If the pandemic has taught us anything it’s that things can change quickly and drastically in real estate. The year 2022 saw Ontario’s housing market experience unthinkable prices, bidding wars, and no less than seven interest hikes from the Bank of Canada. Buyers and sellers have been left reeling and if you’re confused and curious about what’s coming next, you’re not alone.
Keep in mind the real estate market is complex, so forecasts can change but experts do have some ideas that are trending for 2023. Let’s explore some critical areas and predictions for pricing, inventory, and interest rates.
The general consensus is that pricing in the Ontario housing market as a whole will continue to fall until early 2024. Sales have pretty much flattened out. In fact, the number of homes bought and sold monthly is now lower than it's been, per capita, since the mid-1990s. More homes are on the market with fewer buyers wanting to battle it out on every house that pops up. This means sellers have to lower their prices to get attention.
The Canadian Real Estate Association (CREA) recently reported that home prices fell in Canada by 19% from the height of the frenzy in February to November 2022. That’s from an average sale price of $817,720 to $636,838, but still a far cry from the pre-pandemic 2019 average sale price of $454,776. Can we expect more of the same? It seems experts agree prices will drop more, but only slightly and depending on the region. Royal LePage’s annual survey predicts only a price drop of just one percent across the country, while RE/MAX Canada forecasted in its housing outlook for 2023 the collective price of a home is expected to drop just 3.3 percent. The Canada Mortgage and Housing Corporation, (CMHC) is forecasting the average sale price across Canada to continue to decline until the second quarter of 2023. Looking closely at the RE/MAX report, differences arise based on region. The Greater Toronto Area is expected to decline to its 2021 levels, a roughly 11 percent drop from the average this year. They also predict average price declines of up to 15 percent in London, Kitchener-Waterloo, Barrie, and the Georgian Bay area. On a more positive note, they suggest a modest price increase of two to eight percent in the rest of the province, highlighting Ottawa, Hamilton, Windsor, and Sudbury.
Experts also agree pricing will still vary amongst, regions and types of housing (more on this later) and the omnipotent wild card…interest rates.
At the start of the pandemic in 2020, the Bank of Canada lowered its interest rate to a record low of 0.25% to boost the economy. If you were negotiating a mortgage or loan then, it was an exciting time to borrow money. Since January 2022, the Bank of Canada's lending rate increased to 5% across eight hikes. This has impacted housing market prices, homeowners with variable mortgages, and anyone who had enjoyed historically low rates.
There is a method to this madness. In June of 2022, inflation had reached a record 39-year high of 8.1.%. When inflation is high, the value of money goes down. By raising interest rates, the Bank of Canada is trying to slow down inflation. While Canada’s annual inflation rate dropped slightly to 6.8 percent in November, the central bank’s goal is to bring that number down to its target of about two percent.
With this goal set, will interest rates continue to rise in 2023?
This remains to be seen. On December 8, Bank of Canada deputy governor Sharon Kozicki said during a speech in Montreal “We are moving from how much to raise interest rates to whether or not to raise interest rates," however, the bank remains ready to “act forcefully” with rates if need be. It appears for the near future the best we can hope for is to stay around 4.25 to 5%. So, what does this mean for Ontario’s housing market?
Last year households needed 62.7% of their income to cover the costs that go into owning a home. This is a result of the pandemic pushing housing prices to an all-time high, combined with the hike in interest rates to rein in inflation. And yes, that’s also a big part of the problem. Food, gas, electricity…everything costs way more than it used to, and our incomes have not kept up! A recent TD Report is predicting that home prices will bottom out early in 2023 and sales levels will remain depressed. The report states this is “thanks to the poorest affordability…since the late 80s/early 90s.
For the past couple of years, Ontario has seen a hot selling market. Real estate was seen as a great investment to upgrade primary residences, take on a rental property, or renovate and flip. Record low interest rates fueled the fire and then the pandemic added enough oxygen to make a blazing bonfire, with price wars and overbidding.
As we have reviewed, in the back half of 2022 that all changed. Pricing dropped, interest rates went up and affordability went down. RBC economist Robert Hogue shared in his housing market report in December, "Sharply higher interest rates and the considerable loss of affordability continue to challenge buyers. And we think they will keep the market quiet for some time to come.”
This results in a low volume of listings and low sales. Once the market and the economy become more predictable sales and activity should pick up. Hopefully, a more balanced Ontario real estate market is on the horizon. What do we mean by balanced?
The housing market would be considered balanced when the supply and demand for houses even out. This creates an opportunity for buyers and sellers to have a better chance at getting what they both want from a real estate transaction. When it’s a sellers’ market there’s not enough listings and buyers are forced to pay more and accept less. When it’s a buyer’s market, there are way more listings than there are buyers and prices are forced to drop. A balanced market has competitive prices, thoughtful sales, and more balanced transactions where buyers must make some concessions but still get most of their wish list.
During the peak of the pandemic, there was an urban exodus and many city dwellers, particularly from Toronto, sold their homes in town to move to the suburbs. People wanted and needed more outdoor space. More people were working from home making the traditionally dreaded commute irrelevant. And the icing on the cake? You got more bang for that Toronto home buck in your suburban house. Bigger lots and often bigger houses. This desire for more space indoors and output a damper on the condo market.
With the pandemic, dare we say moving to an endemic phase, there is a desire for urban living again. People are returning to the office; they want to be closer to the city and for many that means looking at condos downtown. While detached homes are still way out of reach for many, condos can offer some affordability with lower prices and smaller mortgages. The Royal LePage 2023 forecast sees condo pricing increasing by 1% year over year from $563,300 to $568,933.
Despite what some are calling an increase in interest for condos, the Canada Mortgage and Housing Corp. (CMHC) recently warned that in the GTA, a combo of a steep decline in condo pre-construction sales, higher building costs, and higher interest rates "could lead to project cancellations or delays in project launches."
As we have seen, the real estate industry is complex with many factors at play. It leaves you wondering if any expert can predict the future. Still, some economists are taking a crack and making a few educated guesses on what lies ahead.
The same TD report that shared its bleak outlook in 2023 mentioned above, predicts a brighter future following in 2024. They see lower inflation rates and higher household incomes. This could bring growth in Canadian home sales and average home prices returning to a positive position.
We expect that 2024 will have a more balanced housing market and the worst is behind us now. There is never a bad time to buy real estate. The rental market is hot as well, so choosing to buy allows the homeowner to build equity instead of paying a landlord, buy within your means and a few years from now you can always move up!