Hello and welcome to my second newsletter of 2023 where we discuss Real Estate and Mortgage insights and updates, particularly in Ontario and GTA. The previous edition of the newsletter can be found here.
In this post, I’ll be covering
- Current state of the real estate market in Canada, focusing on GTA highlighting
- Home prices increase over the last year in the GTA
- Mortgage interest rates changes over 2022 & comparison with a historic average
- Change in the rental market in the GTA in 2022
- Whether you’re a real estate professional or a potential homebuyer, what should you care about, with the help of a data-driven real-world scenario
- Final thoughts and what to look forward to
State of the Real Estate Market
Let’s start with the current state of the housing market in Canada, focusing on the GTA.
- GTA Home prices over the last year
Chart1: GTA benchmark prices from Jan 2022 to Feb 2023
The chart above shows a composite benchmark price trend consisting of all the different types of homes – detached, townhomes, condos etc. across the GTA over the last 14 months. As can be seen, there’s been a severe almost 20% drop in prices from the peak.
There were also multiple year-end reports from organizations such as MPC and TRREB which showed that the average Canadian house price dropped by 13.4% from their 2022 Feb peak through the end of 2022. This is in sharp contrast to the 8.5% increase in 2020 and the 22% increase (yikes!) in 2021.
To me what this shows is that the market is rebalancing itself and clearing out the insane price increase of the Covid years. Market “correction” is the term that I’d like to use.
- Mortgage interest rates over the last year and their comparison over a historic average
Chart 2: 5 yr fixed mortgage interest rate comparison
The chart above shows the increase in 5-year fixed rates (by far the most favourite among Canadians historically) over the last 14 months. Jan 2022 had this rate in the 2.5% region. Now it’s almost doubled and is around 4.7%. My last newsletter had calculations of how much this increase led to a drop in mortgage affordability.
But here’s the point I want to draw your attention to. Historically, over the last couple of decades at least, the average 5 yr rates have been in the mid 3% range (it’s at 3.31% at the moment, as the red line in the chart above shows). The eye-popping 1% interest rates (or lower in some cases) that were available in 2021 were way out of the ordinary. If you know someone who says they’ll only buy a property when interest rates drop to those levels again, they just might have to wait for a long time.
- Rentals
This one was a real eye-opener.
Now, a 1 bedroom apartment rental costs on average $2500 per month according to data from TRREB. This is a close to 20% increase in just one year. And the vacancy rate in the major GTA regions is close to 1%. So, not only are apartments in short supply, even the ones that are in the rental market are extremely pricey!
Buying a home in the GTA has been quite expensive for years. But rents used to be somewhat bearable. Not anymore.
So what does this all add up to? In summary, over the last year,
- House prices have corrected and come down from the stratospheric heights of early 2022, but they’re still very expensive, particularly in the GTA.
- Mortgage interest rates have shot up significantly which is causing even more pain to people who were already priced out. But this one also affects existing homeowners whose payments are now going up (or will go up if your fixed mortgage is coming up for renewal)
- Even rents are now going up and pricing people completely out of the region
So, is it all gloom and doom only? Some people seem to think so. According to the MPC report over 35% of their respondents think they will never be able to buy a primary residence (this number was 27% at the end of 2021). Furthermore, affordability, or rather lack thereof is probably the main reason why over 50,000 people chose to move out of Ontario in 2021. (The chart below makes for a striking visual!)
What now?
With all that said and done, what can be done? Or why should you care?
Before going further, I want to emphasize this. Two things I can’t do is a) give financial advice and b) predict the future. For financial advice, please talk to your financial advisor. For predicting the future, well, no one can do that.
As a mortgage professional, what I can do is provide some insights into the mortgage and real estate markets. The thing about mortgages and real estate is that the fundamentals of these markets, don’t really change that much with changes in market cycles. This is particularly true if one knows how to manage risk.
Either a property/a real estate market/a mortgage environment is affordable to you, based on your financial situation and hence less risky. Or it is not. This was true when the average property price in the GTA was $200,000 and it’s true now when it is over a million dollars. Bottom line, although current market conditions definitely matter, what matters more, particularly for real estate which is usually the largest financial transaction in one’s lifetime, is your situation and requirements.
Example Scenario
If, for e.g., you’re renting now, but in your current financial situation, you can afford to buy a condo with a small down payment. However, you decide to hold on and not buy for whatever reason. Maybe you want to save for a larger down payment or your spouse hates condo maintenance fees (two reasons that both I and my realtor partners have heard from clients). Do the numbers support your decision to wait? Let’s see.
Since I can’t predict the future, let’s go back in time and imagine this was Jan 2020. Same situation – you were able to afford a condo back in Jan 2020 with a 5% down payment, but you wanted to save for a larger down payment and/or your spouse didn’t like the condo maintenance fees, so you didn’t end up buying. How did that “risky” decision impact you? Remember, not taking a decision is also a decision which carries its own risks.
Table 1 below shows the housing cost when renting and when buying
| Average monthly rental for a 1 BR condo (in Jan 2020) | $2,073.00 |
| Housing cost over 3 years paid as rent | $74,628.00 |
| Price of a Toronto 1 BR Condo (in Jan 2020) | $500,000.00 |
| CMHC insurance cost (with 5% downpayment) | $20,380.00 |
| Monthly mortgage (with the 5% downpayment) | $2,210.00 |
| Average monthly maintenance fees during the 3 yr period – estimate | $350.00 |
| Housing cost over 3 years if owned (CMHC + mortgage + maintenance cost) | $112,540.00 |
| Extra housing cost when owning vs renting | $37,912.00 |
Now, $37,912 would have been the extra outflow from your pocket over the last 3 years if you owned a 1 BR condo, instead of renting it. That’s over $1000 per month extra out of your pocket. At first glance, it seems like a lot. But is it?
Now let’s calculate how much in value you gained if you had bought a 1 BR condo instead of renting, back in Jan 2020.
Table 2 below shows the increase in value accruing to you because of owning
| Current (or rather Jan 2023) average price of 1 BR condo | $575,000 |
| Increase in value over 3 years (now accrues to YOU instead of your landlord) | $75,000 |
| Mortgage balance (principal) reduction due to 3 years of mortgage payments | $44,282 |
| Subtracting the extra cost for owning (calculated above) | – $37,912.00 |
| Value increase because of owning | $81,370 |
So, if you had held back and didn’t end up buying the property back in Jan 2020, over the last 3 years you would have paid almost $75,000 in rent. That’s 100% an expense and money that’s irrecoverable. But if you had taken a calculated risk and ended up buying, you would be up in value by over $81,000 in the same period and eventually, you could put this increase in value to work for you. With the benefit of hindsight and data, one can see for themself which decision – to buy or not buy ended up being riskier and which gave the higher reward.
A timely discussion with a mortgage professional might have helped, isn’t it?
Conclusion
Will conclude here. But before signing off, I’d just like to add that there’s no reason to disqualify yourself from the real estate market, no matter what the market conditions, before talking to a mortgage professional, like yours truly.
I offer a free consultation to discuss a client’s situation. You can make an appointment here. And, as I get compensated by the various lenders that I work with, I do NOT charge clients for my mortgage services. You can read more about it and see all the lenders that I have access to, here.
In my subsequent newsletters, I’ll expand upon how someone might have more affordability than they realize. Will also cover government incentives and programs which might help a homebuyer in their journey (including this proposed new plan that lets first-time home buyers save $40,000 tax-free in a new tax saving instrument).
Till then, over and out.
