Toronto Real Estate Market Outlook for 2014

Submitted by Jasmina on Tue, 2014-01-14 19:54.

GTA Housing Market Forecast according to TREB

Toronto Real Estate Board's senior manager Jason Mercer discusses the current Greater Toronto Area housing market as of the third quarter of 2013. I find that general public normally does not 100% trust reports form Realtors (because they see them as a ”bait” to start trading Real Estate), but this particular presentation is one of the most thorough and well though through reports from Real Estate community that I have seen!

That’s why I took the time to prepare Jason’s presentation highlights for you to see. Feel free to contact me or my husband Daniel, if you have any questions whatsoever!

Q3 2013 presentation highlights

Overall Home Sales in the Greater Toronto Area

The housing market is held up quite well despite some real and perceived head winds including stricter Mortgage Lending Guidelines and an up-tick in borrowing cost. In the past presentations, we talked about 2013 being sort of a tale of two halves with the first half of the year seeing sales down on the year over year basis, but then a rebound in the second half. In fact, we saw a stronger rebound than expected, that we have upgraded our forecast to a certain degree. We will see overall calendar year 2013 sales above 2012 levels and we expect to further increase as we move through 2014. Now with that said, it’s important to put calendar year sales in the longer term context:
Toronto MLS Sales Forecast for 2014

Toronto MLS Sales below Long-term Trends

And that’s what we can look at with this slide here where we’re comparing the long term trend (the green line) where we’re looking at historic sales per capita over time, versus the actual sale that have been reported through the Toronto MLS system (that’s the purple line):
Toronto MLS Sales vs. Long term Trends
If we look at where that purple line was relative to the long term trend earlier on in the new millennium, we see that we are actually seeing above trend sales activity. And that’s because during that period a lot of households felt the borrowing cost were as low as they are going to get and so they pulled forward their purchase of a home, that otherwise would have been spread out over a longer period of time. And so as we came out of the recession we have sort of balancing out these above trend sales from earlier on in the new millennium. We are still seeing actual sales even though increasing both this year and in 2014 a little bit below trend, so all else being equal we would expect to see it continued upward trend or actual trends through the TorontoMLS system. But obviously this is contingent on sort of shorter term issues like interest rates and the overall economy as well.

Months of Inventory - a.k.a. Absorption Rate

Now, let’s move from our discussion of sales to discussion of price. Of course price is a function of both demand and supply in the marketplace. We’ve talked about demand in terms of sales but of course we have to look at the relationship between sales and listings and see how that feeds through into price growth. A good measure when we are talking about that demand supply relationship is Months of Inventory. So in essence we are taking active listings at the end of a given month and divide it up by sales in that same month. What we are saying here is that if we didn’t see any more listings coming to the market, how long would it take to sell the current inventory, given the current level of the sales. We look at this indicator over time to determine whether or not the market is tightening or becoming more balanced.
Months of Inventory (a.k.a. Absorption-Rate)
If we look at the purple line on this chart this shows us Months of Inventory for Low-Rise home types (single detached, semi-detached and town homes). We see the Months of Inventory for low-rise has been at, or near historic lows and that’s why we’ve been seeing very strong price growth for these home types - high single digit or even low double digit growth on a year over year basis. Now, it’s been somewhat of a contrast when we look at the High-Rise segment of the market where that green line has been at or near historic highs and that’s because we have seen a lot more supply coming in to the market place as new condominium apartment projects have completed. So with more inventory buyers have experienced more choice on that market place and as a result we haven’t seen as much upper pressure on pricing.

Toronto Real Estate Price Forecast

So when you put both those market segments together and we can come up with what we think is a reasonable price forecast over the next couple of years. Certainly driven by the Low-Rise segments of the market, 2013 calendar year price will come in at about $522,000 on average. That will represent about a 5% of increase year over year. Moving it to 2014 we expect market traditions to remain reasonably tight and that’s why it’s forecast in an average price of about $540,000.
Toronto Real Estate Price Forecast

Underlying Economic Factors

Now with sort of a broad view of sales and price complete, it’s important now to turn to the underlying drivers of the market and there’s probably no driver more important than borrowing cost. Certainly since this summer, we have seen interest rates start to edge upwards especially when we’re talking about longer term borrowing products like a 5-year mortgage which is based upon the yield for a 5-year Government of Canada Bond:
Bond Yields Have Declined
So what we did see or we did anticipate in the market place an increase in interest rates moving forward over the summer of months, we have seen a bit of a pullback in the yield on the 5-year Government of Canada Bond over the last month or so - and some of that has to do with the fact that the Bank of Canada in their most recent interest rate release said:

  1. They’re holding firm with their target for the overnight lending rate at 1%.
  2. Their view on growth in the Canadian economy became more pessimistic. They are not expecting now to see the Canadian economy reach capacity until the end of 2015.
Bank of Canada Slashes Growth Forecast
This suggests that we won’t see much in the way of interest rates until the first part of 2015. So with that said, what’s the outlook for mortgage rates?

