• Condo Surplus

    and High Prices Amid Rate Cuts

Whatโ€™s Behind the Persistently High House Prices in the GTA? And What Should Governments Do About It?

As we approach the second half of 2024, the housing landscape in the Greater Toronto Area and across Canada remains surprisingly resilient despite significant economic headwinds. Traditionally, high inflation and increased interest rates lead to a downturn in housing prices, yet recent trends defy these expectations. The current scenario sees moderated prices but not to the extent historically anticipated. To understand this phenomenon, several key factors must be considered.

Over the past eighteen months, interest rates have surged to levels unseen in decades, while new home sales have plummeted to less than half of the ten-year average. Although there has been some moderation in prices since their peak in 2022, with certain areas and types of homes experiencing a 10 to 15 percent decrease, this decline is less severe than many experts predicted.

The scarcity of shovel-ready, serviced land within municipal boundaries in the GTA is a significant factor. Unlike previous cycles, the current supply and demand dynamics mean there is limited room for land prices to fall. This scarcity drives up the costs as developers compete for the few available parcels of land ready for immediate construction.

Additionally, fixed-rate municipal charges, such as Development Charges, now constitute a larger portion of the overall cost of new homes. In many GTA municipalities, these charges range between $100,000 and $150,000 for a single-family home. These charges have been increasing rather than decreasing, further adding to the inflationary pressures on new home prices.

The cost of building homes has also escalated dramatically. From 2019 to the end of 2023, Toronto saw a 98.3 percent increase in single-family home construction costs and a 74.1 percent increase in apartment construction costs. Nationally, in an 11-city sample, these increases were 69.1 percent and 54.2 percent, respectively. These surges are attributed to rising material and labor costs, making significant price moderation unlikely without a substantial reduction in these expenses.

Moreover, the cost of capital remains much higher than it was in the previous decade. With expectations of prolonged higher interest rates, the financial burden on construction projects remains substantial. Access to capital is crucial for financing these projects, and the higher costs inevitably get passed on to homebuyers.

Addressing these affordability challenges requires a multifaceted approach. Governments need to control the additional charges imposed on new housing, expand the availability of land for development, and increase density allowances to maximize land use efficiency and distribute costs more effectively. Streamlining approval processes and removing unnecessary barriers to new housing construction are also crucial steps.

While historical precedents offer valuable insights, the current housing landscape demands targeted interventions. Policymakers must focus on addressing the root causes of these issues to tackle affordability effectively. This involves not only immediate measures but also a renewed emphasis on long-term strategies that ensure sustainable growth and housing accessibility.

The question remains: How can we balance the need for new housing with the economic realities of today, ensuring affordability while fostering growth and development in our urban centers?

The Condo Market Conundrum: Torontoโ€™s Surplus Amidst a Housing Crisis

In the midst of a housing crisis, Toronto finds itself with an unexpected surplus: a record number of condominium units up for sale, yet no buyers in sight. Near Jarvis and Dundas streets, realtor Jamie Page warned his clients that their condo’s prime features might not suffice to attract buyers quickly. His caution was well-founded. Despite dropping the price by $21,000 to $589,900 for 550 square feet, below average for that size and location, there has been no interest. Not even a single showing.

“The condo market right now is a ghost town,” Page remarked, reflecting the broader sentiment in the market. Despite the rising number of homeless individuals in Toronto, which the city reports has reached nearly 11,000 people in the past three months, a record number of condos, typically the most affordable form of housing, are flooding the market.

These available units are often smaller, investor-driven properties. As these investors try to offload their holdings before profit margins evaporate, they contribute to the growing inventory. Critics argue that the provincial governmentโ€™s approach to resolving the housing crisis has inadvertently exacerbated the problem by prioritizing developers and investors over ordinary people needing affordable housing.

