Real Metrics-June Edition
Economy opens up – real estate activity picking up but is there risk in condo land?
It has been and is an usual time for everyone. With the shutdowns lifting in stages, people are starting to resume their normal activities albeit at a physical distance and with masks – Indeed a very different environment! Nonetheless, activity has been picking up and anecdotally, observing the number of cars on the road shows traffic (at least) is returning to normal. This is also true with the real estate markets in the GTA. In fact, since March, there has been a consistent and steady pick up in activity with increased showings, bidding and transaction volumes.
In May, there were 4,606 total sales transactions in the GTA. This was down 53.9% from a year ago, but an improvement from the 67.1% decline in April. We anticipate June will show further improvements. While volumes declined, prices did not. Average transaction prices in the GTA were up 3.0% (for All home types) from a year ago, and up 5.1% from April. Its hard to draw strong trends on this data given the low number of transactions but it does show that the market continues to display some resilience in the face of difficult market conditions.
Nevertheless, the one area that we see some risks is in the condo market – and particularly the downtown condo market. While the headline number of a price increase of 4% for C01 (Downtown west) and +10% for C08 (downtown east) appear to be quite positive, there are some troubling underlying fundamentals developing that we are watching closely. C01 and C08 are the two largest condo markets in Toronto representing 35-40% of all condo transactions in the city. In May, active listings for condos in C01 and C08 were up between 10-11% which bucked the downward trend overall – that is, Toronto as a whole saw a decrease in active condo listings of 14% and a decline of 18% in the GTA. New listings surged in C01 recording 573 new listings which is above the monthly average over the past 2 years of 512. We find this a bit of a red flag because during this COVID period, many would-be sellers have opted to wait until the market normalizes before listing their property. So to us, it suggests that some of these sellers are trying to rush to the exits before the market drops.
We pointed out the possibility of a rise in condo inventory in our April newsletter and suggested a few reasons for it which we have expanded on here:
1) the changes in short term rental rules/by-laws in Toronto, in addition to the impact of COVID on travel is having a very adverse impact on these units (e.g. AirBnB). Many short term rental units are either a) being put into the long term rental market or b) the owners are selling their units. Most short term rental units are in the downtown core.
2) Lower immigration and foreign student populations has resulted in a lot of vacant rental units sitting on the market. The latest data that we have was that there were some 168,000 foreign students at one point studying in Toronto. Many students have returned to their home country during the pandemic.
3) newly constructed buildings coming onto the market are adding to inventory
4) the combination of all of the above is resulting in a lot of rental units available. Many are sitting empty and rental rates are declining, causing a decline in investment returns for condo investors. So some of these investors are trying to unload their investment units.
As of this writing, there were some 4,858 condo rental units available in C01 and C08 on the MLS system. To give perspective, this is approximately the total amount of rental transactions since February. In May, there were 1,256 total rental transactions in C01 and C08. So, it is taking longer to rent out units, often resulting in lower rental rates or landlords offering incentives. In the most recent national rental market report by Rentals.ca, one bedroom rents in Toronto have fallen 6.1% from a year ago.
There has been a divergence between the condo resale market vs. the rental market. We do not believe that this is sustainable and there will be convergence – either condo prices come down or rental prices need to go up. Given the inertia of the market, we believe the former is more likely.
Now this all sounds negative, but not all of the markets are displaying these trends. Certain other condo markets such as in areas of North York have actually been quite stable and balanced. C07, C14 (Willowdale East and West) and C15 (Bayview Village) are still showing stable fundamentals. While sales volumes are down, active listings are down in tandem which is keeping the market balanced (see exhibit below).
Exhibit 1: Condo Sales vs Active Listings-downtown condos continue to see a rise in listings while North York showing more balance
We believe it’s a matter of time before these units get absorbed (both on the rental and resale side). We also see opportunities for condo buyers in the coming months as we start to see some convergence of the market. For many buyers that have been shut-out of the red hot condo market, this could be the opportunity they have been waiting for. While the short term outlook for Toronto and Canada are somewhat muddled due to the impact of COVID, we believe the long term fundamentals remain sound.
Exhibit 2: Summary of Activity by Region and Property Type – May 2020*
Exhibit 3: Summary of Activity: May 2020 – Detached Homes
Exhibit 4: Summary of Activity: May 2020 – Condo Apartments
For more charts and data on prices, please access our report in pdf form here.
Take care and be well!
Jenny & Justin Wu
RE/MAX Hallmark Realty Ltd.