Housing Market Outlook For GTA 2012

As shown in the Chart above, the market has evolved from a ‘Sellers Market’ in spring this year, to a ‘Buyers’ Market’ since July 2012.  In the current market, there are more choices for buyers, which resulted in downward pressure on housing prices.  In the next few months, there will be fewer houses for sale because (1) sellers are likely to take their houses off the market if/when they are not selling within the listing periods; (2) sellers are not keen in putting their houses on the market during winter months, especially during Christmas and New Year.  As the inventory of homes for sale diminishes, the market will eventually return to equilibrium or a ‘balanced market’.  Seasonally, the market will bounce back in February and March when more buyers begin to look for their next homes.  

In 2013, home sales will slip to 87,000 units due to less activity from first-time buyers.  Although the total resale homes sold are expected to be slightly lower than those in 2012, momentum is expected to pick up later next year.  On the other hand, new home starts are expected to slow to 37,600 units in 2013 as condominium apartment construction moderates from strong levels in 2012.

In the coming months, slow price growth, continued low interest rates, net migration to the GTA, and stable employment conditions will set the stage for an increased flow of households into the ownership market in the second half of 2013.

* Source: Toronto Real Estate Board, CMHC

There are several reasons for the apparent shift in the demand of resale homes since June this year. 

• Seasonally, sales volume and prices went down in summer as many buyers have bought their homes in spring and plan to move in summer before the schools start.
• Based on recent reports from the media, the chartered banks and CMHC, many home buyers felt that the housing market may be moderating/adjusting and have therefore taken the ‘wait and see’ approach.
• New mortgage lending guidelines and tightening of the mortgage approval policies.
• Buyers continue to face the upfront cost associated with the City of Toronto’s Land Transfer Tax.  This may be partly attributable to the disproportionate decline in sales in the City of Toronto versus surrounding regions.
• The average home prices in the past three years have increased by about 7 - 9% whereas the average increase in wages is less than 2% in the same period of time.  It became more difficult for the first time buyers to purchase their first homes.
• Net migration to Toronto this year has slightly reduced (for example, from China) compared to the past few years.
   

1. Review of 2012 Housing Market year-to-date

• Both resale and new home construction activity will reach high annual levels in 2012; however momentum will slow in the second half of the year and into 2013 (refer to Chart 7.1 Forecast Summary Toronto CMA 2012).
• MLS sales will total 95,000 this year at an average price of $500,000. 
• As the market begins to be stabilized, it is actually more inductive to people who sell and buy homes, especially to the ‘move-up’ buyers because they would have more choices for their next homes and the price would be more affordable compared to the past few months.
• New home construction will reach 44,500 units in 2012 due to increased condominium apartment starts.
• Employment and net migration will slow in 2012, but are set to improve in 2013.
  
   

Slower price growth expected

The levels reached by the existing home market in the Greater Toronto Area (GTA) in 2012 will be accompanied by a gradual easing in the underlying trend during the second half of the year. Sales activity will stay close to recent levels, however the stimulative effect of historically low mortgage rates will begin to fade. Furthermore, previous strength in housing price growth coupled with a recent slowdown in employment should lighten demand for homeownership in the months ahead. Continued low mortgage rates and an improving job market and net migration flow will ensure only a mild downward adjustment in 2013.

Resale Market

Higher home prices to delay new entrants

Record-low interest rates will remain a key driver of demand in the near-term— particularly since very little job growth will be recorded this year — but will exert less force on the market. Because prices have been outpacing incomes, the carrying costs associated with buying have become more expensive and reduced the pool of potential buyers. The share of sales under $400,000 and within the reach of the average first-time buyer in the 25-34 age range has declined from roughly 70 per cent in 2008 to less than half in the first quarter of 2012. Meanwhile the savings needed to keep pace with the market and buy the average priced home with five per cent down payment has risen to $25,000 (an extra $5,000 compared to two years ago). Although intergenerational transfers of wealth may be helping some boomer children enter the market, parents may be less willing or able to assist as their accumulation of home equity begins to slow as price growth moderates.

 

2. Projection of 2012 & 2013 Housing Market

(1) Since 2009, we have experienced an exceptionally strong ‘Sellers Market’. It is forecasted that the second half of 2012 will be a softer ‘Sellers Market’ or a balanced market. The market will grow more moderately for the rest of this year and 2013.

