Everyone who lives in and around Toronto knows that home prices have been on a meteoric rise to record highs for the past several years.
It is widely believed that the soaring prices are due to a shortage of housing stock for the many people moving to the region each year. Low supply mixed with a high demand creates competition that causes buyers to bid higher to secure the home of their dreams.
And money is relatively cheap. With interest rates at an all time low, buyers were less cautious about bidding a higher for a property, because, on paper, it seemed they could afford the monthly payments to carry the mortgage.
Low-interest rates and a supply and demand issue aren't the only factors to the out-of-control GTA real estate market. Investing in the GTA real estate market became a "sure-thing" and Canadian and non-Canadian speculators began buying up properties to rent to tenants or to hold, often without tenants.
And they weren't wrong. Both home prices and rental rates continued to rise with seemingly no end.
But things seem to be different now...
Announced on April 20, 2017, the Ontario Fair Housing Plan (OFHP) is a 16-point plan to make housing more affordable for middle- and lower-income families. The Ontario Liberal Government hopes to level the playing field and maintain a viable real estate market in the Greater Golden Horseshoe (GGH) area, which surrounds and includes the Greater Toronto Area (GTA).
Also, on July 12, 2017, the Bank of Canada raised its key interest rate by a quarter of a percentage point to 0.75% — the first interest rate hike in 7 years.
On September 6, Bank of Canada raised the rate again to 1%.
Canada's largest banks immediately passed on the rate increases to consumers by raising their prime interest rate first to 2.95%, and then to 3.20%. This means that current homeowners with variable rate mortgages saw an instant increase in their monthly payments, and new borrowers would see the increase when shopping for a new mortgage.
What is the Ontario Fair Housing Plan?
Let's take a look at some of the more notable elements of the plan.
15% Non-Resident Speculation Tax
The 15% Non-Resident Speculation Tax (NRST) is aimed at buyers who are not Canadian citizens, permanent residents or Canadian corporations but are buying in the GGH.
It's important to note that there are exemptions for this tax. This includes buyers:
- That are buying multi-residential rental apartment buildings (has more than 6 units), agricultural land or commercial and industrial land.
- That are international students.
- That buy a property with spouse who is a Canadian citizen, permanent resident of Canada, refugee or nominee
Note: If the buyer becomes a citizen or a permanent resident within 4 years after buying the property, they will receive a rebate.
Rent control would be extended to all private rental units in Ontario. Before OFHP, only properties built before 1991 were subject to rent controls, meaning that rental rates could only rise at the rate posted in the annual provincial rent increase guideline. The OFHP proposes that rent controls now include private rental units built after 1991.
Strengthen the Residential Tenancies Act
A new standard Lease agreement with tighter provisions for “landlord’s own use” evictions was amended to the Residential Tenancies Act. When the amendments take effect, it will be more difficult to evict a tenant on the grounds that the landlord intends to use the rental unit for their own accommodation.
Did the OFHP have an impact?
Buyers stopped buying because they wanted to see if prices would drop (essentially waiting to see if the bubble was going to burst).
And sellers rushed to the market to try and sell before prices began to drop, which created an oversupplied market. These "knee-jerk" reactions to the new plan caused prices and number of sales to drop.
There was a psychological shift for buyers. Many buyers were worried about buying and decided to wait to see what happens in the Fall. This created a disconnect between buyers and sellers in terms of price expectations.
The OFHP was like someone pressing the pause button on the Toronto real estate market. But I expect it to be a temporary pause.
Did home prices really drop?
With prices no longer soaring out of control, the Toronto real estate market has been out of sorts lately.
It's true that prices have gone down month-over-month. However, prices were over inflated because it was normal to have 20 buyers bidding on a house.
This Spring and Summer, there were fewer buyers bidding on homes, which caused the number of bidding wars to decrease, if not completely eliminated. Real estate agents are starting to hold fewer offer dates. Homes are being listed at actual market value and buyers are able to do some negotiation.
But year-over-year, home prices are still on the rise.
In July 2017, the Teranet-National Bank Composite House Price Index (which looks at the "rate of change of Canadian single-family home prices") reported that Toronto home prices were up 2.1% for all housing types, month-over-month for the Spring market. But remove Condos from the mix, which have maintained their value, you see that house prices have dropped 1.6%.
What about for July sales? The Toronto Real Estate Board (TREB) announced that in July the number of home sales had dropped 40%, but prices were up compared to July 2016.
It is difficult to compare sales activity to last Spring and Summer which was a record breaking year for the market. Keeping pace with last year's sales would have been unsustainable. Returning to more balanced conditions in the market is much healthier for everyone.
The Fall market will be hotter than the Spring and Summer
Why do I think early fall will be a hot market?
The Bank of Canada is expected to raise the rates again in October, and 2 more times in 2018. When buyers (who are currently on the sidelines) realize that prices won't change more than they have, and soon, mortgage rates will soon be more expensive, they will rush back to the market to get in before homes start becoming out of reach.
The Spring and Summer market slowed considerably, but overall the real estate market in the GTA is still very strong. No, you're not getting the price you would have gotten before April 20th, but if you look at the year-over-year sales prices are still showing an increase.
Average sale price year-over-year
Average Sale Price
Average sale price month-over-month by year
And you have to remember that historically, the market always slows in the summer months as Canadians would rather enjoy our few months of hot weather with their families than taking on the task of finding and buying a new home.
Now that the kids are back to school and the weather more conducive to getting busy with work and business, expect to see more real estate activity in the coming months.
Were you worried about selling your house this Spring or Summer? Do you believe Fall will be a better time for you to sell?
Tell us about it in the comments below.