The Toronto real estate market continues to be hard to predict. On one hand, interest rates might be coming down. On the flip side, banks are revising down real estate forecasts.
Now even thought we can’t tell the future, we can share what we’ve seen and analyzed so this can help you piece together what we might expect for the Toronto real estate market in 2024.
1. Toronto Rents Expected To Stabilize In 2024
In 2023, rents in Toronto went through the roof, but recently, we’ve seen them level off. This makes sense because interest rates, which play a big role in where rents go, are also stabilizing. Now, even if rates start to come down in 2024, we predict that rents in Toronto will stay pretty steady.
Why? Well first of all, we’re not going to see substantial drops in rates and two, the Toronto real estate market supply and demand dynamics, thanks to our high immigration goals and diverse economy in Toronto on the demand side and limited rental supply growth, are probably going to continue to support rents in Toronto. Just note that this situation might be different outside of the Toronto real estate market, so keep that in mind.
2. Lower Interest Rates Mean A Growing Preference for Variable Rates
Let’s be clear – we’re not trying to predict the future, but will defer where interest rates go to forecasts from our big banks.
Right now, consensus is saying that rates will start to come down around mid year with inflation easing up and signs of a possible recession in things like GDP and job markets.
At this point, fixed rates are considerably lower than variable rates so it still might not make sense. But as rates start to fall, and the spread because fixed and variable get closer, we suspect more people to choose variable rates moving forward to take advantage of potential lower rates later down the road.
3. Rental Cap Rates Should Come Down With Interest Rates
There’s a historical connection between rent yields and interest rates. The idea is straightforward: if interest rates rise, rent yields need to go up too to make sure investors are still making money on rents.
Real estate investors measure rent yields with something called a cap rate, which is calculated by subtracting operating expenses (like taxes, insurance, and utilities) from gross rents and then dividing by the property value.
When fixed mortgage rates peaking at 6.3% up until early November, we were looking for cap rates of 6% just to break even on cash flows with a 20% down payment.
This is something some investors are comfortable with since they don’t need to fork money out of pocket to support the investment each month, they profit from monthly principal pay down and benefit from long-term appreciation.
Now take a look. If fixed rates drop to 5.5% in mid 2024, then cap rates might have room to drop to 5.5% to keep the same break even cash flows.
4. Growing Interest In Investing In Houses Over Condos
We think one of the best way to grow your investments is by investing where the government is investing. Right now, all levels of government are focusing efforts on the “missing middle”, balancing density out by adding more units in houses where the population is dropping, especially in contrast to the increasing density caused by condos downtown.
Because of this, we’re seeing a lot more policy changes in the low-rise front, especially in the Toronto real estate market. Think laneway suites in 2018, garden suites in 2022, and multiplexes in 2023. Next year, they’re giving the green light to rooming houses in April, and there might even be an initiative allowing more units to be created in houses on major streets.
With rents visibly better and the news to gain media attention, we expect more investing interest here and this will probably mean faster appreciation in the Toronto real estate low-rise market too.
5. Higher Growth In Toronto Semis As Investors Prioritize Rental Income In Medium Term
Investors are probably going to place a higher emphasis on rental income rather than just hoping the property value goes up. This change in approach is because we expect interest rates to stay higher than usual for a longer time, which might slow down how much home prices go up.
In today’s market, the best returns for rental income in Toronto are expected to come from multiplexes that are Toronto semi-detached homes. These houses cost less to get into, yet they can earn you rents similar to those from detached homes.
So, if investors want max rent yields, Toronto semis are probably at the top of their list.
What This Means For Toronto Real Estate Market Prices
The news is saying we might see bigger real estate price drops than previously expected and TD says prices at the lowest point will be 15% higher than before the pandemic.
What this means is that in Canada, prices can still go lower but prices haven’t been coming down at the same rates. In Toronto, we’re closer to that expected low point. And in some Toronto neighbourhoods, prices have already dropped below that!
Real estate demand has slowed down a lot since summer. If history repeats, we might see more people wanting to buy homes in the new year. Add this with the lower fixed rates lately, there’s a chance that prices could go up again.
Let’s break this down through an example.
- Fixed rates were at around 6.3% until early November this year in 2023, and we mentioned that cap rates would need to be at 6% just to break even.
- Lately, fixed rates have come down quite a bit to 5.7% but at the same time, the market is slowing down for the holidays so prices haven’t moved much and that’s why cash flows have been improving.
- Looking ahead, if investors continue to expect break even cash flows at our current lower 5.7% fixed rate, we mentioned cap rates came come down to 5.6%, which is about a 7% price increase from today’s values.
- And then if fixed rates come down to 5.5% by mid year and then variable rates also settle to 5.5% by year end 2024, we can potentially see prices coming up by 10% from today’s values.
How We Can Help
Most Toronto real estate investors aim for at least breaking even cash flows, but in our current slower market, some properties are making much better cash flows because interest rates have adjusted lower but the buyers haven’t caught on yet.
This gives buyers who are ready to invest today a chance for better deals before prices catch up with lower fixed rates that have come onto the market.
If you want to see what deals look like before more buyers come back fro 2024, we can guide you to our top picks in the Toronto real estate market.
Just reach out to kick things off – book a free call with us!