Where Will Real Estate Prices In Toronto & The GTA Go From Here On?

After everything we’ve gone through with COVID, you probably know by now that it’s not that accurate to look at real estate trends as a whole. Different submarkets reacted quite differently during the pandemic. As we recover, we’re likely going to see more diverging trends. In this video, I am going to reveal where we think real estate prices in Toronto and GTA might go from this point on.

Two Main Types Of Real Estate Buyers

There’s two main groups who buy real estate and their buying behaviours are actually very different:

Investors: They make decisions based on numbers. At the end of the day, if the bids start getting higher and an opportunity doesn’t make sense anymore, these investors are going to walk away from a deal.
End Users: When it comes to buying an end user home, there might be other factors that are harder to put a price tag to.

What this means is that many end user buyers end up making their decisions based on feelings and emotions. When this happens, end users are way more likely to pay more than an investor for the same property. The truth is, it only takes one of these end user buyers to overshoot on price to set a new record high as a benchmark for the market, and in hot markets, this kind of momentum is the fuel that propels prices higher and higher.

What we have is a behaviour where markets with more end user buyers usually sees higher price growth as a percentage during hot markets. At the same time, this never lasts forever because it really goes against true fundamentals. Once the steam is gone and things start to cool, these more volatile markets that overshot with price growth will also see a bigger drop because they need to readjust and reposition back to their normal levels.

Price Growth vs. Proximity To Core

As we plot the price growth of real estate against its proximity to core Toronto, we can see that the further a property is from the core, the higher the price growth has been during the past year which means they have also been more volatile. And before you say this might be a permanent change because of COVID, you have to know that this isn’t the first time this has happened.

If we look further back and compare the core toronto market with the suburbs, you will notice that whenever a real estate market gets hotter, the price gap between the suburbs and core Toronto typically starts to compress. If you think more about the buyer pool differences in the two markets, things might start to make a bit more sense.

The Toronto real estate market tends to have more experienced buyers, no matter if they are end user buyers who have purchased real estate before and are looking to upgrade their existing home or real estate investors who are looking for investment deals to maximize returns.

The suburbs have more first time home buyers because they have a lower starting price and there’s also less real estate investors in those markets. More end users and more buyers with less experience means that real estate prices in the suburbs are more likely go up higher triggered by more emotional or FOMO buying.

Source: BoC; Teranet; Better Dwelling.

Example: Oshawa vs. Toronto

Here is a chart that compares real estate prices in Toronto vs. Oshawa over the past 10 years. When you plot it out, you can will see that there has been typically a 52% discount if you choose to live an hour away from Toronto in Oshawa. But you can also see that the discount is not consistent throughout – particularly during hot sellers market, the discount spread gets smaller.

In 2017, real estate prices were red hot all around, but Oshawa‘s prices went up more than Toronto and so the end result is that the discount for a living in Oshawa went from 52% down to 44%, an 8 percent difference. Oshawa’s prices definitely overshot more than Toronto and so when the government imposed a new foreign buyers tax to cool the GTA market, Oshawa had a much bigger reaction, seeing property prices drop more than Toronto so that they can go back to it’s long term discount level of 52% and it also took a much longer time to recover from the shakeup.

Source: Listing.ca

Where Will Real Estate Prices Go From Here?

Now let’s look at where we are today. The Toronto real estate market wasn’t nearly as heated from the pandemic effects and because of it and that’s why the discount gap is compressing again. Right now, the discount has compressed even more than in 2017 and prices are in some areas irrationally high in the suburbs. And when you combine this with a COVID recovery story, we are reaching another turning point in the real estate markets.

Moving forward, we’re facing tougher mortgage stress tests, which impacts all buyers, but mainly the newer end user buyers buying in the suburbs who most likely won’t qualify for special mortgage programs and therefore this change has been putting downward pressure on suburb prices. Then we have the upcoming return to office movement which will put more downward pressure on suburban buying demand but at the same time, the same movement will draw more rental and buying demand into Toronto.

If we use Oshawa as an example once again, right now the discount is a much lower 38% compared to the average 52% discount, a 14% difference. Similarly, Hamilton is at a 33% discount compared to the average 41%, an 8% difference. So if suburban prices need to go back to its intrinsic values, then the discount gap will need to widen, which means that we should expect much better appreciation by around 8-14% in core Toronto than the GTA in the short to medium term.

Takeaway

The further a property is from the core, the bigger difference you might expect simply because it’s a more volatile market and its property values have gone up that much more over the past year. In other words, if you choose to invest in more volatile suburban markets, your returns will simply fluctuate more. Toronto is a more mature market, and so that’s why we didn’t see such massive 40%+ appreciation over the last year, but we also don’t expect major downward swings moving forward either.

If you need more help with investing in real estate in Toronto, we can help you out. What your risks are, what projected returns look like, help you buy the best opportunities and get your investment property up and running.

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