Toronto Real Estate Trends 2021: Where Do We Go From Here?

Toronto Real Estate Trends 2021: Where Do We Go From Here?

The new year sparked renewed interest in real estate! So even though Toronto was in lockdown, the demand and sales in the winter from January to March 2021 felt like we were already in spring. More recently, we’ve noticed a lot more sellers as well, and this is definitely helping to balance the market and cool things off.

Because real estate prices have gone up so much already in the past few months, there is more uncertainty now when you combine that with other external factors happening around us. I’ll address three of the biggest concerns surrounding the Toronto real estate market: inflation, government policy, and the massive real estate gains since the COVID pandemic.

Interest Rate & Inflation Concerns

The first thing I’ll talk about growing interest rates and inflation concerns. Our Canadian inflation rate before the pandemic was around a healthy 2 percent per year. But once COVID came, we saw inflation come to a full stop. Q2 2020 inflation was at 0 percent, and throughout the rest of year we were still sitting between 0.2 to 0.7 percent.

And then things started to change come end of January this year. Government bond yields suddenly shot up because the expectations for inflation are now higher. Things look like they’ll recover soon, and because of that, inflation won’t stay low forever. More people and businesses have been benefiting from recent low borrowing rates, so naturally consumer spending is expected to head upwards taking inflation along with it.

And because inflation expectations are higher, bond yield, the rate we’re willing to lend money out to the government, has to be higher for it to cover expectations for higher inflation. General borrowing rates are linked to government bond yields, so this drives up the cost of borrowing for businesses. This is also why we’ve been seeing a slowdown in stock prices, because profit margins are expected to compress.

Rising bond yields also affect real estate, with fixed-mortgage rates directly correlated to bond yields. Five-year fixed-rate mortgages were the lowest in February at 1.39 percent but has since then moved back up to 1.6 percent, which is still very low but is a relatively big jump within a short period of time.

The higher returns that we’ve seen during the pandemic may have been short lived. In the next while, there could be more cooling off in both the stock and real estate markets before things revert back to regular long term growth rates.

In the long run:

  • Stocks have annual returns at around 8 percent
  • Toronto real estate on its own similar has around 7 percent annual appreciation but much low volatility
  • Once you add in leverage to real estate, your long term returns are much higher while maintaining similar volatility rates compared to stocks.

So if you’re trying to choose the best long term investment option of the two, it’s Toronto real estate.

Other Government Intervention

Besides inflation and interest rates, another wild card that can affect real estate prices is other types of government intervention. The fact that prices have shot up over 30 percent in 2021 vs. 2020 in the suburbs definitely triggers warnings.

You can try to compare this with what happened in April 2017. Real estate got really hot and was growing at higher double digit annual appreciation for over a year starting in early 2016. Toronto detached prices hit above 30 percent towards the end of 2016 so the government finally took action. In April 2017, the government introduced the foreign buyer tax in the Greater Golden Horseshoe Region to calm the market, and it worked.

After the news, new listings shot up by 62 percent between March and May of 2017 while demand dropped by a more minor 5.7 percent. This definitely threw the market out of whack, changing sentiments from a strong seller’s market to a buyers market and priced dropped 25 percent in 4 months before bottoming out in August 2017.

From the regulators standpoint, the Bank Of Canada isn’t concerned about the overheated housing market, and believes the economy is weak and actually welcomes the growth.

If you dig deeper, this is because the Canadian economy has become super reliant on residential real estate – and it might be too big to fail. Residential real estate has been a growing part of Canada’s GDP and it’s now almost at 10 percent of our GDP.

TRREB Real Estate Price Trends

If you look at it from another angle, here are the facts. Toronto real estate hasn’t actually gone up that much and the recent price gains are short lived lasting only a few months.

Last year in February, Toronto real estate had the second highest property prices at $989,000. But after the pandemic, we’ve now dropped to 4th place and Toronto real estate has only grown 0.6 percent year on year as a whole. On the other hand, Halton Region and Peel Region are now more expensive than Toronto. The crazier Durham Region and Simcoe County saw 36-38 percent annual appreciation!

So based on this, Toronto doesn’t actually need cooling measures from the government. But what you should note that the COVID price growth in the suburbs probably isn’t sustainable because Toronto has been the long term better performer. When it costs more to live in a house in Pickering vs. Toronto, end users buyers will stop moving away. Investment properties are also a no-go in the suburbs because rent yields look a lot worse with higher property prices over there.

And when you combine this with immigration coming back and people wanting to move back to the core, the better topic might be actually be a rebalancing of real estate prices between regions.

So how should you go about if you want to invest in real estate in today’s market?

  • Stick with fundamentals. Real estate returns are primarily weighed on appreciation and if you want to learn more, watch this video. So your best bet is to choose asset classes and locations that have the best long term appreciation.
  • Understand your risk tolerance. What’s right for you might not be right for me. For example, Toronto condos might seem like a deal because it’s a lot cheaper now, but you’ll likely have to deal with negative cash flows and higher price fluctuations – if you don’t feel comfortable with that, don’t even think about it.
  • Get the right facts. When you’re comparing real estate returns, there are a lot of variables and the accuracy of assumptions is probably even more important than the final number. If you use the wrong numbers for rents, expenses, and appreciation, then your ROI number is pretty useless. When you work with us, we know the facts. We do hundreds of leases a year and we’re always working on few renovation projects, so rest assure we will provide precise numbers that helps you make the best real estate investing decisions quickly.
  • Make objective decisions. If you’re buying an end user home, it’s hard to be objective sometimes especially when you fall in love with a place. But when it’s an investment property, it’s really all about the numbers. Don’t get emotional when there’s crazy bidding wars and when the numbers don’t make sense anymore – be prepared to walk away.

Over the next few weeks, we expect prices to continue to stabilize in Toronto. Right now, price are where we expect them to be with Toronto bungalows starting at the low $900,000s and the detached 2-storey homes in the mid $900,000s to $1,000,000.

If you’re looking for less buying competition, the next short while is actually a great time to buy!

How We Can Help!

When you work with us, we take time to understand your requirements, preferences, and risk tolerance, so that you choose the right investment properties for you. We also help with renovation support, leasing, and property management if you need them.

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