“Something is wrong with the market when we have housing nobody wants and homelessness at the same time,” stated Councillor Gord Perks, chair of Toronto’s planning and housing committee. At the end of May, the Greater Toronto Area recorded 8,183 condo units for sale, surpassing the previous high of 7,600 in October 2020.ย 

The issue extends beyond existing condos. Pre-construction condo sales have plummeted by 74 percent compared to the 10-year average. John Pasalis, president of Realosophy, notes, “We’re not building enough houses, and fewer and fewer low-rise houses, which means we don’t have anywhere for tomorrow’s families to live.” The focus on small condos for investors over the past two decades has skewed the market.ย 

The number of new condo listings has surged 30 percent since last May, particularly in the 500- to 599-square-foot range, which increased by 49 percent year over year. The average list price is $593,000, with downtown resale condos averaging about $1,000 per square foot, and presale units even higher at $1,500 per square foot.

Why are investors willing to pay such high prices? Many saw pre-construction condos as an easy profit opportunity, planning to sell before completion to avoid dealing with tenants and rent. This speculation has driven prices up without addressing the underlying need for affordable housing.

The City of Toronto has limited power to influence the construction of larger, family-friendly units. Despite issuing guidelines for developers, they cannot enforce the creation of larger suites. Councillor Perks criticizes the provincial government for exacerbating the issue by reducing development charges, further incentivizing investor-driven construction.

“The province’s solution to Ontario’s housing crisis has been to eliminate planning laws, development fees, and public discourse, assuming it would fix the problem. Instead, we have empty condos and unaffordable living conditions,” Perks said.

The provincial government maintains that increasing the overall housing supply is the solution. They have introduced initiatives like development charge exemptions for not-for-profit and affordable housing, and reduced charges for purpose-built rental units with further discounts for family-friendly units.

While the Bank of Canada recently cut its key interest rate by 25 basis points to 4.75 percent, offering some relief for potential homebuyers, many remain sidelined, awaiting further rate reductions. Realtors predict this hesitancy will persist for several more months.

In the interim, sellers may need to invest more to make their properties appealing. Ira Jelinek, a realtor, suggests staging and ensuring units are available for showings to attract buyers. Buyers, leveraging their negotiating power, are requesting price reductions and improvements.

However, significant price drops are unlikely in the near term. Pasalis points out that despite high listings, the market remains balanced. Many investors, holding significant equity, are prepared to wait, prolonging sales times to three and a half to four months.

As the condo market stagnates amidst a housing crisis, the core issue persists: how can we create a housing market that serves the needs of all, balancing affordability with investment viability?

Toronto’s Rising Home Prices Defy Interest Rate Cuts

It’s disappointing news for first-time homebuyers: despite a recent interest rate cut, buying a home in Toronto is now more expensive than it was six months ago. On June 5, the Bank of Canada cut the key interest rate by 0.25 percent โ€” the first such move in four years. However, this long-awaited cut has not provided the relief many Toronto homebuyers hoped for. Since January, the average home price in the city has risen by nearly $140,000, increasing the carrying costs for homeowners with variable-rate mortgages, even in the wake of the rate cut.

In January, the average home price in Toronto was $1,026,700, with the best available five-year variable rate at 6.75 percent as of January 15. This resulted in a monthly mortgage payment of $5,627, assuming a 20 percent down payment and a 25-year amortization period. However, by May, the average home price had climbed to $1,165,690, and despite the interest rate cut, the best available five-year variable rate as of June 11 was 6.1 percent. This change resulted in a monthly payment of $6,022 โ€” an increase of $395 compared to January.

“For new homebuyers, interest rate cuts are a double-edged sword,” said James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender. He explained that if interest rates fall by two percent, the carrying cost might remain the same because rising home values can negate the benefits of lower rates. Home values play a crucial role in determining a homebuyer’s carrying costs, and this has been particularly evident in Toronto’s resilient real estate market.

Victor Tran, a mortgage and real estate specialist for Ratesdotca, noted that while regions like Durham, Halton, and Peel haven’t shown the same resilience as Toronto, the city’s market remains robust due to supply and demand dynamics. The recent rate cut will likely have a marginal effect, as buyers need more substantial rate reductions to feel reassured about entering the market.

Tran suggested that if another rate cut occurs in July, it could boost consumer confidence, potentially bringing buyers back to the market. Economists predict a 200-basis-point drop over the next 24 months, which would be beneficial for many homeowners as their variable rates decrease accordingly. For those renewing mortgages between 2024 and 2026, the beginning of the rate-cutting phase provides some optimism.

