of factors resulted in an asset price phenomenon that caused values to balloon and detach from any real economic drivers. What we’re seeing now, is a reversion to a range of value more in line with fundamentals. This deflation should be expected, and even welcomed, when a market has run for too long on sentiment and emotion alone. A return to a more balanced environment is a good thing for everyone.
We expect the correction to be most pronounced in the single-family detached and semi-detached segment between 1 and 2 million. This sector saw the strongest run-up in prices during COVID due to the relatively low cost of buy-in and the eagerness of families seeking more space and comfort. For investors holding newly purchased single-family homes, we recommend holding the asset for a minimum of 3 years and, if necessary, consider tenanting the property to minimize any uncomfortable carrying costs.
For those who invested in other property types, objective value – the kind that weathers corrective storms – resides in properties that have inherent wealth generators. Purpose-built multi-residential properties located in strategic areas offer a unique level of stability. Rental housing is an effective foil against volatility. Similarly, condo units in the downtown core often absorb the slack brought on by increasing interest rates and affordability woes. When budgets are reconfigured, condos become an alternative market entry point.
We’ve also noticed a broad-based recovery in the rental market. Average days on market is down, and average lease rates are improving. We are seeing strong demand for our larger condo suites and executive family homes. Headwinds are still present in our studio apartments and basement suites. Inventory levels remain elevated, with units that present as dated or poorly maintained continuing to struggle with cash-flow.
When contemplating the changes mentioned above, it would be prudent to consider the overall growth of your investments, from initial purchase to today. So far, all things considered, property values have increased by 9.4% this year. As we pivot toward the fall market with a focus on sustainable growth, we continue to recognize unique opportunities for strategic investment and successful sale of property – whichever direction you choose, we’re here to help.