What is Going On With Toronto Condos & Why Is It Turning Into A Buyers Market?
If you live in Toronto, there’s probably a handful of topics you’ve been hearing a lot about lately – the numbers of daily COVID cases, what’s happening with back to school plans, and the Toronto real estate market.
What’s interesting about Toronto real estate is we’re seeing a divergence between freeholds and condos. On one hand, you hear that freeholds sales are going bananas like COVID never happened. On the other hand, you hear that condos are getting hit hard and it’s turning into a buyer’s market.
Changes To The Sales To Listings Ratio
A market is driven by simple economics – if there’s high supply relative to demand, then it becomes a buyers market. If supply is low compared to demand, then it’s a sellers market. So a key metric that the real estate guys use to measure this is to look at the sales to listings ratio, which is calculated by dividing total sales by total listings over a given period of time. If the ratio is over 50%, we call this a sellers market and if it’s under 50%, it’s a buyers market.
So let’s look at what’s happened with the freeholds so far. Last year in July 2019, we saw the sales to listings ratio at 59%. This year in July 2020, the ratio is more or less the same at 61%, both signalling a sellers market. Semis follow a similar story with an even stronger sellers market – it was at 78% last July and 80% this July. So on the freehold side, the trend hasn’t really changed that much from last year. It’s a sellers market but holding steady compared to last year.
Now let’s look at condos. Last year, condos saw a sellers market with sales to listings at 67% but this year the tables have turned. Now, we’re only seeing a 42% sales to listings ratio, so the news is right here – condos are becoming a buyers market.
Is The Change In Condos Caused By Supply Or Demand?
But what this ratio doesn’t tell you is what is driving this market. Is it because buyers have decreased, or is it because sellers have increased? To really understand what is happening, you can’t just look at the year on year July data because regular seasonality trends don’t apply this year. In normal years, spring is the hottest but because of COVID, the markets were frozen and sales simply didn’t happen.
So now as Toronto opens up, both buyers and sellers are playing catch up, making up for lost time. On top of this, a lot more people are staying in town this year compared to normal years where people normally go away for summer vacation, so overall activity is also up because of this.
Instead of just looking at July, I think it’s more accurate to compare the April to July 2019 numbers with the same period this year to see how COVID really has affected the supply and demand so far. Detached sales and listings are actually still much lower than the same period last year – we saw 32% less sales and 36% less listings. Semis are lower priced and easier to get into, so we’re seeing slightly more activity here but still much lower than last year with sales down 29% and listings down 28%. As you can see, people are still more reserved and cautious because of COVID and the freehold market isn’t actually as bananas as the news reports it to be.
Let’s see what happened with condos. Condos sales are 35% less year on year from April to July and honestly it’s not too far off from the freehold sales trend – so what’s interesting is condo buyers are still around! So as you probably guessed, the buyers market is created because of a hike in inventory and we saw listings go up 5%. Let’s think about this – there are more condo sellers in the market this year from April to July compared to last year despite all these barriers from COVID & when everything else has been down around 30%.
Why Is There A Spike In Condo Supply?
One part comes from condo owners who occupy the unit. Because of the work from home situation, they don’t need to be close to downtown and want more space. With all time low interest rates, it makes monthly costs of owing a house much more affordable so we’re seeing condo owners moving to houses.
The biggest drive of this inventory comes from condo investors. A lot of condo investors were barely cash flow positive before the pandemic. Things were fine because condo prices were appreciating quickly, so this made up for lower cash flows. But now with higher vacancies in the condos combined with lower rents, a lot of condo investors are dipping into negative cash flow territory so they’re trying to cash out, take profit, and hopefully move into better cash flowing real estate – the freeholds.
Why Aren't Condo Prices Dropping That Much?
Condo prices have only dropped 5.5% year on year so it hasn’t dropped significantly despite being a buyers market. The thing is even though condo investors want to cash out, they have holding power. Rates are low and mortgage deferrals are available so they’re not in a desperate need to sell right now.
Our Fall Forecast
Now, mortgage deferrals are coming to an end in October and immigration won’t be bouncing by back then, so I anticipate more condo weakness in coming months and a prolonged condo buyers market.
And here’s also our prediction for freeholds. Before COVID, freeholds in Toronto were seeing really great cash flows. It’s true that rents have dropped since, but with all time low rates and the fact that freeholds haven’t been as affected by vacancies, the cash flows are still more or less the same in freeholds. When you combine this fact with freeholds still playing catch up with sales & listings, we anticipate freeholds remaining strong in the coming months.
How We Can Help
Now anything can happen – a second wave with schools reopening, or something else totally unpredictable so nobody knows for sure how things will pan out in the short term.
The reason we’re so confident in the freehold market though is because we believe Toronto is strong as a long term investment, and this is also why investors are entering the freehold market now. As long as you have holding power with strong cash flows, you can ride through short term volatilities while getting stable double digit annual returns which outperforms stocks in the long run.
We specialize in freehold investment properties in Toronto, so if you’re looking for the best cash flowing properties in Toronto, we can help. We’re happy to learn more about your situation so we can recommend the best investment properties for you.