What Will Happen to Toronto Real Estate in 2024?
You know I don't make predictions, but here's what I'm keeping my eye on in 2024.
Happy New Year! How late into the year is it ok to keep saying that? I feel like the first couple weeks of January each year are kind of a blur because I never know who's still on vacation, or who's sneaking in some extra time off before the year officially gets underway. My favourite time of year is probably those two weeks from just before Christmas to just after New Years, when my phone doesn't ring, I have no obligations, I can wear pajamas all day, and the day of the week doesn't matter! But it's probably about time I get back into the swing of things and back to reality ;)
If you know me at all, you know I don't make market predictions. What's the point? No matter how much I stare into my crystal ball, it never seems to be right. As I've said over and over, anyone who says they can predict a market (or time one for that matter) is full of it. But what I can do is pinpoint a few things that should/could push the Toronto real estate market in one direction or the other. So here we go:
1 - Interest rates: The talk of the town for the past 18 months has been interest rates and that won't change one bit in 2024. And while everyone focusses on the Bank of Canada, I've been laser focused on the bond market. Why? Because the bond market effectively sets how fixed rate mortgages are priced. Do you know anyone in the past year who has bought a place and opted for a variable-rate mortgage? Yeah, me neither. Historically a variable rate mortgage was less expensive because of the inherent risk of your rate changing as the Bank of Canada sets their policy rate every six weeks or so. But because of this crazy thing called the yield-curve inversion, short-term rates (and variable rates) are actually higher than fixed rates. So opting for a fixed rate, longer term mortgage (say, 2-5 years) has been the cheaper option for quite some time now. It's counter intuitive but that's the world we're in. The bond market has been saying "rates will come down in a year or two, so longer term bond yields should be lower than short-term interest rates" and that's causing long-term fixed rate mortgages to drop. That's a good thing. If these yields keep dropping, banks will offer lower and lower fixed mortgages and that should help with buyer affordability. And that should mean more buyer demand.
Side note: I'm obsessed with the bond market right now and here's where you can see the 5-year bond yield, in real-time: https://www.marketwatch.com/investing/bond/tmbmkca-05y?countrycode=bx. Typically there's a spread of about 2.5% between the 5-year bond yield and what banks will charge for a typical 5-year fixed mortgage. Keep an eye on this. Nobody was talking about this last year. But they will in 2024.
2 - Supply: Ah yes, Economics 101. Supply and demand. Supply has always been the biggest issue in Toronto, especially for freehold housing, and that's probably the single reason why prices here have fared better relatively than parts of Ontario where the supply constriction is less pronounced. Even condos in Toronto, where the supply is leaps and bounds greater than freehold housing, didn't see the flood of inventory that would indicate panic last year. Yes, there were a lot of "deals" to be had in the Fall of 2023 as some investors just couldn't take it anymore and dumped their units, but I saw the year end off with a sense of calm and stability that said to me that most sellers were not panicking and if you were patient enough, and priced attractive enough, you would find a buyer. Inventory always dries up at the end of December so I will be keeping a close eye on condo supply over the next few weeks, and how quickly that supply gets snapped up by willing buyers. That will probably set the tone for the year.
3 - Condo fees: As someone who spends a great deal of time analyzing the condo market, I can't help but wonder/worry about how condo fees are going to impact the future of condo prices. If you read my blog post from last year, I revised my analysis on what I considered to be reasonable condo fees in the City of Toronto. I had to make that revision because my previous analysis was done about 4 years prior and we all know that the cost of "everything" has gone up substantially since. And condo fees are no exception. I sit on the board of two different condo corporations as I'm writing this and I can tell you that keeping costs down has become exponentially more difficult since 2020. Construction costs have gone up significantly, which affects the cost of repairs and maintenance in buildings, minimum wage has increased, which means the cost of your concierge, cleaners, landscapers, etc are all going up, and engineers have drastically increased the required reserve fund contributions for pretty much every building because contractors have jacked up their prices for everything. It was not unusual to see a building increase their condo fees by double-digit percentages last year. So I can't help but pay attention to how these increased fixed costs for buyers will impact their budgets, and affordability, when it comes to the condo market. I'll be keeping my eye on this for the next year or two, you can count on it.
4 - The rental market: We all saw how rents in Toronto skyrocketed in 2022 the minute the Bank of Canada started raising interest rates. That was no coincidence. Would-be buyers either decided to "wait and see" and chose to rent instead, and other would-be buyers were forced to the rental market because they couldn't qualify for the mortgage they needed any longer. The rental market in Toronto stabilized in late 2023 and rents actually started to come down in the last couple months of the year. Year-over-year, rents are basically flat. And to be honest, I'm not sure what that means for condo resale prices. Lower rents could incentivize people to continue renting, taking some buyers out of the market in the short term. It could also push some investors to choose to sell their units if their tenants leave and they can't get the rental rates they were hoping for. There's always a steady stream of new condo completions that hit the downtown core every year, adding much-needed supply to the rental market. But if that supply pushes overall rents lower, will that also keep the resale price of condos from rebounding? I do a ton of rentals every year and this is another thing I'll be watching closely. And I'll be paying close attention to why my renter clients are choosing to rent versus buy.
5 - Market sentiment: This is one of those things you just can't quantify. I've been doing this long enough to start getting a "feeling" when the market is picking up. And while it can take a little while for new buyers to start feeling the same, when it finally does happen, it can change the whole dynamic of the market. People want what other people want. When buyers start getting more active in the market, and activity picks up, it attracts more buyers. Maybe it's FOMO, maybe it's the fear that prices will start rising again and they'll be priced out, but it happens during every cycle. Buyers buy when other buyers are buying. It's somewhat counter-intuitive because the best time to buy is when nobody else is buying, but I digress. The Fall of 2023 was pretty bleak. Sales hit a 23-year low (which is actually as far back as the TREB data goes), buyers mostly disappeared, and nobody wanted to talk about real estate (except for how slow it was). Market sentiment sucked. But let's see if/how this changes as we kick off 2024. I can tell you that things started picking up in mid-December 2023, when historically things would be super slow. And even the first couple weeks of January have seen a big uptick in activity. Maybe it's just me being the eternal optimist but if this momentum continues, maybe we'll actually see a healthy Spring market where buyers are feeling confident again. Market sentiment can't be measured. But boy, can you feel it!
6- Pent-up demand: This ties right into market sentiment and is another thing that is next to impossible to quantify. People need housing. People want housing. People want to buy houses. So when sales in 2023 hit a 23-year low, you have to believe that there is now a pretty decent amount of pent-up demand from buyers who need and want houses. But those buyers found reasons why 2023 was not the year for them to buy. Perhaps they're waiting for interest rates to come down. Or perhaps they're waiting for prices to come down. But at some point, the waiting game ends and those buyers will need to buy a house for their family, or need to upsize/downsize, or simply accept the things they cannot change and take the plunge. How many? That remains to be seen but just like experience can help you "feel" market sentiment shifting, it can also help you "feel" pent-up demand. And my phone ringing from potential buyers is the first indicator. And that's already started.
Let's see how 2024 plays out together, shall we?
Have you checked out my previous blog posts?
Your Toronto condo lover,
iPro Realty Ltd, Brokerage
Direct: 647-223-1679 (call/text)