Introduction
With a slowing economy and real estate losing momentum, you’re probably wondering about the future of Toronto real estate in the coming year.
I want to give credit to Desjardins, who’s gone the extra mile to analyze various scenarios, ranging from a milder slowdown to a 1990s style recession, and how it affects Toronto’s real estate market.
I’ve combed through this data to share insights on how you can position yourself strategically in Toronto’s real estate market ahead of the game.
Canada vs. US economy
Here in Canada, inflation is slowing down, and people are spending less money, so we’re definitely entering a weaker economy for the rest of this year and next year, and it’s starting to look pretty different from the US.
In the US, people are still spending, and a significant part of this difference could be how much more sensitive we are to the housing market here in Canada.
Our mortgage rates were lower than the US during the pandemic, so the impact of higher interest rates ends up being bigger. Our maximum mortgage term is also 5 years, whereas the US has 30-year mortgages, which obviously contributes to our higher sensitivity to mortgage rates too.
So, based on the Bank of Canada (BoC) forecasts, our economy will get weaker sooner, but it’s also expected to recover sooner.
And because we’re seeing more sensitivity in Canada to higher interest rates, it actually gives us more clarity into what’s going to happen to our economy and rates, which leads up to Desjardins’ report that looks at different scenarios and how our Toronto real estate market might react based on where our economy goes.
Scenarios
Desjardins’ base case is based on BoC and a few other sources’ forecasting techniques, which expect slow growth but no recession. If this happens, they expect Toronto prices to go up by 5% in 2024 and another 5% in 2025.
A part of this strength is because the base case expects interest rates to come down slightly in 2024, but the main reason is because of the big imbalance of supply and demand in housing dynamics in the short to medium term.
Huge immigration is a big factor; we’re seeing record lows in terms of available housing supply, and housing starts are also not looking good, and all of this forms the basis for strong support for home prices.
In Desjardins’ worst-case scenario, we might see a 1990s style recession, and if that happens, housing prices might come down by 16% in 2024 and even more in 2025.
But this is highly unlikely because fundamentals are actually pretty different. Back then, available housing levels were much, much higher, and there’s no way to hit that in the next few years because there’s typically around a 3-year lag between housing starts and housing creation, and our current housing starts just won’t hit that in the next couple of years.
They also mentioned that’s not something we want, honestly, because that would mean a huge job loss – we’re looking at 500,000 jobs lost in Ontario by 2025, and even with such gloomy numbers, housing prices would still only hit 2020 levels next year and 2015 levels in two years’ time.
To be honest, we’re in the camp that a recession is just as likely as the optimistic case that BoC is predicting, and so Desjardins’ average recession case is also something we’re looking closely at.
If this happens, Desjardins thinks that Toronto home prices might drop 5% from July 2023, which would bring them back to where they were at the beginning of 2023.
After that, prices might start going up again – so not much change to prices at all. There’s also a best-case scenario, which presents some incredible growth, but honestly, I think we’re all more concerned about downside price risks, which don’t seem so bad after all.
And so, once you combine this with our extremely slow market these days – few buyers and a spike in listings, we’re in the strongest buyer’s market since the global financial crisis, and that’s a huge advantage if you’re looking to buy.
It’s obviously a much more comfortable experience because not many bidding wars anymore, firm offers aren’t really a thing anymore, and realistically, you can potentially get much better than a 5% discount on the market, and that’s already the recession case from DesJardins’s report.
An Example Of A Deal In Today's Market
We know that trying to predict where prices go is hard, so as real estate investors, we focus on strong rental income and positive cash flows.
Because interest rates are high, sellers will have to drop the price of investment properties until cash flows make sense for investors to buy. So yes, we’re seeing many more deals in Toronto with positive cash flow now, even though interest rates are at 6%.
For example, there’s a two-story house in a prime area of Toronto that is probably going to sell for $1.3 million. Right now, it’s divided into three units, but one of them doesn’t have a kitchen.
The plan here is to add a new kitchen to make it fully functional, and we’ll also make some other changes like adding more rooms and doing some cosmetic upgrades to get the most rent we can. All of this will cost us around $80,000 and take about three months from when we buy the property to get it all done if we start planning before we close the deal.
Once we finish these changes, we can get a total rent of $9,000 per month, which means we make about $7,700 per year after operating expenses.
If you want to reduce the risk of interest rates going up in the medium term, you can get a fixed interest rate for three years, which is around 6.05% right now. And as you can see, this will give you very strong positive cash flows of $1,500 per month!
What comes next? Well, the fact is that we have a supply issue, and it’s going to stay that way for a few more years because not many new houses are being built, and that’s going to give support to both prices and rents.
Interest rates are also peaking and possibly coming down a bit next year, so there’s a good chance for more upside on cash flows too.
How We Can Help
The reality is that there might be some ups and downs in the short term, but we’re going to see smaller fluctuations as we get more clarity; there will be price gains in the long run, and there are huge benefits to getting in the market now in today’s buyer’s market.
And if you need help investing in real estate in Toronto, just get in touch with us.
We’re not your usual real estate sales brokerage. We’re all about investing in houses in Toronto that give you strong rental income.
What this means is that not only will our sales team help you find the best opportunities to invest in, we’ll also be around to put you on the right track if you want to take on renovations to help you maximize your success there and, in turn, your value-add gain.
Want to see what kind of opportunities are out there? Just reach out and book a time to chat with us by heading to the link down below.
