2021 Toronto Real Estate Market: A Complete Playback!

2021 is done, and it’s been another year full of ups and downs, then up agains in the Toronto real estate world. I was reviewing our videos, our social media posts, and our newsletters, and it’s interesting to see how our views now are actually pretty different compared to how the markets first reacted when we were first met with the news at the time.

Let’s do a playback of 2021 and look at it from two different lenses: how the markets reacted at the first onset of the news, and how things actually panned out. The goal is really to help us understand the Toronto real estate market better, so that we can make faster and better decisions when we see new things coming our way in the future.

Q1 2021

Let’s dive right in and go back to the beginning of 2021. COVID cases were rising, and we ended up going into another lockdown in Toronto at the beginning of January. But despite that, economic sentiments were actually positive because vaccines were rolling out. What this translated to was that sellers were holding off because of the lockdown, and they didn’t feel a rush to sell because things were looking up for real estate. At the same time, demand was strong, even with the lockdown, because buyers also thought the same with real estate prices trending up.

With a tight seller’s market, news that home prices shot up double digits in January 2021 alone attracted even more attention to real estate. Once our lockdown ended, more supply started coming onto the market, which fuelled more buyer momentum and kept the Toronto real estate markets very hot until the end of March 2021.

Looking a bit further backwards, remember that Toronto condos were slammed for the whole of 2020 and prices were down 11% by year’s end compared to pre-pandemic. Well, it was also in Q1 of 2021 that we noticed a bottoming out for Toronto condos, and so condo prices finally recovered to 1% above their pre-pandemic levels by the end of Q1 of 2021.

On the freehold side, Toronto semis were down 3% by the end of 2020 versus pre-pandemic, and then came up 11% in Q1, so by the end of March 2021, Toronto semis were 8% higher than pre-pandemic prices. Toronto detached homes were up 5% by the end of 2020, then saw an 18% spike in Q1 2021, and so Toronto detached homes were sitting 23% higher than prices pre-pandemic at the end of the first quarter of 2021. GTA homes were definitely in the lead. They were already up 16% by year’s end 2020, and then saw a 12% increase in Q1 2021, which meant they were now 28% higher than prices before the pandemic by the end of March 2021.

Q2 2021

Things were definitely very positive in Q1, but the tables turned pretty quickly in Q2 of 2021. Right at the start of April, we heard news of stricter mortgage stress tests. Practically, it only reduced borrowing power by 4.5%, but it definitely worked psychologically to hit the breaks on the buying momentum. On top of this, inflation started to be a concern, and because this was very new at the time, there was more uncertainty in the markets and real estate investors didn’t know how inflation would affect real estate: Was it transient? Will it stick around? Will central banks start tapering and raising interest rates sooner than expected? And will that affect real estate growth?

There was also the fact that prices went up so much in Q1 of 2021 already, that maybe that’s all the growth we’ll see that year. And then, reality started kicking in. Toronto real estate prices shot up, but rents were still dropping, so investors were wondering if we might run into a stagflation scenario with real estate crushing rent yields. To top things off, we entered another lockdown yet again in April, and so this sealed the deal to slow down real estate activity in Toronto.

As a summary of Q2 of 2021, detached homes in Toronto were down 3%, semis were down 2%, condos went up 1%, and GTA detached homes went up 1%. This means that the suburbs were still leading in terms of price growth since the pandemic, up 29% by the end of Q2 2021.

July & August 2021

Once school was out and summer arrived, it appeared that real estate sentiments were much more balanced. Our city was reopening, and we saw good news about Toronto rents recovering as well. One of the biggest impacts of COVID on Toronto real estate, especially condos, was on rental prices. Rents have been dropping and were down 20% at the start of summer 2021 compared to pre-COVID. Then finally, during the summer of 2021, rents recovered 5%, which was another big turning point and gave more confidence for investors to consider Toronto and even more so, Toronto condos again.

But even with this good news, the nice weather and the city finally recovering meant more people wanted to just go out and enjoy life instead of looking at real estate, so it was definitely a more typical real estate slow summer market in 2021.

In July and August, Toronto detached home prices went down 1%, so by the end of the summer, detached prices were 19% higher than pre-COVID. Semis went down 4% over the summer. Condos went up another 1%. At the end of summer, semis and condos were both down 3% compared to pre-COVID. The surburbs continued to lead the pack, growing 2% during the summer, and so prices were now up 31% compared to pre-COVID.

September to December 2021

Real estate sentiments turned even more positive once schools started again in September. Inflation looked like it was here to stay, which meant interest rates were expected to rise sooner than previously expected. By December, it was clear that monetary policy was prioritising tackling inflation as opposed to slowing down rate hikes, even with the new omicron variant. All of this actually gave buyers more confidence in real estate, and their priority is to get into the market sooner rather than later before prices continue to climb and they lose the opportunity to access lower interest rates while they still can.

When real estate prices were expected to continue to go up, sellers didn’t feel the rush to sell. So from September all the way until now, the key theme has been a big supply shortage that’s put a cap on the number of sales and also resulted in prices heading up more quickly again.

In the last four months of 2021, we saw another increase in real estate prices across the board. Toronto detached homes were up 7%, which brings the grand total to a 26% price increase compared to pre-pandemic. Semis came up the most, at 17% in Q4 of 2021, totalling a 20% increase compared to pre-pandemic. Condos went up 3% during the last four months, meaning they went up 6% compared to pre-pandemic. Suburban detached homes went up another 9% during the last 5 months, totaling a 40% increase since the start of COVID.

Things To Keep In Mind

Now that we’ve gone through all of that in 2021, here are a few things to keep in mind to help you understand how Toronto real estate might react next year:

In general, Toronto real estate buyers seem more reactive to negative news compared to suburban buyers. Even with the markets flooded with negative news in Q2, it was the Toronto core that took a downturn, but the suburbs continued to plough ahead without as much of an impact. It’s possible that it’s because Toronto has more investors who react more cautiously, or for another reason, but either way, this has caused a widening gap in growth between the suburbs and Toronto, which points to more reversal opportunities and faster growth prospects in Toronto coming up to narrow down the gap.
Condo prices in Toronto appear to be more sensitive to rental recovery than in other cities.Once we saw the bump in rents over the summer, that’s when condo prices saw their big uptick. And then, even when other markets continued to go up for the rest of Q4, condos stayed behind when condo rent growth slowed down again.
In 2021, the markets went from not knowing how inflation would affect real estate markets, to fearing that rate hikes would dampen real estate price growth, to now seeing real estate as an inflation hedge. Plus, the central bank just released their reinforced mandate, stating that their primary objective is to keep inflation at two percent until the end of 2026. And what about managing real estate prices? Well, that’s something that the government should be taking care of, not monetary policy. They also mention that they will hold their key rate at low levels for longer than usual if they need to. In other words, inflation is now positive for real estate, and that’s why we expect real estate demand to stay strong in the short to medium term.
It seems like new variants and lockdowns don’t affect real estate demand in one way or another. For the January lockdown, demand was strong. When Delta came along and the April lockdown came, demand slowed down. Right now, demand is still strong even with new omicron fears and higher COVID cases.
On the other hand, lockdowns more obviously slow down supply, with sellers holding off on selling homes until it’s safer to do so. COVID also creates supply chain issues that slow down new supply. So what this means is that until COVID settles down, we’re going to continue to lower supply, which might cause prices to continue to go up more quickly.

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