However, Tran advised against switching to a variable-rate mortgage upon renewal due to the significant difference between fixed and variable interest rates. Most fixed-rate mortgages are tied to the five-year bond yield, meaning that when bond yields rise, so do fixed mortgage rates. Currently, the best market rate for a five-year fixed-rate mortgage is 4.69 percent.ย 

“If the difference is one percent or greater, it’s not worth taking the risk of moving to a variable rate,” Tran explained. “It’s best to take the three-year fixed rate, call it a day, and hope that rates will be lower in three years.”

The situation leaves many first-time homebuyers and homeowners in a challenging position. Despite the Bank of Canada’s efforts to ease financial pressures through rate cuts, the rising home prices in Toronto continue to outpace the benefits. This trend raises a critical question: How can policymakers and the real estate market balance interest rates and home prices to make housing more affordable for everyone?

Interest Rate Cut Offers Welcome Relief

The Bank of Canada’s recent decision to trim its key interest rate by 25 basis points to 4.75 percent marks a pivotal moment for the real estate market as we head into summer. This move could potentially encourage prospective buyers to return to the market while offering much-needed relief to those with variable-rate mortgages.

Gillian Oxley, founder of Oxley Real Estate, describes this rate cut as a “pivotal moment” that could instill confidence in hesitant buyers. With more buyers entering the market, both sellers and buyers stand to benefit. Sellers, who have learned that extended days on the market donโ€™t necessarily lead to steep discounts, may now find increased buyer confidence and activity leading to stable or even rising home prices, despite longer selling times.

Reducing uncertainty can encourage more sellers to list their homes and more buyers to make offers. While the historically low rates of the COVID-19 era are unlikely to return for decades, this interest rate cut presents a promising opportunity to rejuvenate the market for both buyers and sellers.

In an effort to cool inflation, the Bank of Canada had aggressively raised its policy rate from 0.25 percent in March 2022 to five percent by July 2023. This strategy, intended to curb spending and slow the economy, appears to be easing as the central bank adopts a more measured approach to lowering rates further. Some experts predict additional cuts on the horizon, suggesting that some buyers might remain cautious, waiting for further rate reductions before making their move.

James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender, notes that this rate cut is a welcome announcement for those with variable rates or home equity lines of credit. As the rate they are paying finally moves off a multi-decade high, variable rates may become more attractive to those deciding between fixed and variable options.

John Lusink, president of Right at Home Realty, echoes this sentiment, emphasizing the psychological boost this cut provides to consumers and agents alike. However, he warns that not all homeowners will see immediate savings, particularly those locked into fixed-rate mortgages. Increased delinquencies in other debts and loans are pushing some homeowners, especially in the condo market, to sell. This increase in inventory could lead to further price drops in the condo sector.

Greater Toronto Area realtors reported 7,013 home sales through the Toronto Regional Real Estate Boardโ€™s MLSยฎ System in May, a 21.7 percent decline from May 2023. High interest rates have been a significant factor in this decline. However, new listings entered into the MLSยฎ System totaled 18,612, up 21.1 percent year-over-year.

The next scheduled date for announcing the overnight rate target is July 24. Bank of Canada governor Tiff Macklem indicated that further rate cuts are possible if inflation continues to ease and confidence grows that it will sustainably reach the two percent target. However, he cautioned against lowering rates too quickly, which could jeopardize the progress made so far.

A closer look at the numbers reveals the practical impact of the recent rate cut. A homeowner with a 10 percent down payment on a $703,446 home, with a five-year variable rate of 5.95 percent amortized over 25 years, has seen their monthly mortgage payment decrease from $4,157 to $4,061 following the rate cut. This reduction means $96 less per month or $1,152 less per year in mortgage payments.

As we navigate these changes, the real estate market faces a critical question: Will the initial rate cut be enough to spur demand and reignite buyer confidence, or will further reductions be necessary to see a significant shift in market dynamics?

-The TanTeam Editorial

The TanTeam Real Estate Group