GRIDLOCK. Why the number of Toronto property sales are at their lowest levels since 1998, and why it won’t last for long…

Gridlock. That’s how I’ve been describing the market to clients over the past year.  We’ve entered a period of stalemate between sellers who won’t budge on price and buyers who are increasingly disenfranchised by stubborn sellers and high interest rates, not to mention a lack of “quality” inventory and deteriorating personal finances after multiple years of hot inflation that has outpaced wage increases. As a result, the Toronto and GTA real estate markets have gone into a prolonged hibernation. Eerily quiet and with only a family resemblance to what it looked like in recent years.  Transactions are at historic lows; other than the first 6 months of 2020, the year-to-date number of Toronto purchase transactions in 2024 (January through June) are significantly lower than anytime in the last 26 years.  However despite this current (and rare) period of relative inactivity, it won’t last forever and depending on your situation, there are always opportunities to take advantage of.  Let’s take a deeper dive into the forces at play creating the environment we find ourselves in today, and shaping what’s around the corner. 

The psychology of buyers and sellers…

It’s been 2 years and 4 months since the BOC started raising interest rates from recent historical lows, and we’ve now likely seen the peak of rate hikes given the recent 0.25% cut in June and the slowing economy + cooler inflation data rolling in. But affordability remains at all time lows because prices have not responded much to interest rate hikes, and it’s hurting buyers and sellers alike. How does affordability impact sellers?  Selling often means buying something new (and more expensive), which means refinancing, which means additional debt at higher rates. This has owners thinking twice about their plans to sell, deciding to wait and see if rates come down. On top of this, because there is a lack of high quality inventory on the market (the type of properties that make you swoon and attract multiple offers), many sellers aren’t currently confident that they’re going to find something they love for their next home, furthering cementing the case to put their plans on hold and reinforcing the cycle that’s slowing down the pace of the market. 

Affordability has hit first-time buyers the most; they’ve watched their buying power evaporate before their eyes as interest rates increased exponentially and home prices barely moved in response. They’ve had to reset their expectations for what type of condo or freehold home is realistic, or pad their down payments substantially to keep up with their previous aspirations.  Most have sat on the sidelines waiting for rates to drop.  

Let’s take stock of the dynamics at play in both the freehold and condo markets (because they behave quite differently), and consider what might be in store for the future.. 

We are starting to see cracks in the months-long gridlock, most notably in the Toronto condo market where an increasing number of investors are trying to offload their units and get their equity out after months of higher-than-expected borrowing costs that have strained their finances to the point that they want out. I’ve seen this first-hand as some of my lease clients have been faced with owners who decided to sell this year.   I believe these condo investors are also motivated by a fear that prices will further decline in the months ahead if rates don’t come down (or come down quickly enough), and they want to give it a shot and see if they can exit at today’s prices; an increasingly difficult task with inventory skyrocketing and number of sales on the decline. For perspective - year to date total number of condo sales in toronto are 20% lower than the average over the last 10 years. And condo sellers continue to flood the market with new listings → the average number of months of inventory in 2024 stands at 3.5 months, 42% higher than the average year-to-date figure over the last 12 years (as far back as data for this variable goes).  And the big question, how is all of this impacting price? Not much, and that’s the kicker. Despite ballooning inventory and record-low sales, the average YTD selling price of a Toronto condo in 2024 is $710,926, only 8.5% less than the average price YTD 2022 - a year when the average Toronto condo price peaked in March at $808,921.  
So now we understand the gist of what’s happening - condo sellers are unwilling to give in to market pressures that would typically drive prices lower, because presumably, the majority of them can afford to hold out for sunnier days ahead. So far, they’ve shown remarkable resiliency and an unwillingness to give in en masse to aggressive offers from buyers.  It’s clear many are taking a “test-the-waters” approach and delisting their unit if they don’t sell for the price they want. They are patiently waiting for further interest rate cuts to jump-start the market again, keeping prices roughly where they are today (if not putting upward pressure on price).  Whether or not this scenario plays out is of course no slam dunk. But I’d say there is a much stronger possibility it will play out vs. will not play out. And given the supply and demand dynamics in Toronto, a few interest rate cuts is all it will take to get the wheels turning again.

