Another pandemic year has passed with much of the same uncertainty and frustration as the one before: the same intractable pandemic, the same disruptions to business and daily life and ironically, the same “over-heated” Toronto real estate market. This year, more than others, we’ve been pulled toward mediation and conflict resolution – housing being a unique stressor with COVID related pressure points. As a team we remained focused on the well-being of our clients and their tenants. We offered guidance through instability and – as always – perspective on a city, and a market, in flux.
Through the year, the average selling price for a Toronto home increased by a staggering 21.7%, with detached low-rise increasing 30%, and condo apartments gaining 18%. The conversation about supply and demand inevitably circled back to the systemic failure by the Canadian government to address low inventory levels, as Canada now boasts the lowest number of housing units per 1,000 residents of any G7 country – and that number has been falling steadily since 2016. Heading into this month, the sales-to-new listings ratio hit 90%, up 14% over last year. For context: 50% would be balanced and 60% would be indicative of a bourgeoning seller’s market.
Despite these concerning statistics, there have been indications that the market may be descending from its apogee. House price appreciation was at its slowest pace in seven months at the end of Q3, with building permits and housing starts that peaked in March starting to recede. The Bank of Canada also announced it will soon be entering (as early as April) a period of sustained rate increases. However, until then, the current environment of low interest rates, a back-log of immigration, stockpiled savings accounts and the desire for more living space should keep those keen on buying in a tight race for remaining inventory. Unless the forthcoming rate increases are larger than the average Toronto family can afford, we anticipate they’ll have a moderate cooling effect on value appreciation transitioning into 2022. Those effects could move from moderate to pronounced if rate increases are unmanageable, if Omicron proves more pernicious than Delta, and if inflation continues unabated. We’ll be monitoring these three variables closely and will update throughout 2022 as necessary.
Leasing activity has continued its recovery following a correction through the end of 2020 and into early 2021. Absorption rates of vacant inventory continue to be bolstered by a return to in-class learning and improved part-time and youth employment metrics, with service-sector industries that disproportionately impact these groups seeing a return to operations. Rental transactions were up 15% over last year with a modest average increase in lease rates at around 3%. Strongest among the segment were single family homes and large 2- and 3-bedroom apartments, with small condos and basement apartments struggling through a prolonged period of volatility and muted demand.
From this vantage point, we offer some emergent trends and strategies to consider as we transition into a new year and a new market:
Work from home is here to stay:
Since 2020 many employees who once made the daily commute to their downtown offices have managed (quite successfully) to conduct business from their homes and according to a recent survey by PwC, 36% of them want to keep it that way, with only 10% hoping to return to a traditional in-office environment. For many, their home had to immediately accommodate a workspace and those who could, moved. We saw above average turnover in our smaller condo units and basement apartments, producing a glut of suddenly undesirable inventory and sustained downward pressure on lease rates. Our Q3 and Q4 leasing activity has shown signs of recovery, however many of our basement units and micro-condos have not seen the same absorption rates and value recovery of larger units.
Our strategy:
Avoid investing in a studio apartment whenever possible. Not only does speculative buying of those units push them further out of reach in terms of affordability for first-time buyers and end-users, but you’ll also struggle with your margins. Lease rate and value appreciation is slowest on these units, and during times of volatility tiny units are the hardest to cash-out of. If you can, invest in a condo with a bona fide den, or a second bedroom – enough space for multi-functionality. We also noticed increased activity in our multi-res segment, with tenants seeking out the larger, often brighter spaces in a purpose-built or converted low-rise rental, particularly if there’s access to a rear-yard.
Location is more important than ever:
Spending so much time at home has anchored many of us to our communities and has reinforced the importance of convenience and comfort. There’s huge value in being able to meet our daily needs – from grocery shopping, to school drop-off – within 15 minutes of our homes, ideally without having to get into a car.
Our strategy:
When investing in real estate, pay close attention to the live/work/play dynamic and beyond that, proximity to retail, office and of course, transit. This becomes more important the further you move from the downtown core. Volatility is more pronounced the further you detach from those important anchors.
Single family rental housing as a viable long-term alternative:
Property values across the GTA have reached a point where for many, purchasing a home is a financial burden they are unwilling or unable to undertake. Additionally, strong immigration brings many new families who prefer to rent for several years before purchasing. This has allowed for a sustained shift in the traditional approach to housing, and a new segment of long-term, potentially life-long renters. Often families, these tenants are stable, responsible, and ready to put down roots. What they don’t want, though, is unpredictability. They are often looking for long term leases.
Our strategy:
Some of our clients have been working with this model for many years, quite successfully. The idea of purchasing a home for themselves, or their children, with the future in mind allows them to invest in a community early and enjoy the value appreciation over five to ten years. The prospective investment property should be scrutinized to avoid unexpected capital expenses, and the area should be strategic to ensure steady value appreciation and, when the time comes, a safe-harbour for long-term real estate investment.
Evolving Real Estate Practices:
To conclude that property values in Toronto are driven solely by tight supply and overwhelming demand is a quick answer to a complicated question. As Realtors, it’s our responsibility to ensure that our clients are being strategic when investing. I touched on it in our last update, but the point is more salient now: the blind bidding process and the influence a buyer’s Realtor has over their client in the transaction is adding a level of over-valuation to the market that is best described as froth. What I mean by this is, currently, most properties in the city are being positioned similarly for sale – they are being marketed at a price that attracts and incites a competitive bidding process and on a pre-determined date, all interested buyers have their Realtors submit offers on their behalf. The catch is, none of the buyers know what they’re competing against and in this late stage of frenzy, fatigued buyers are easily encouraged to over-spend, sometimes by hundreds of thousands of dollars. It wasn’t always this way. Twenty years ago, competing buyers would gather in a room and present their offers together. The sellers would review, and negotiations would be ongoing until the strongest offer was accepted. The transparency allowed for true market value to percolate through. If a buyer over-paid, they did it knowingly. We’ve seen first-hand how this has impacted property values by adding an illusory layer of over-valuation to the market.
Our Strategy:
There have been rumblings from the Federal government about scrutinizing the real estate transaction and the way Realtors work within it. If they do, this could be one of the biggest changes they try to implement. Any modifications will be rolled-out slowly – if at all – and our strategy remains unchanged: as investment-focused Realtors, we involve ourselves fully in every part of the transaction. We understand why and how a target area is selected, we understand property values and why they might fluctuate, and we counsel our clients to avoid making emotionally fuelled decisions that could compromise the long-term viability of the investment. In the past two years, most Realtors have moved away from negotiating and sale prices have detached from value trends as a result. We welcome a return to the negotiating table.
Thank you!
As an essential service, we’ve worked together through what has been a challenging two years. We’ve had to re-imagine how we interact with our clients, tenants, and their properties and how that could (and should) evolve into the future. We’ve relied on each-other and collaborated in new and exciting ways. Some of our most impactful moments were shared with our clients and tenants: the gestures of kindness, patience, levity, and generosity have made our jobs easier and for that we thank you.
Happy Holidays from all of us at Landlord. We wish you continued stability, and health in 2022.
Notes:
https://www.cmhc-schl.gc.ca/en/blog/2021/hma-indicates-higher-degree-vulnerability-national-level
https://www.moodysanalytics.com/-/media/article/2021/10-canada-housing-market-outlook.pdf
https://www.pwc.com/ca/en/industries/real-estate/emerging-trends-in-real-estate-2021.html
https://www.scotiabank.com/ca/en/about/economics/economics-publications/post.other-publications.housing.housing-note.housing-note–may-12-2021-.html
https://trreb.ca/index.php/market-news/market-watch
