It's no secret.
The Greater Toronto Area (GTA) is in the midst of a housing crisis.
The average house price has been steadily increasing for years. Recently, however, there have been some signs that the market might be starting to cool down. In this article, we'll take a look at the current state of the GTA housing market and try to answer some questions like: What has caused the average price of a house to hover around $1M? And, how likely is it that the average house will stay at a million dollars or higher?
The most recent data from the Toronto Real Estate Board (TREB) shows that, while the average house price in the GTA is still just shy of $1.1M, it has been slowly trending downward since its peak in December of last year. This is partly due to the fact that interest rates have been on the rise recently, making it more expensive for potential buyers to get a mortgage. Additionally, sales volume has been steadily declining for months now, which could be an indication that fewer people are interested in buying a home.
I was speaking to a colleague last week about this information, and we were wondering what factor(s) had caused every house listed in the GTA to be around million dollars? After having that discussion I felt the need to write this article.
As you may be aware, the average price of homes in the GTA has shot up past $1M recently, with most selling for hundreds of thousands over the asking price. The real estate market up until now had been so hot that there seemed no end in sight. This has left many feeling curious and cautious about cashing in because there are some expectations that prices will continue to rise.
Stack of Canadian Money.
We were wondering if that was a realistic outlook to have? And, how much further can the average Canadian family stretch their budget to get into a home?
Our discussion helped us to see pretty quickly that there are a few points about this current housing market that don't make much sense, and we both believe that there is going to be some sort of “correction” whether it is financial, or lifestyle related in the near future.
Here are a few things we discovered when talking about these issues, and I recommend that you read to the end because I will share some valuable insights about what we see as “bad” investments right now, and what look like positives to take away from this shifting market.
Right away we concluded that we see the million dollar price point as the new benchmark in Canada, because homebuyers are required to make a minimum 20% down payment for homes worth $1,000,000 or more. This clear fact changes the eligibility for most Canadians who are hoping that 5% down will be their downpayment.
Simple math says that:
To buy a million-dollar home in Canada, you’ll need a yearly income of at least $175,230, as well as a cash down payment of at least $200,000. That’s the minimum in order to qualify for a large enough mortgage.
But consider that:
Statistics released by the Canadian government confirm that fully employed Canadians earned an average salary of $54,630 in 2020. Which means that even if they had the $200K down payment available, the average Canadian household would be $65,970 short each year qualifying for a mortgage based on their income.
That is a pretty strange bit of information, right?
By no means are we saying that it’s not possible to get a mortgage for more than $1M dollars. In Fact there are many ways to make the numbers work for most people that have a committed interest in getting into the market. What we are saying is that it becomes more difficult for the AVERAGE household to meet the requirements and therefore $1M seems to be an approximate ‘ceiling’.
We also noticed that as soon as you get past the million and a half dollar price point there is a difference between what you can get from a house in Toronto, and other locations in the GTA. That having been said, location is key. It's not always about the distance to your favorite restaurant, it's sometimes as simple as how close you live to work. Also, things like whether or not there are stores available in an area that will satisfy your specific needs.Most people who moved out of Toronto to other parts of Ontario find themselves now spending hours driving. For example, I know of at least one couple that are now living outside London but have an office in Toronto that is requiring them to be in person at least 3 days a week. These factors should be considered when choosing where you live and can make all of the difference between a successful decision and lifestyle failure.
There are a few things we think most Canadians should at least consider as this market continues to unfold. There are predicted interest increases expected later this year that will affect borrowing power. The price of food and gas rising, it's important to keep an eye on how this will affect your budget. Not to mention that the inflation rate is about 7%, which means that your money doesn’t go as far as it used to.
Which leads us to the idea of a correction:
We believe that real estate prices might be in for a bit of a dip. The most recent report from one of the world’s leading forecasters, Oxford Economics, shows home prices falling 24% by mid-2024. Higher interest rates and anti-speculation policies are forecast to begin the price declines this fall. Home prices have increased 50% since the Bank of Canada (BoC) began cutting interest rates. Even with this correction, the firm expects prices to still be 15% higher than pre-2020.
Indicators of the movement in the market can be hard to read.
So, what does “correction” really mean?
Technically a “correction” is a 10% decline in the price of an asset from its most recent peak. These corrections can be scary, but they don't have to keep you up at night, nor do they necessarily mean that your money is lost and you should panic! The best way for investors to weather the storm is to look at their long-term goals and approach decision making with patience. Sometimes we need to look at the forecast and cut losses, but the worst thing anyone could do during this process would be jumping ship too soon.
We find it interesting that euphemisms are employed so often in our industry. The term “correction” at once diminishes the real world effect on the market and implies something sinister, at least that was our consensus.
From the outside looking in it may appear that our conversation was negative and filled with doom and gloom about Real Estate, but I assure you that the nature of it couldn't have been further from that in tone and repartee.
Honestly it started out innocently enough… with simple questions like “what do you think about the market right now? What's the biggest thing to be excited about and which segment? And the conversation took off in a lot of directions. We know that obviously Hamilton is a different place than Oakville, and it is definitely a different place than downtown Toronto.
Either way this is what we concluded:
The one thing we wouldn't touch at this point is pre-construction.
Construction worker working on a new development.
Depending on what happens with the economy, prices may or may not go up. We all know that the real estate market is unpredictable. You could be paying too much for something and it might not work out in your favor. There's no way of knowing what will happen with our economy or if things are starting to plateau. It certainly doesn’t make sense to us to buy preconstruction, but you need an agent who specializes in this type of deal and as always there are opportunities if you're willing to be creative.
If we were going to buy right now?
This one is tough….but here are our thoughts.
Children enjoying some quality time.
Lots of factors affect the thoughts behind buying a home. Do You have kids, or pets? Lifestyles influence a lot and can be very different. Think about the differences between couples who only want to go out for date night every once in a while and a single person with a busy schedule. Someone that looks forward to spending time at home reading, versus people who enjoy cooking dinner together. Everyone wants to be able to enjoy their own space.
Cuteness Overload!
It can be hard to paint with such a broad brush but, two segments that we see heating up in the next few months are the condo market within a 50km radius of Toronto, specifically already built condos with moderate to low monthly fees, and detached homes that are located over an hour and a half from Toronto.
We obviously don’t have a magic eight ball, but with all of the movement in the market we believe that the days of 40 showings in one day and receiving $250k over asking with no conditions is coming to an end. The most likely positive takeaway from this situation is that buyers will have more options at more realistic prices, and that with prices retreating below the million dollar high water mark, hopefully more “average” Canadians will have the opportunity to get into the market.
I really want to stress that there are always different perspectives and angles to look at the real estate market from. Like on most television shows that offer advice, I must say that our opinions should not be seen as recommendations or stop signs for you as you navigate the very interesting world of real estate. Remember, each segment of the market from 3500sqf single family detached homes to 500sqf bachelor condos have market factors that influence the movement of value. The purpose of sharing the highlights of my conversation with my colleague is to impart our thoughts and opinions, and further a discussion about our chosen profession.
I also wanted to know if anyone else is having these types of conversations, and ask if YOU thought it was strange that EVERYhouse in the GTA seems to cost A MILLION DOLLARS?
Please let me know your thoughts and feel free to message me privately if that makes more sense.
Thank you for reading
-Kia