Trends in Real Estate

A 2021 review and what’s to come in 2022

The burning question on everyone’s mind is whether the real estate market in Toronto will stay as hot in 2022 as it was in 2021. Cameron Levitt, agent with The Richards Group, shares his market outlook

Every home purchase and sale is a story. The majority of people move for real-world reasons: they need more space or less, have to relocate for work or family, and need a lifestyle change. So when I look at forecasts, I start by looking back at the stories that have been and continue to drive us as the best predictor for how the next year will unfold.

STORY 1:

A pandemic-driven frenzy

Last year was unprecedented for many reasons. The pandemic and the response from the various levels of government were a tipping point that sent an already rising market into parabolic gains.

First, the Bank of Canada set interest rates to historic lows. Then the psychological effect of the lockdown exponentially boosted the motivation for many people to find a larger house.

But what’s talked about the least was a massive increase in personal wealth. Working from home directly created the largest rise in disposable income in decades. Suddenly, there was no need to buy gas to get to work, no parking to purchase, no buying clothes for the office. No vacations, no movies or concerts, no eating/drinking out, no impulse shopping on the way home from work.

On top of this forced savings, equity markets roared off the March 2020 crash. Along with that came a surge in retail stock trading, speculative option activity and gains in cryptocurrencies. Some of this newly found wealth was invested as larger down payments for real estate.

After reviewing the events last year, it should be no surprise prices exploded upwards of 35% in Q1 in some areas of the GTA. Buyers pushed forward at a frenetic level of activity that surpassed the hottest years in memory.

Areas like Durham, York and Halton, which traditionally offered value compared to central Toronto, saw incredible gains as buyers flushed with cash and fueled by record-low rates desperately sought to escape smaller living quarters in the city.

Houses in central areas of Toronto stayed hot and also experienced massive gains across the board, as did recreation properties in cottage country. As the year progressed, prices remained well elevated over the previous year, but we did witness a bit more balance come back to the market.

STORY 2:

An interesting look at rates

Interest rates to rise going into 2022. The Bank of Canada is signalling that several hikes will take place over the next 12 to 24 months.

The relationship between rates and housing prices cannot be understated. The 40-year long trend in rising housing prices directly correlates to the 40-year decline in interest rates. The market will react more negatively to the high rate of change rather than to the rates themselves.

If rates rise several times in a short period, the market may become a bit more hesitant as buyers lose some purchasing power. This will dampen some of the growth expectations going forward.

First-time homebuyers are the most sensitive to interest rates – especially those without significant assets. Entry-level housing (condos and small houses in suburban areas) are likely to be affected the most by rising mortgage rates. However, it’s important to remember that rates are still very low on a historical level and that there are significant supply and demand issues driving growth.

STORY 3:

A seismic shift in buyer demographics

Despite rising rates, the economy is doing well by many metrics. Employment is back to preCOVID levels. Immigration restarted as borders reopened. Financial markets are still reaching new highs, so asset holders benefit from big gains to their wealth.

While the government enacted new restrictions to combat the Omicron variant, international data suggests the outcomes will be less severe. Given Toronto boasts one of the highest vaccination rates in Canada and internationally, it is likely the economic impact of these restrictions will be mild.

Buyers who moved out of the city to the suburbs will likely not be in a position to return right away as housing changes have a heavy transactional weight and require a big commitment in terms of time and effort. It is unusual to see anyone making another move after only a year.

These buyers also moved to find more space and better value, so returning to a smaller but more expensive property seems unlikely.

In my opinion, this trend of buyers moving out of the city was, in actuality, a more specific exodus from the condo market. It’s incorrect to think this trend was solely initiated by COVID. The pandemic only supercharged a trend that was already percolating, and it demonstrates how a very important demographic shift is affecting the housing market.

Millennials are now Canada’s largest generation by population group. Born between 1980 and 1996 they now range in age from 26 to 42 years old. This is an important age as a person’s peak earning years is 35-55 years old.

Millennial couples are starting families later than previous generations – so the move from smaller condos in downtown Toronto into larger suburban homes is not simply a pandemic-driven rally. What we’re actually seeing is a fundamental shift in real housing needs by the largest population group in Canada who are now either within or entering their peak earning years and are starting to have families.

Then let’s factor in the millennial generation’s parents: the Baby Boomers. Our former largest generation is starting to retire. They’ve benefited from the full length of the multi-decade bull market in real estate and financial markets. There is not enough official data on this, but the “bank of mom and dad” is a significant driver that is pushing real estate prices higher.

STORY 4:

The strong Toronto market does not appear to be ending

The aggregate market will cool from the rapid boil of 2021 – but only to a lower level of heat because the fundamentals driving the market have not changed. The first quarter looks to be hot as buyers rush to purchase before interest rates go up.

There will still be a lack of supply for housing going forward as there are just not enough houses in good areas to satisfy the demand. There had been talk amongst various levels of government to enact policy changes to allow for more housing development, but even if approved, these will take years to get off the ground.

Some of the government’s proposed changes like increasing the upper limit for insured mortgages to $1.25 million may increase competition.

In terms of specific real estate classes, condos are the likeliest to underperform the rest of the aggregate market. Condos are the entry-level for housing within the City of Toronto so rising rates will affect these buyers the most. And as more millennials seek larger properties, there will be a natural supply-demand imbalance compared to freehold houses. Finally, the pandemic restrictions, while hopefully in the past, are still fresh in recent memory. The thought of being locked down into a small condo may reduce some buyer enthusiasm.

Fortunately, as long as rents remain high, which looks likely, investors seeking yield and value will put a floor under the condo market. So prices are unlikely to fall much – if they do at all. That said, condos in desirable areas with lower inventory and restrictions on development (such as Leslieville) will likely remain leaders in the condo market segment.

The freehold market of semi and detached houses will continue to experience the most growth. Neighbourhoods that are safe and have good schools will be highly prized, so expect The Beaches, Leslieville, and Riverdale to hold their value and see continued demand. If financial markets stay at or near their all-time highs, expect to see the luxury market continue to gain as high-income earners who hold significant assets have benefited from well above average gains since in the past year.

I also expect the “value” suburban areas around Toronto to see high demand and low supply.

Any new buyers who are just starting their search this year should always remember to keep a long-term view of real estate and use leverage wisely. While the overall market may slow slightly in 2022, the overall upward trend is unlikely to reverse anytime soon. The best real estate strategy is to invest for the long-term and try to purchase a home that will accommodate your needs for as long as possible.

Want to learn more? Connect with Cam today!

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