When it comes to the Toronto real estate market, everyone has questions.
Will the market crash? Should you lock in your mortgage? How the heck can anyone afford to buy in the city?
Well, so far, all signs point to a better-balanced market in 2019 and with fixed mortgage rates dropping it might actually be a good time to lock in. But when it comes to buying, there’s a lot more than affordability to keep in mind. So, without further ado, here are three home buying trends buyers to keep in mind this year.
Fixed Mortgage Rates Will Regain Popularity
Variable-rate mortgage borrowers tend to keep a close eye on the Bank of Canada, the central bank that controls the price of borrowing by tweaking its trend-setting Overnight Lending Rate, which consumer lenders use to set the rates on their own products.
While the BoC has hiked its rate five times since 2017 and signalled more to come this year, it has recently backed away from this mandate due to weaker-than-expected oil prices. It left its rate untouched in its January announcement, meaning variable-rate borrowers will get a bit of a reprieve on their rising monthly payments. However, this has also had a cooling effect on the fixed-rate side of the mortgage market.
This is because consumer lenders take their cues from the bond market when pricing their fixed-rate mortgages, which is also very sensitive to rate hikes and cuts.
This is because when rates rise, the yield on an existing bond – the payout the investor is guaranteed to receive upon its maturity – becomes less valuable than newly-issued bonds. When rates are cut or remain the same, these bonds remain competitive and viewed as a stable and lucrative investment. Yields drop when this is the case because it takes less of a payoff to entice investors, which in turn pads banks’ profits. They then tend to pass those savings down to fixed-rate borrowers in the form of lower mortgage rates.
There’s already evidence fixed-rate discounts are coming; yields have since fallen below the 2 per cent mark, prompting the Royal Bank of Canada to cut its posted five-year fixed mortgage rate 0.15 per cent, to 3.74 per cent. Borrowers who compare rates from smaller lenders and credit units are likely to get an even better deal, with some offering rates as low as 3.29 per cent. That’s just 0.64 per cent above the best five-year variable option currently available; while variable rates are historically a better deal, more borrowers will likely opt in on the security of a fixed-rate option as long as the BoC holds status quo.
Secondary Markets Will See the Most Action
Sales activity slowed considerably in Canada’s largest markets last year, due to a combination of price fatigue and the tougher mortgage qualification stress test introduced in January. However, rather than stay out of the market altogether, financially squeezed buyers set their sights further afield, fueling strong activity and price growth in smaller, secondary markets. According to the fourth quarter market report released by Royal LePage, Windsor and Kingston saw the highest rates of price growth in Ontario in 2018, up 14.7 per cent and 13.8 per cent, respectively. That’s followed by a 9 per cent uptick in the Kitchener-Waterloo-Cambridge region, and 8.9 per cent in the London market.
This “drive until you qualify” mentality will continue to be a strong trend this year and will boost markets on the outskirts of the GTA and beyond. However, the 905 markets, which have softened considerably since the 2016-early-2017 market peak, will remain deflated, re-establishing them as an attractive entry point for first-time buyers, states Phil Soper, Royal Lepage’s president and CEO, in the report.
“The market correction in the suburbs of Toronto has been more significant than elsewhere in the country because price increases in recent years were more extreme. Even as prices in the core of the nation’s largest city begin to rise again, we expect prices in the region known as the ‘905’ to remain soft, providing new families with an unexpected entry opportunity into some of the most sought-after communities in southern Ontario,” he said.
Condos Will Still Be King
The most affordable home types will keep leading the market this year; the afore-mentioned stress test effectively chopped the budgets of an estimated 100,000 buyers over the course of 2018 and will continue to be an affordability roadblock. In a sharp turnaround from the frenzy for detached homes that defined the 2016 market, condo price growth easily outperformed all other home types in 2018, despite sales taking a 15 per cent dip along with the rest of the market.
Multi-family home prices, including condos for sale in Etobicoke and North York as well as the downtown core, rose 8.7 per cent to an average of $593,366, compared to the -7.1 per cent drop in detached home prices which, at an average of $1,320,333, remain well out of reach financially for a good portion of the market.
Real estate metrics think tank Urbanation forecasts resale market units to increase 6 per cent this year, will pre-sale units (think Liberty Village condos for sale) will see values balloon to an average of $1,000 per square foot, despite the anticipated incoming supply of 25,000 to the GTA this year.