Outlook for the Mortgage Rates

5-Year Government of Canada Bond Yield vs. 5-year Fixed Rate Mortgage
Well, the consensus view in the market place today is that we’ll see a moderate increase on the yield in the 5-year Government of Canada Bond by the end of 2014, but probably something neighbourhood of 25 to 50 basis points above where we are today. The bottom-line is if you look at the post rate before discounting for the 5-year fixed mortgage it’s probably up somewhere by that 25 to 50 basis points.

But it is important to note that there’s still going to be a lot of room for discounting in the market place as well. A home buyer with good credit visiting their lender to get pre-approval will likely be able to take on mortgage for a substantially lower rate than posted as we move forward through the end of next year.

So that’s borrowing cost covered off, but it’s also important to think about consumer confidence.

Consumer Confidence & Job Market

One of the key drivers of consumer confidence is the labor market. If you’re looking to make a big ticket purchase for example on a house or a car you’re going to be thinking about:

  • Am I confident that I’m going to retain my employment over the medium to long term?
  • Do I think that we’re going to continue to see wages and salaries growing on average as well?
and the key indicator of this of course is the unemployment rate. What we see today is the unemployment rate is quite a bit lower than the recessionary peak:
Unemployment Rate in Toronto Census Metropolitan Area (CMA)
We are sitting right around the 20-year average so it make sense then that looking forward through the end of 2014 it will continue to see income growth probably in and around the rate of inflation. The market isn‘t tight enough to see a sustained above inflation increase in incomes but at the same time sitting right on that 20-year average it says a somewhat of balanced labor market and income increases right and around the inflationary mark.

So that wraps up our outlook for sales and price and we’ve also considered the underlying drivers. So it’s important to put that all together and think about affordability for home ownership in the Greater Toronto Area.

Housing Affordability Remains in Check in the GTA

At the Toronto Real Estate Board we measure affordability by calculating what percentage of the gross household income or average gross household income is going towards mortgage principle and interest, property taxes, and utilities. Right now, even with relatively strong price increase and a slight uptick in borrowing cost in the second half of the year we’re still seeing that share ranging in around 32% to 33%:
Housing Affordability Remains in Check in the GTA
That’s still well below the 39% ceiling mandated by the Government of Canada – as stricter guidelines came into place in the summer of 2012. We’ve also got a sensitivity analysis... we’ve also thought about, how would this share change? How would that affordability indicator change as we start to see mortgage rate increases overtime? Even with a 100 basis point increase in borrowing cost (which is well above what we expect to see through 2014) we’d still expect to see that share of income going towards those major home ownership payments well below that 39% ceiling set out by the Federal Government. The bottom-line is affordability is going to remain in check over the next year and it will continue to be a net positive in terms of housing demand.

And so with the broader overview complete, I want to switch gears and talk about the condominium apartment market in the GTA.

Condominium Apartment Market in the Greater Toronto Area

Now the Toronto Real Estate Board has just released its 3rd quarter condominium report and rental market report, so we can use some statistics from these reports to sort of think about how that market has progressed over the last year or so.

First off, I want to start with the ownership market. We talked earlier about how months of inventory we have been at or near historic highs because of added supply in the market place as projects have completed. But even while that is happened we have continued to see prices hold up.

Whether you’re looking at the Average Condominium Apartment Price or MLS HPI (Home Price Index) Apartment Benchmark you’ve seen that those price trends flat, even slightly up in the 3rd quarter of this year and that’s because we have continued to see enough demand - relative to the increase supply, to provide a foundation for pricing:
Average Condominium Apartment Price vs. MLS HPI Apartment Benchmark

Investors & Renters

Now if we look at the rental market, things have actually been very, very tight:
Rental Market Remained Tight
If you think of the development of rental units over the last decade most of those units have come from investor held condominium apartments. We haven’t seen a lot of purpose built rental projects come on line in the Greater Toronto area over the past 10 years. If you are a renter household looking for a new modern unit close to popular leisure, employment, and transportation - alternatives are more often than not that you’re going to be pointed at an investor head condominium apartment unit. And as a result, vacancy rates has been very low in this market segment and we continue to see sustained growth in average rents for popular 1-bedroom average condominium apartment rent and 2-bedroom average condominium apartment rent units. We expect this to continue as we move forward through 2014.

So with that, that wraps up our update for 2013 and our Outlook for 2014. Thank you!