2019 Toronto Real Estate Market Forecast

2018 YEAR IN REVIEW

Before we begin our fearless forecast for this year, we need to recount our predictions for 2018. Buyers and Sellers should be pleased with how prices unfolded. Downtown condos averaged a 10% increase. Low rise under one million in Toronto also increased by 6%. The 905 area saw minimal price appreciation with York Region showing a 5% drop. However, those in the real estate industry were not as pleased, as we widely missed our sales estimates. Like others, we underestimated the significant impact of the ‘Stress Test’ (2% over actual five-year fixed rates and where buyers needed to qualify at).

WHAT TO LOOK FOR IN 2019

To summarize: “What you see is what you will get in 2019”. Here’s why.

1 The Bank of Canada is committed to raising short term rates this year in an effort to restrict first-time buyers. It can’t be because of inflation fears! The worry that five-years rates could spike for these buyers is unfounded (see figure 1). Ten-year money is still cheap but the inversion of rates could be a sign of a coming recession by the end of 2019 or 2020. Still these higher rates in the short term will reduce the number of qualified buyers in 2019.

2 GDP growth for the GTA is forecast to be 3.5% versus 1.5% for the rest of Canada. Most of this growth is in new high-tech jobs and with continued immigration to the GTA, demand for housing will exceed supply in 2019.

3 What has been a staple of our Market has been a balance of listings to sales – no more than three months inventory for price support.

Figure 1

Canada Yeald Curve January 2019

2019 SALES FORECAST

1 Resales on the Toronto Real Estate Board will be 87,000 units – up 11% from 2018. This number at 1.6% is still below the Canadian average of Resales per Adult in Canada over the past seven years. (Figure 2). Restricting first-time buyers is a drag on the overall market. Without these buyers, we curtail the move-up buyer and hence slow the overall market.

Figure 2: Average resales per adult in Canada is 1.7% over the past 8 years

Resales Per Adult in the GTA

2 New Real Estate Sales will be 25,000 units. In 2018, it was 27,000 and 42,000 in 2016. New condo sales will make up 85% of this number. Developers seem to be in no hurry to bring new projects to market. Currently, there are 120,000 condos in the pipeline to be built over the next five years. That is 24,000 units per year. Based on current population growth trends, we need 35-40,000 new units each year to keep the market in balance.

3 Price changes must take into account that the GTA is no longer a homogeneous market. As in 2018, price increases will be strongest in the 416 area and particularly for housing under the million-dollar mark. Condos had a 10+% increase in the first seven months of 2018 and then levelled off. Condo prices will remain in the $800-1,000 psf range this year with increases averaging less than 3%. Condos priced under $500,000 are in high demand. The price differential between condos and low rise has narrowed, so look for price increases of 10% in the attached and semi-detached house market under a million dollars in 416. Properties up to two million will increase in the 5% range. Looking at 905, lower priced properties will experience a maximum 5% increase. Over two million dollars, the market will be flat. (Figure 3).

Figure 3

Price Differential Increases Between Condos and Low Rise Homes in Toronto

4 For new condo investors, the price gap between resale prices of newly built condos and new launch condos is now $125 psf. versus a historically premium of $50. (See Figure 4). Construction costs have risen significantly, so, don’t expect developers to reduce prices but rather to postpone projects.

5 Assignment sales (owners selling new condos before registration) will increase in 2019. Enforcement of tax rules (profits taxed as income as opposed to capital gains, plus HST as the sale is deemed to be commercial and not residential) has made this option less attractive. But the new ‘Stress Test’ rules will make it impossible for some buyers to get a mortgage to close and they will be forced into this market segment. Because this market is not on MLS, our guess is that we will see 5,000 assignments this year.

Figure 4

New Launch VS New Resale Condo Prices Toronto 2019

2019 RENTAL FORECAST

1 Rentals will be 30,000 units as reported on TREB (65% of all rentals are in Central Toronto). Rental activity is unchanged from 2018 and 2017. Why no change with 40% of all new condo units dedicated to rentals? That’s because rent controls for existing tenants are making it more attractive to stay if they cannot qualify to buy.

2 With no increase in supply, expect rents to increase this year by 5-10% on top of the 10% in 2018. The only moderating influence is whether salary increases can keep reasonably close.

3 Vacancy rates for condos, currently at .7%, will actually be lower in 2019.

FINAL THOUGHTS

In the strong markets of 2016 and 2017, buyers and sellers, gravitated to those agents who reduced fees and provided little or no service. As the market has changed, we will see a real move to those agents who know how to price and market properties. Remember when it did not matter how low you priced a property because it always went ‘over ask’? Now if you price too low, you only get full price! Remember when photos and staging were not critical because properties sold in days? Buyers continue to view properties, first through the Internet, but just like Tinder, they will just swipe past your listing without a strong first impression! 2019 will be the year where the best agents will outperform the market!