(2) Despite slow recovery of the economy, the continued net-migration to GTA and low mortgage rates keep home buying activity in the GTA in line with the average, over the past ten years.

Value areas and housing types gain importance

With an increasing number of neighbourhoods and housing types becoming pricier for first-time buyers, homes offering the best relative value will gain more attention. Buyers tend to be more willing to sacrifice on size or location as price differentials between housing options widen. Expect detached housing in Halton Hills, Brampton, Newmarket, the west end of the former City of Toronto, Scarborough, and Oshawa to outperform as prices in these areas are offered at considerable discounts in relation to neighbouring municipalities. The same logic can be applied to multi-family housing types in relatively expensive areas such as

Central Toronto, where row homes, semis and condos sell for less than half the price of singles.

(3) *The sales-to-new listings ratio is the % of homes sold (Demand) compared to new listings (Supply). Sellers market is when the % is above 55%; balanced market is between 40-55%; Buyers market is when the % is below 40%.

 

Note:  If you are selling your home in a balanced real estate market and in a slower economy, it is absolutely essential to find an agent who has strong expertise in this complex market and a proven track record, especially someone who is knowledgeable of your neighbourhood. 
 

3. Condo Market

Condo price growth faces stronger headwinds

Despite the price and location advantages that should support a fairly stable outlook for condo demand, resale price growth will be challenged by increasing supply pressures. Appreciation has already slowed considerably — the quarterly growth profile for prices has flattened out and annual rates are half the levels recorded during the past two years. A big factor has been the increasing number of units listed for sale as more projects are completed and registered.  The demand response to these newer, higher-priced and often smaller units has been tepid, pushing unsold listings higher and softening overall resale conditions. As completions remain close to record highs (approximately 18,000/year) in the coming years, there will be limited potential for condo prices to rise by more than inflation.

Market conditions will support prices for singles

Single-family home price appreciation appears to have better upside potential than condos as existing homeowners continue to move up in the market and supply growth remains limited. Improvements to affordability in recent years have allowed a lot of first-time buyers to get into the market. Also, strong price appreciation has allowed them to accumulate a considerable amount of equity in a fairly short period time, putting many in a position to be able to move-up in the market. So while the average single detached price has risen above $600,000 in the GTA, the carrying cost with a 20 per cent down payment is easily affordable for owner households earning the average income (approximately $120,000).  However, existing homeowners will face challenges in moving up as the ability to sell their current home is impacted by less first-time buying and overall new listings in the market remain close to current levels. Much has been said about the lack of listings for single family homes in relation to demand. However, as a share of the existing stock, listings are fairly close to their longer-term average and can be considered to be at an appropriate level given underlying economic conditions. While some modest improvement can be expected, growth in listings will continue to be held back by the marked down in low-density development adding fewer units to the resale stock.

4. New Home Market

Condos will push housing construction higher

A strong start to the year will boost new home construction in 2012 before falling back in line with recent rates of household formation during the remainder of 2012 and next year. Condo starts will reach approximately 25,000 units in 2012

following a banner year in 2011 for pre-construction sales. An expected slowdown in new condo pre-sales will weigh down the number of projects beginning construction next year, however the level will remain fairly high as some projects opening this year face delays in getting started. The construction of singles will slide a bit this year then remain flat, while row home starts will move higher in comparison to the past few years.

Condo development set to gear down

The level of condo construction underway this year will mask the beginnings of a slowdown for the industry. Pre-construction activity will moderate as sales centre demand softens. With asking prices for new launches having escalated to an average of more than $600 per square foot in the first quarter (an extra $100 compared to two years ago)1, the prospects for past rates of appreciation upon completion to continue have dimmed. Market conditions for newly completed resale units (discussed in the Resale Market section) are suggesting an average price ceiling for end-users of approximately $500 per square foot, which will be challenged to move higher as supply competition remains strong. As the slowdown in resale price appreciation becomes clearer in the months ahead, it will provide a signal to some buyers to resist purchasing at new project openings. Even those who buy with intentions of holding after completion should scale back as the up-front investment cost necessary to break even in the rental market has risen well above 20 per cent of the purchase price — the typical deposit that developers ask for.

