Real Estate Reversal: Biggest COVID Impacts To Toronto Real Estate In 2020 & How It Can Change In 2021

Real Estate Reversal: Biggest COVID Impacts To Toronto Real Estate In 2020 & How It Can Change In 2021

COVID-19 has affected the supply and demand in many assets including Toronto real estate. With vaccine rollouts happening, let’s summarize the biggest 2020 COVID changes to Toronto real estate and how some of those changes may be reversed for 2021.

Sales To Listing Ratio As A Market Indicator

Real estate prices start to change when supply and demand move differently. So, if demand drops but supply also drops at the same pace, market prices typically stay more or less the same. When supply and demand don’t move at the same pace – that’s when the prices really start to change.

One indicator we love is the sales to new listings ratio which tracks the relative movement of supply and demand. Markets are balanced when the sales to listings ratio is at 50%, a sellers market when it’s above 50%, and a buyers market when it’s under 50%. And instead of comparing this from month to month, it’s more accurate to compare the ratio with the same period last year to account for seasonalities.

Real Estate Impacts In The First Lockdown

Real estate across the board first got impacted when we entered the initial lockdown in mid March. Nobody left their homes, so there was practically no real estate activity from mid March to mid May. No matter which market you you looked at, you’ll see a slight dip in prices in April to May, and this caused by desperate and panic selling – a small handful of properties were sold at a discount because of the lack of buyers out there.

Because there really wasn’t much activity, you don’t see the true impacts of COVID until lockdown measures started to ease in May. When people were active again, their new preferences began to surface that’s when we began to see significant changes in supply and demand – which is the ultimate driver for prices.

COVID Impact To Toronto & GTA Condos

The first big real estate change due to COVID-19 happened in condos. No matter if you’re looking at condos in the Toronto core or looking at the suburbs in the GTA, COVID impacted condos big time on the downside.

What happened was that people wanted more space because they were working from home, so condo home owners started to sell their condos. A similar thing happened on the rental side and renters also wanted to move out of condos – some into bigger spaces and other moved back home since there wasn’t a need to live separately closer to work downtown. This created a jump in rental vacancies and at the same time a drop in condo rents, so many condo investors also sold to cash out.

The summary here is that even though condo demand didn’t change significantly, supply surged and this is what caused the big change in the condo markets. This is really obvious when you look at the sales to listing ratios. 

As you can see, the sales to listings ratio for GTA condos was consistently lower by 24% ever since April. Ultimately, this change meant slower growth in GTA condo prices – YoY growth in Q1 2020 was a very high double digit 16% but they ended the year off with a decent but lower 6% YoY growth in December.

This was way more drastic in Toronto condos because the sales to listings ratio consistently 30% lower since April (December listings was reduced due to start of lockdown at the end of November), going from a strong sellers market to now a buyers market. This translates to Toronto condos going from high double digit YoY growth 17% in Q1, to ending the year off with a 5% decline YoY.

COVID Impact To Houses In The GTA

Besides condos, the other big change in happened in freeholds outside of the Toronto core. Now we just discussed condo home owners selling … and many of these people ended up buying houses in the GTA suburbs.

For the GTA freeholds, you can see that the 2020 sales to listings ratio stayed on average 15% higher than the same months in 2019, signalling a much hotter sellers market since COVID. Demand went up and supply was stable, so GTA freeholds was the best performer for 2020. In Q1 2020, the average YoY gain was 11% but we ended the year with a 23% YoY gain.

COVID Impact To Houses In Core Toronto

Finally, let’s see how our favourite market, core Toronto freeholds, did in 2020.

The reason we love the core Toronto freehold market so much is because we believe it has the best and most stable long term appreciation and cash flows, and the final numbers in 2020 have really validated our beliefs. Despite COVID, demand and supply continue to move in line with each other in 2020.

The main reason is that most end users stayed put. Those who decided to sell because of COVID where countered by a similar level of demand. Even though rents did drop in the spring, vacancies didn’t change in the freehold market. So all time low interest rates still make net cash flows are extremely attractive for new freehold purchases.

It’s a bit boring when you look at the sales to listings ratio for detached properties in core Toronto. The 2019 and 2020 ratios are almost overlapping once we left the first lockdown and this meant the sales market conditions haven’t changed much due to COVID. On the price side, Q1 Toronto freehold prices saw a YoY growth of approximately 16% vs. 8% YoY growth in December which is still very good.

2021: Toronto Real Estate Market Reversal?

There’s been discussions about a market reversal in 2021 mainly for the stock markets. Some analysts predict that assets who outperformed during the COVID pandemic will see a reversal or slowdown, and assets that underperformed will start to recover – translating to a higher chance of appreciation.

If you apply this to real estate, this could mean that freeholds in the suburbs might see a period of slower appreciation and condos might see a higher uptick in appreciation once offices, immigration and schools bounce back.

Keep in mind that it’s also possible that condo demand may not be as high as before with more people choosing to work from home permanently. So if you believe the COVID reversal story, you can try to bet on higher appreciation, but keep in mind that it is higher risk because of the speculation involved.

On our Elevate team, we don’t like to speculate and we believe that core Toronto freeholds offer the most stable and highest long term returns. Our view is based on fundamentals – they’re not making any more land in Toronto, demand for housing in core Toronto will always be strong in the long run, and there are better cash flows in Toronto freeholds compared to Toronto condos.

How We Can Help

When it comes to investing in Toronto freeholds, we know the market inside out – we have the data insights and financial projections to help you make more informed decisions, we have end to end investing services for you from sales, to leasing, to property management to help you build and grow, and of course we personally invest in it too.

So if you need help with investing in freeholds in core Toronto, we’re happy to chat all about it!

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