Hello and welcome to my first newsletter of 2023 where we discuss Real Estate and Mortgage insights and updates, particularly in Ontario and GTA.
In this post, we’ll be covering:
- Impact on mortgage affordability due to the ongoing interest rate hikes
- Identifying the medium-term trend in real estate markets using data
- Why 2023 might just be one of the best times to get into the real estate market
- Challenges
- What is coming next
If you are:
- A potential or current homeowner, read on as I try and cut through the clutter to help you understand the market and enable you to best navigate it with insights relevant to you
- A realtor, read on as I help you better position yourself to manage this turbulent environment and be ready to help your clients make the right choices. You just might find useful data and talking points here, for your discussions with your clients
- An investor, read on as I arm you with insights to take advantage of the opportunities that present themselves – some obvious, others not so much
- Any other partner such as a real estate lawyer, financial advisor, immigration consultant and many others – you would want to read on because on your business is impacted by the real estate and mortgage market more than you might realize
Intro
What a year 2022 was. Last year we saw the start of a devastating war that’s still ongoing, the beginnings of an economic downturn whose worst is probably yet to come, a pandemic that keeps coming back, the list seems endless. But 2022 was also the year that the world took some of the most serious steps to deal with climate change, there were new medical breakthroughs particularly in treating Alzheimer’s, we reached further for the stars with NASA’s new $10 billion telescope and yours truly attended his first ever hockey game in Toronto’s Scotia Bank Arena 😉
Impact on mortgage affordability due to increased interest rates in 2022
More to the point, we now see an interest rate environment which seems a world away from what it was just a year ago. In Jan 2022 you could get a 5-year variable mortgage for as low as 0.85%. The 5-year variable rate at the moment stands at 5.5%! The table below illustrates what this means to a potential homebuyer using a very basic scenario.
| Jan 2022 | Jan 2023 | |
| Annual Income | $150,000 | $150,000 |
| 5-year variable interest rate | 0.85% | 5.5% |
| Maximum mortgage (approximate) | $775,000 | $630,000 |
| Monthly payments (25 yr amortization) | $4625 | $4625 |
In just 12 months, for the same $150,000 income the maximum mortgage that one might qualify for has dropped almost 20%!
But there’s a silver lining to every cloud and to understand the silver lining to this cloud, let’s dig a little deeper into the data.
“When in doubt, zoom out”: Getting to the overall TREND – the silver lining
“When in doubt, zoom out” is a mantra that financial traders usually use to overcome any lingering doubts over a potential trade due to short-term volatility. The mantra applies here as well.
The chart below shows you the GTA property prices from Nov 2015 to Nov 2022. Why this time period? Because this 7-year window has 2 very prominent run-up and subsequent correction cycles. Ergo, lots of volatility but still an evident and discernible trend. And 7 years, let’s face it, is not a very long time when it comes to wealth creation through real estate. The trend is even more prominent over longer periods but for now, let’s go with this.
What the chart shows
- In Nov 2015 the average price of a detached home in GTA was $716,000. In Nov ’22 it stood at $1,283,600 an increase of 79.27% despite 2 price corrections
- Price increase among apartments usually, the entry point into the real estate market for first-time home buyers, is even more impressive. In Nov ’15 an apartment in GTA would set you back roughly $333,700. If you had bought it, that apartment on average would now be worth around $711,800. That’s an increase of 112.19%!
One thing to remember here is that the above numbers are deliberately not a bottom-to-peak comparison. That would make them look even more impressive but would be meaningless because nobody can perfectly time the market. At least not consistently or with a high level of certainty.
And, the trend is visible in any other reasonable duration (at least 5 years) time periods as well. The point here is that to see the overall trend, one needs to zoom out. And the trend here clearly shows a substantial increase in average property value despite wars, pandemics, and everything else that has happened in a relatively short time.
Imagine if you were to buy a property today, what its value will be in 7 years. Food for thought, huh? Now imagine, if you could have bought a property today, but didn’t. What’s the opportunity cost of that?
2023 – Will it be one of the best years to get into the real estate market?
What the chart shows:
- The blue line in the above chart above represents the YoY average price % change in the GTA region in the last 10 years. (For e.g., in 2019 the average GTA home price increased just under 4% over 2018 prices, in 2020 the price increase was 13.49% higher than in 2019 and so on).
- The orange line represents the yearly average price % change over the last 46 years (the maximum time period that we have data for), and this number stands at around 7%.
- As can be seen, every year in the last 10 years, except for 2018-2019, the yearly price rise has been greater than the average yearly price rise taken over 46 years and in 2022 it’s already down below this average line
What all this means is that GTA home prices are on a rising trend and are actually rising faster in recent years. Buying opportunities, where the breakneck price increase has taken a pause have been few and far between. But the next one seems to be just around the corner, it might already be here. Prices are down and opportunities are available if one were to look closely. 2023 might just be presenting everyone with a great entry opportunity into the real estate markets (esp. for first-time buyers).
However…
Having said all that, I’m aware that there are challenges. Home prices are still unaffordable to many, interest rates are disqualifying a lot of people and even among high earners affordability is low. But there are strategies that one can follow to mitigate these problems and you might not be as badly priced out of the market as you think. Stay tuned here and follow my other social media channels (links in the signature below) as I share details on how these challenges can be overcome or at least mitigated to a large extent.
Using my social media channels and subsequent posts I will also be sharing regular updates on relevant real-estate related news, analysis, tips and tricks, mortgage myth-busting, explaining the mortgage process in simple terms along with the updates on interest rates and any ongoing mortgage offers.
Would love to hear your suggestions for topics that you’d like me to cover, and any general comments or feedback. You can always email them to me or add your comments to any of my social media posts.
What’s next
As a sneak peek, I’m working on detailed scenarios that explain how the impact of high mortgage interest rates can be offset by taking advantage of other aspects of homebuying. Will illustrate this using actual data which shows that a home purchase doesn’t need to be as out of reach as one would assume. I’ll also share some relevant and interesting statistics from 2022, predictions for the real estate and mortgage markets in 2023 and more in subsequent posts.
I’ll leave you with this. Housing is a necessity for everyone. That’s why my goal is to not only get people into their own homes, but also ensure everyone is able to build wealth along the way in the right way.
Until next time!