The challenge of rising unsold pre-construction inventory

As pre-sales trend lower and unsold pre-construction inventory edges up, it will be important for developers to be cautious in opening new projects. Already, unsold units in preconstruction have moved back up to their highest point since the recession. Although measured against recent sales levels, unsold supply is low —approximately six months worth — a record number of new projects set to open this year could quickly see that metric double. Furthermore, it won’t be as easy as it was in the early economic recovery period to bring inventory down by ramping up incentives due to quickly rising land costs and tighter conditions for financing. As a result, new projects could face delays or even cancellations.

Construction of singles will continue to be held back

The potential for rising supply in the condo market is in stark contrast to what developers of low-rise housing (singles, semis and rows) are up against. They continue to struggle to keep up with demand as strong interest in upper-priced homes and limited listings in the resale market create line-ups at many new project openings. In the end, the number of single-detached homes that will begin construction this year will be down by over 10 per cent and the low-rise category will represent their smallest share of housing construction in decades. Reduced land zoned for low density housing and infrastructure capacity limits will continue to restrain the number of new developments available to buyers, regardless of demand. According to RealNet Canada Inc., remaining supply available in new single detached projects is half the level from five years ago. This will work to restrain starts to about one-third lower than levels reached over the past decade, capping new construction at 10,000 units over the next couple years.

Row homes will see growth

One area of growth within the low-rise segment will be the construction of row homes this year. Particularly tight market conditions for mid-priced resale homes and a limited new supply of larger-sized condos will boost row home starts by over 40 per cent. Row homes have developed a niche offering within the new home market by being able to supply relatively affordable ownership options within infill settings, which complies with the province’s growth objective towards greater multi-family development. This form of new housing development has become especially popular in the York Region.

5. Local Economy

Conditions in place for job market improvement

Growth in the Toronto labour market will lag the rest of the province, and the country in general this year. The level of employment will remain virtually unchanged, keeping the rate of unemployment above eight per cent — almost a full percentage point higher than the Ontario and Canada averages. Labour market slack in Toronto will lead income growth to fall below the general rate of inflation this year and also attract the lowest level of net migration into the region in over ten years. However, the prospects for the job market appear to have brightened, setting the stage for an improvement in housing demand fundamentals in 2013 that will help support sales going forward.

Perhaps the clearest signal comes from the Conference Board of Canada’s Help Wanted Index, which measures growth in online advertised job postings and has been outstripping employment growth for several months now. It seems fitting that local businesses would be gearing up to hire following considerable strength in corporate profits and business investment in recent quarters. Nonresidential

building permits in Toronto have trended up sharply to a new high while average vacancy rates in the office market have declined to just five per cent. According to Colliers International, most of the office space under construction is located downtown. This should help provide a lift for financial services employment in the city, which has been one of the main drags on jobs as of late. Goods producing industries also appear set to increase hiring as auto sales in the U.S. have rebounded — which will lead to relatively stronger growth in Durham Region employment — and labour demands remain high from the record number of condos under construction.

6. Mortgage Rate Outlook

CMHC uses publically available information and the consensus among major Canadian forecasters as a basis for its interest rate forecast. Although there is significant uncertainty, consensus forecasts suggest that interest rates are not expected to rise until at least later in 2012, but will remain low by historical standards, thus supporting the Canadian housing market.

According to CMHC’s base case scenario, posted mortgage rates will increase near the end of 2012. For 2012, the one-year posted mortgage rate is expected to be in the 3.1 to 3.6 per cent range, while the five-year posted mortgage rate is forecast to be within 5.0 to 5.4 per cent. For 2013, the one-year posted mortgage rate is expected to rise with interest rates and be in the 3.5 to 4.1 per cent range, while the five-year posted mortgage rate is forecast to be within 5.1 to 5.6 per cent.

 

7. Summary
 

Overall, the Canadian banking regulations, low interest rates and net migration have helped to protect Canada from the ‘extreme’ economic blow that faced in other parts of the world including the European countries and the United States of America.  It has rebound to positive economic growth since the 2^nd quarter of 2009, ahead of all the G8 countries.
 

It is expected that the Canadian economy will have a moderate growth in 2012. The real estate market will be maintained in a healthy but more stabled and moderate growth alongside with the economy with about 95,000 resale transactions and an average price of about $500,000 in 2012.