Paranoia seems to have set in with the rapid rise in real estate prices over the past year – almost 30% year over year. And most of this increase has happened in just the past four months. Now Governments at all levels are ready to act! But wait! The market in terms of prices has already begun to plateau. It started in the last 10 days of March and has extended into the first two weeks of April.
So what has changed? We started from a market with a shortage of listings to one where listings are now at more normal numbers. In the first 14 days of March we averaged 450 new listings per day. Over the last 17 days of March we averaged 630 new listings. At that rate we would have 19,000 new listings in April. So why the increase? For years, many people in Toronto refused to sell. The cost to move with double land transfer taxes, commissions, and legal fees could be as much as $50,000! But at today’s prices, many have decided to cash out and ‘baby boomers’ are taking the lead. Plus, this is the start of the spring market which historically brings a jump in listings. You are also seeing buyers who have grown tired of the ‘multiple offer’ circus. Where there used to be 10 and 20 people bidding for a property, we now see the number at 2 or 3. And in some instances no buyers appear on the offer date!
In terms of sales, TREB reported just over 12,000 sales in March. That was 17% higher than March of 2016. The number matches normal sales for April and May. What we can tell you is that the spring market will end earlier than normal – probably by mid-May. Nonetheless the Ontario Government has been the first to the market with a ‘Fair Housing Plan’ or should we say, ‘Vote Getting Housing Plan’. The key changes, effective April 20, are: a non-resident buyers tax of 15% on all sales written from this date. The good news is that it will not apply to foreign nationals working in Ontario or to international students. There will also be expanded rent controls covering all units, with rent increases for current tenants limited to the cost of living each year! Additional changes are forthcoming but they are less important to individuals in the housing market.
The result of these changes will be to produce a market ‘pause’. Everyone will try to figure out the impact and buyers will hope for a price drop. Looking at the non-resident tax in B.C., we saw lower sales, and prices did decline. But that was primarily because of the poor introduction of the tax by the B.C. Government which made the change retroactive and forced a number of sale defaults. While Vancouver sales are lower than last year, prices for condos are now higher and detached houses are about the same.
So how does this translate to our market? The non-resident buyer impact is much smaller here than in Vancouver. However, the introduction of rent controls will encourage some investors to sell over time. We expect prices to soften from current levels. Our best guess is that prices will drop by 5% over the fall. There are always some people who want or must sell and if buyers hold off for a period of time they will see a small reduction. However the only time you will get a big price correction is if interest rates spike – owners can’t afford their mortgage (Currently mortgages in arrears are .12 of 1%! That is 30 times lower than the current U.S. rate). Forecasts for the next ten years suggest that the worst-case scenario is for rates to get to the 5-6% range – the rate where buyers already have to qualify today! The other situation is if we were to experience a major recession with big job losses. Do you see that for Toronto? No! Even the Ontario Government can’t mess that up. For buyers waiting, we are sorry to tell you that prices will be higher next year. The window of opportunity is small.
Why the Government’s sudden preoccupation with rent controls? The media has reported two cases where the landlord doubled the rent from $1600 to get rid of a tenant. The current rules of the Rental Tribunal make it very difficult to evict a tenant for non-payment of rent or for carrying out illegal activities. This is the only resort for landlords to get a speedy resolution. In both instances, the landlord needed to sell the unit as vacant. We can tell you that landlords value good tenants and want to keep them. By keeping a good tenant, you avoid vacancy costs and you save on leasing commissions. Good tenants can usually get rents below market for these reasons.