The story for the first half of 2024 in the freehold market is similar but with some significant nuances. Transactions are down even more than the condo market (slowest first half of the year since 1990), and prices are down just 9.6% since 2022 highs.  The one major difference is that inventory is not piling up quite like it is in the condo market, only increasing 2.1X from 1 month to 2.1 months of inventory listed (whereas condo inventory is up 2.9X from 1.2 months to 3.5 months). Most Toronto homes are still holding offer nights and seeing a successful sale (albeit with way more conditions than in recent years!).  Buyers are still reluctant to get into bidding wars as most are pushing the extreme limits of their affordability parameters, but generally speaking, what is listed in the freehold market is selling as long as it is marketed well and priced appropriately.  Those looking to “test the waters” at prices above market value are unlikely to see a sale these days. 

Ok so let’s recap…

A multitude of economic and psychological factors are converging that are causing the current gridlock in the Toronto real estate market: 

• A general expectation from sellers that interest rates will start to come down significantly (hence keeping prices aloft)

• A general expectation from buyers that interest rates will start to come down significantly (hence increasing overall affordability)

• Buyers who don’t see value at current prices (given where interest rates and buying power is today) and are fearful that if they make a purchase and interest rates don’t come down, they will be on the losing side of the equation because prices will drop further. 

Confounding these factors above are other financial pressure points impacting many and straining the economy: 

• More and more homeowners and investors who have renewed (or are about to renew) at higher mortgage rates, and a large chunk of homeowners on variable rate mortgages. In both cases, discretionary income is under attack as more and more household resources go towards the mortgage payment and less goes into the economy/savings/etc. 

• Inflation of basically everything else we buy over the last 4 years, eating into overall buying power and out-pacing wage growth. 

So what does all of this mean for the future? 

Despite what buyers are hoping for, I don’t expect prices to decline much further because interest rate cuts and pent up buyer demand will circumvent this.  I’m of the belief that the Bank of Canada will be forced to cut interest rates fairly significantly in the near-to-medium-term given a rapidly slowing economy.  Assuming unemployment doesn’t skyrocket, we will start to see buyers who have been sitting on the sidelines making moves as mortgage affordability improves (vs prices coming down), sellers pressing play on their plans to move up or down the housing ladder, and a draw-down in the ballooning inventory while prices trade sideways-to-upwards for a period of time, depending on the housing type and neighbourhood. 

Besides interest rates being so central to how this market is behaving, another important catalyst is pent-up demand. Most still want to own real estate (or own more real estate!) if the opportunity presents itself.  And there has recently been a flood of new people coming to Canada and settling in the GTA - this is only forecasted to grow meaningfully over the next 20 years. And on top of this we are still not building anywhere near enough new homes to house everyone.  These fundamental forces driving demand will exert enough pressure on the market that the wheels will start to turn again.

In the meantime, there are always opportunities at the various stages of the housing market cycle and as I’ve said in the past: 

Sellers - if you are selling and buying in the same market what you may “lose” on the selling side (vs. say, selling in 2022!) you will gain with a lower purchase price on the buying side.  If your next move involves taking on more mortgage debt, you may need to adjust your aspirations a bit, but you can also carefully consider your financing options.  Many have suffered by choosing a variable mortgage - maybe consider a fixed-rate mortgage option that you know you can afford, and then reassess the situation a few years down the road.  And if you’re selling and not buying, well, we now can earn a decent amount of interest on our savings, helping to keep that capital moving in the right direction in the years ahead. 
Buyers - there is no better time to buy if competition and price wars are your kryptonite and you have a healthy downpayment. Buyers have leverage now and despite average prices only coming down about 10% since 2022 highs, it is still a savings on the purchase price. Rates will fluctuate over time, but the price you pay doesn’t ever change.  And to my first-time buyers having to reset their expectations on what they can afford - the long-term case for home ownership still applies - get on a rung of the ladder and start there. Use that as the catalyst to notching yourself up a few rungs down the road when the conditions present themselves.  In the meantime you’ll be building equity, owning what has consistently proven to be a long-term appreciating asset, and building your own wealth instead of your landlord’s! Keep the long-game in mind. 

In conclusion

Barring some major catastrophe, this quiet lull in the Toronto real estate market is a period that we will undoubtedly look back on in the not-too-distant future and remember as yet another short-lived pause in an otherwise consistently growing and appreciating Toronto housing market that continues to have exceptionally strong underlying fundamentals.