July 2017 Real Estate Update
GTA real estate market remains slow but will it last?
The real estate markets in the GTA and Toronto remained slow through July. Transaction prices have fallen 19% from the peak in March/April but remain 5% higher in the GTA and 9.9% higher in the City of Toronto from a year ago. Overall, transaction volumes in the GTA declined 40% from last year, and 26% below June levels. With the doldrums of the summer and prime vacation time upon us, we anticipate similar trends in August.
However, will the market pick up in the Fall? We expect it will due to seasonality, but also due to our belief that expectations are being been reset by buyers and sellers; buyers are realizing that while good deals are available there is a downside limit absent a desperate seller, and sellers are realizing that March-April prices are no longer realistic. As all markets do, the Toronto real estate market needed to correct itself and it is doing so. Many buyers have been waiting on the sidelines for signs that prices are stabilizing. Transaction volumes should pick up as this occurs, as market participants regain confidence that prices are at more sustainable levels.
It’s interesting to note that despite the big drop in transaction volumes, and big increase in listings, average transaction prices remain reasonably strong, which suggests that many sellers are not desperate. Highly motivated sellers typically sell because
1) they cannot afford to keep their home (due to a change in life situation such as loss of employment) and/or
2) They need the funds to finance a home they recently purchased.
With a relatively strong economy, we don’t see loss of employment as a key factor at this time. As far as sellers that are desperate because of a prior purchase commitment, we see this as a transitory issue.
Assuming a 60 day close, purchasers who bought before June (when the market began to slow) have already closed their purchase transactions. Therefore, we see the many of the highly motivated sellers should be out of the marketplace by the Fall, which should help to stabilize pricing in the coming months.
Exhibit 1: Not all markets are equal – Condos continue to perform well
Average transaction prices decline from last month
Average transaction prices in the GTA for detached homes declined 5% from June to just over $1.0 mm but remain 5% higher than last year – still, this is 17.6% below the peak price in March. The condo market has been stronger with a year over year increase in transaction price of 23%, and down 7.3% from peak April prices. Listings for all home types remain high at 18,751 but down from June, as the pace of new listings slowed this month (partially due to seasonal slowness in the summer). Inventory stood at 3.2 months of supply which is up from 2.5 months in June.
Exhibit 2: Summary of Activity: July 2017 – Detached Homes
Exhibit 3: Summary of Activity: July 2017 – Condo Apartments
Rental markets surge forward
As we had expected, market rents in Toronto have started to rise – and rapidly. When we first commented on the Ontario governments’ “Fair” Housing Plan, we indicated that rising market (or street) rents would likely occur, as landlords look to lock-in higher rates now given rent controls reduce their ability to adjust rents during tenancy. The policy has had the opposite intended effect, and in our opinion is misguided.
We conducted a mini-analysis of rents within the Toronto C01 – Waterfront neighbourhood for 1 BR units before and after rent controls were announced. As can be seen in the exhibit below, one-bedroom units are now renting for close to $2,100/month on average compared to less than $1,900 at the beginning of the year.
Longer term, rent controls could worsen the affordability for renters, as supply lessens. At the end of the day, developers of purpose built rentals require a reasonable rate of return to compensate them for the risk of such projects. Unlike condos where buyers will deposit up to 25-30% of the purchase price before completion (and thereby funding some of the construction costs), builders of purpose built rentals take much of the funding risk upfront.
Similarly, small landlords also need to make a reasonable rate of return on their investments – many landlords are individual investors, or families looking to build a nest egg for their retirement. By reducing their ability to adjust rents for higher expenses (such as maintenance, higher property taxes and other costs) seems unfair. While we will agree that there are some landlords that abuse their power, the majority play by the rules and are fair with their tenants.
Exhibit 4: Rents are rising faster since rent controls
As always, feel free to contact us if you have any questions regarding the contents of this update or about the market in general.
Jenny & Justin Wu