3 More Signs That The Toronto Real Estate Investment Market Might Have Already Bottomed Out In 2022!

3 More Signs That The Toronto Real Estate Investment Market Might Have Already Bottomed Out In 2022!


You’ve been hearing from us that the market is picking up and some news outlets are also reporting it recently. But with the holidays coming up, things are clearly slowing down and it’s really a seasonal thing this time. Many of our buy side clients are going away for the holidays and so they will take a pause over the coming weeks. For buyers who are still actively searching, it’s also slower because sellers are also winding down for the holidays. So, if you look at November and December sales data, it might still show that the market is pretty slow. 

The reality is that the macro market is recovering, and we’re probably going to see more visible signs of recovery by early next year. Now, even though investors are coming back, investor requirements have changed over this past year and preferences are getting more similar. 

Most investors these days are looking for lower purchase prices under $1 million, they need slightly positive cashflows, and their preference is to buy in Toronto, because these lower prices make it actually affordable finally to buy here. So I decided to drill down into the data in this smaller investor submarket to see what’s happening more clearly, and I found three more signs to show that the market might have already bottomed out!

Days On Market

If we’re looking at data, there are three good ways to get a better sense of where the market is at. The first one is days on market, and this one is a more reliable metric in our current slower markets. Days on market are less reliable when things are hot because agents may hold out, put an offer date a week out hoping for a bidding war and refuse preemptive offers. So the average number of days on the market ends up bottoming up at around seven days. 

However, because we are no longer in a sellers’ market, and there’s less manipulation and more organic activity, days on market make a much better indicator of where the market is at. If days on market is clearly trending down, it‘s a good sign that things are improving. 

We talked about investors having more specific requirements for investment properties, and so I narrowed it down to semis in Toronto in our typical investment pockets. Just to give you more colour, the reason semis in Toronto make good investment properties is because the actual building and rents might be the same as a 2-story detached house. But you end up getting it for a cheaper price because the lot is smaller and you’re attached to a neighbour, and that’s why cash flows end up being better on semis. 

You can also look at it another way by comparing other opportunities at a similar price. For example, a two bedroom condo today might actually not be too far off from a starter semi in Toronto, and so semis are actually much more affordable these days. The difference between semis and condos are the cash flows. You can cash flow positive with semis whereas condos are very negative still, so that’s why Toronto semis for investments are much more desirable these days. 

Just as a reference, their average price was close to $1.07 million in 2021, and peaked at $1.3 million in April of this year. Since then, prices have come down quite a lot, and now they’re selling for even lower than the average in 2021, at a much more affordable price of slightly under $900,000.

Take a look at this chart that compares the days on market for these semis. The red line shows the average days on market in 2021, and the blue line shows the average monthly days on market since the start of 2021. As you can see, the market was really hot at the start of 2021, so the days on market were well below the average. It then cooled a bit in the summer of 2021, going back above the average days on market. 

The cycle then repeated, and we ended up seeing another hot start to 2022 with days on market dipping again, which was the result of buyer momentum picking up and the reason for the huge spike in prices in early 2022. But as we all know, once rate hikes hit in March, the market did a fast u-turn, and investors quickly moved to the sidelines. So the days on market went from an average of 13 days to 29 days at the quietest of times in July. 

September’s days on market actually fell below the 2021 average for the first time, then October came back up a bit. Right now, we’re definitely not as hot as early 2021 or early 2022, but the market is visibly trending up based on days of market, returning back to more of an average range.

Sales To New Listings

Now we know sales have come down. We also know listings have come down. But sales fell more than listings and we were clearly in a buyers market all summer long. Honestly, it’s hard to tell what’s going on if you look at sales or listings on its own. 

A better metric to gauge overall dynamics is to look at the sales-to-new-listings ratio, where you divide the number of sales by the number of new listings in any given month. Once you put this on a chart, you’ll see that the average sales to new listings ratio for our investment semis in Toronto is at 74%, which is higher than the overall average in Toronto that sits closer to 60%. 

So if we were looking at these investor semis, even 60% would be a buyers market still and basically anything below 74% would be considered a buyers market. And if you go above 74%, then we would be entering seller market territory.

Things got pretty hot towards the end of 2021, and we month after month of sellers markets. And, like I mentioned before, this strong momentum was what caused the massive price growth in early 2022. Just like the days on market turnaround, the sales-to-new listing ratio dropped like a rock starting in May and I would say that we’re just seeing more confirmation that things are improving based on the sales to new listings ratio. 

Right now, it’s hard to say for sure that we’re clearly out of a buyers’ market since we have only seen one month where the sales to new listings ratio is back at average levels. On the other hand, it’s pretty visible that the markets are improving based on this indicator.

Price vs. Mortgage Cap

But perhaps the most interesting insight is this last chart, where we stack the selling price against the average mortgage ceiling for that month. Before rate hikes, I would say that not as many investors were being capped on the financing end. Instead, they might have been limited because they only had, say, $350,000 to invest, and so based on a 20% downpayment, closing costs, and some renovations, their purchase cap might have been $1.1 million. 

In our current market, more and more investors are seeing a financing cap because of tougher stress tests, and this will be another force that keeps prices lower. What I did was plot the typical investment semi financing cap in the red line. The purchase price was much higher at $1.05 million in 2022 because banks were using the lowest stress test rates of 5.25% to qualify investors. But as interest rates started going up in March, eventually stress test rates also got harder.

Now we can stack sale prices on top of this mortgage cap to see what happened over the past two years. As you can see, prices were sustainable in 2021 because selling prices were around the mortgage ceiling. But then, as the market got hotter in 2022, the spike in prices really stretched investors. The gap between the selling price and the financing cap was over $300,000 at the peak in April, and that’s a huge red flag. 

Realistically, prices have to come back down closer to the mortgage gap for investors to actually be able to buy, and we’re finally getting closer to this point. We finally reached that in October, and so this is another sign that properties are close to affordable prices that most investors can actually buy. 

Just for your reference, the mortgage cap is calculated based on five-year fixed rates at that time, and I chose it because fixed rates typically have expectations priced in. And because fixed rates kept going up until around July, this is the main reason the mortgage cat has been going down. I did factor in improving rents over the past year, which did help to lessen the impact of rate hikes on the financing ceiling. Because of this, the financing cap for investor semis saw a smaller 19% drop compared to a bigger difference in the end-user markets, which came down by around 25%.

How We Can Help

Right now, confidence is coming back, cash flows can still run positive, and purchase prices are much more affordable, which are all reasons why the market is picking up. Rate hikes aren’t done yet, in fact we do expect another rate hike in December, but all of this has already been factored into current fixed rates. 

Bond yields are stabilising and coming down, and that’s another sign that fixed rates are stabilising and might even come down a bit too. This means the financing cap is probably going to stay more or less at these levels in the medium term, as long as nothing unexpected happens from this point on. 

So if you are ready to buy now, you might actually be able to catch the last slowdown in these next few weeks before more buyers come back in early 2023. And if you are interested in seeing what kind of deals are on the market today, just reach out to our team.

We’re a real estate sales brokerage that focuses on investing in houses and multifamily homes in Toronto. When you work with us, we take the time to understand your needs, teach you the ropes, show you these deals, crunch all the numbers, and eventually help you buy the best one for you. But that’s not all. Our team also provides renovation guidance, leasing, and property management if you need it. So, just connect with us if you want to learn more about our services!

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