It’s hard to believe that it was only 24 months ago that the Toronto resale market was literally out of control. Through the first four months of 2017, average sale prices were on a year-over-year basis, increasing by 30%, an inconceivable number today. The average sale price in April of 2017 had reached an eye-popping $944,000, and that included condominium sales. The average sale price for detached properties was almost $2,500,000.
What caused this frenzy? The simple answer is easy and cheap money. Interest rates were historically low. A ve-year mortgage could be had for an interest rate of less than 2.5 percent. In addition, foreign buyers, primarily Asian, were flocking to Toronto after British Columbia imposed a foreign buyer’s tax in 2016. It all combined to create a kind of tulip mania, only in this case it wasn’t tulips but real estate that was causing buyers and sellers to behave irrationally.
It all changed in April of 2017. At the end of the month, the then Liberal provincial government introduced our own 15% foreign buyer’s tax. Although it didn’t impact a large segment of the buying public, it did act as a wakeup call. Overnight, buyers became more tentative and suddenly the market slowed. It probably would have returned to its earlier accelerated pace, but the foreign buyer’s tax was followed by a series of mortgage interest rate hikes. By the end of 2017, the average sale price had tumbled to $735,000.
As we progressed through 2018, further interest rate hikes also came into effect. Of greater impact, however, was the implementation of mortgage stress testing. The new rules require all federally regulated financial institutions to vet borrowers’ applications using a minimum qualifying rate equal to the greater of the Bank of Canada ’s five-year benchmark rate or the buyer’s calculated rate plus two percentage points. That was a game changer. Buyers are now qualifying at almost 6 percent. Some are having difficulty qualifying.
As 2018 came to an end, it became clear what the new normal for real estate would be in Toronto. The average sale price is now $750,000. Given the stress testing, the various interest rate hikes, and the implementation of the foreign buyer’s tax, average sale prices have held up well and will continue to do so. The new normal is a market place that is devoid of irrational exuberance. It will be restrained by the economic measures that have already been implemented and the further interest rate hikes that are anticipated in 2019.
What’s happened in Toronto is happening on a global basis. Almost every “world-class” city – those cities that, for the last decade, have been magnets for people and capital from elsewhere – is experiencing the new normal. This phenomenon is being described as a synchronized global housing downturn.
It would appear that many of the same factors that have influenced the Toronto marketplace are responsible for changes globally. Government engineering, substantial interest rate hikes, and restrictions on foreign investment are having their greatest impact in the cities that saw housing prices skyrocket in the recent past. The prices that buyers were paying in 2016 and into early 2017 were, in a word, unsustainable.
In Canada, Vancouver has been dramatically affected by these global factors, particularly restrictions on foreign capital investment in the local housing market. At the end of 2018, homes sold in Vancouver were down by 31%, marking a 25% drop below the city’s 10-year average. The composite benchmark price for homes had dropped to $1,032,400 from December 2017, a 3% decline. Even with these declines, the price of homes in Vancouver is still quite expensive.
Australia’s housing market, specifically cities like Sydney and Melbourne, is also experiencing a downturn. Average sale prices have fallen by 11% and 7% respectively, from their peak in 2017. Australia’s housing market, and in fact its whole economy, parallels that of Canada’s. Australia’s economy has been powered by a rapidly growing resource sector. It saw massive amounts of Chinese money coming to its housing sector, and money was cheap, and unfortunately, a little too easy. Now government intervention is restricting foreign capital, and increased borrowing costs and more vigilant government supervision of banks is making borrowing less easy. The impact of these changes is being felt by the housing sector.
Like Toronto, Vancouver, Melbourne and Sydney, other cities throughout the world are responding to these global changes. New York, London and Hong Kong have also seen downturns in their housing markets, where prices have fallen in each of these cities. Unlike Toronto, more people are leaving London and New York than are moving in. All these cities have been affected by a combination of government intervention, increased borrowing costs, and the fact that easy money resulted in overpriced markets. The housing market in numerous other world-class cities is reacting similarly, moving in unison, in a form of synchronized choreography.
What we will experience in 2019 is a real estate market in which buyers are much more deliberate, extremely conscious of their borrowing costs. In this environment, there will be no great price fluctuations. We can anticipate that, both in terms of sales volumes and average sale prices, increases will be moderate, somewhere around 2% to 4%. At the higher end of the market, for properties valued at $3 million or more, we may even see some price modification. Higher-end property prices accelerated to levels of unsustainability during the early mania of 2017. The new normal should be viewed as a welcome change to the irrational marketplace that we experienced in 2016 and early 2017.
The new normal will be the marketplace where real estate professionals will, for the first time in years, demonstrate their pricing, negotiating, and selling skills.
Written by Chris Kapches, President and CEO of Chestnut Park for the 2019 winter issue of Invest In Style Magazine