We are going to be frank, 2020’s real estate market was not that unusual. The year started off extremely strong, with busy offer nights, home prices accelerating and transaction numbers well above the previous years. By the end of 2020 total sales for Toronto were almost identical to 2019, and the average price for all property types was approx $985,910 or 11.6% higher than that of 2019. What was unusual was the rapid shift in demand to freeholds and away from condos, as well, the timeline for purchases was compiled into one elongated period rather than spaced out over the two “seasons” we typically see. The result of this was freehold prices accelerating due to increased demand that outpaced the normal supply level, while condo prices saw effectively zero growth year-over-year, due to an overabundance of listings and reduced demand. We will cover both in more detail below.
Looking at the beginning of the year, total sales from Jan-March considerably outpaced 2019 and average prices followed suit. Then, in only a matter of a few days, real estate effectively halted completely in April. Sales dropped 70% compared to 2019, the average sale price dropped -11% MoM and -2.5% YoY. What followed was one of the most interesting examples of how, when it comes to real estate, value is in the eye of the beholder. Sales rocketed back in June-July and remained steady all the way into the holidays. However, a disparity between condo and freehold demand quickly became apparent, with the demand for freeholds far exceeding supply and the demand for condos falling well below the supply. This led to average prices blowing 2019 out of the water, peaking at 24% higher YoY in August and +11.56% for all of 2020. In Nov and Dec prices appear to drop, this was merely a result of condo sales recovering, up 75% YoY in Dec, and representing a greater portion of total monthly sales during those months.
The sharp-eyed among you will notice that condo prices ended the year below where they started in Jan. What hurt condo values? The first was a shift in demand to freehold properties, as a result of work from home protocol, lockdowns, the desire to spread out, avoid elevators and have green space. The second was the nature of condo dwellers. Most people are familiar with the fact that Toronto has a larger number of rental condos and most depend on premium rent prices to support them. Through a combination of Airbnb rule changes, increased unemployment, immigration drying up and students staying home, the rental market in Toronto saw a dramatic downturn in prices. We’re talking $100’s off what a unit would have previously fetched and days on market (DOM) creeping past 100 days. As a result, there were 37,541 condos listed for sale, up 31.3% over 2019, but a demand that just did not support it. When we look at condo prices across all of 2020, this lack of demand meant that prices effectively remained neutral, while all other property types ended the year with noticeably higher average prices. Condo sales did pick back up in Nov and Dec, reducing Months of Inventory by almost half. If new listings remain stable the current demand for condos should be able to absorb the excess inventory, providing price stability and perhaps modest gains.
Let’s go into more detail on the contributing factors we mentioned a little bit in the introduction. Yes, Covid was obviously the biggest factor in what happened to real estate in 2020 but we can go deeper. The way we see it there are two groups of factors, hard factors, i.e quantifiable changes in key variables that impact the broader real estate market and soft factors, i.e changes to people’s preferences and outlook regarding individual property.
The two biggest hard factors that contributed to almost all the other changes to real estate in 2020 were the increase in unemployment and decline in immigration. Amid the pandemic, Toronto reported the highest unemployment rates in all of Canada with over 14% unemployment rate in June & August. Unemployment has since dropped to approx 10% but still sits well above the national average. What’s more, a study by Toronto Foundation found that approx 30% of people in Toronto are struggling to pay rent, mortgage, food, utilities, and other essentials as a result of the pandemic. Additionally, the pandemic’s impact has been greater for those with low wage, temporary or part-time employment (those more likely to pursue rentals and smaller condo purchases) while high wage earners saw an increase in work between February and August of 2020.
As the most multicultural city in the world, immigration is extremely important to our city. According to the Ontario Government, Ontario experienced a 62% decrease in international migrations in Q2 and Q3, meaning over 56,000 fewer people came to Ontario in 2020 during that time. Interprovincial migration also saw similar trends with a net outflow of 37 people in Q3 (first time since 2015), compared to an inflow of almost 3,500 people during the same time last year. It is safe to say that the sharp decrease in immigration played its role in the usual demand patterns.
Soft factors are the changes we identified through a combination of our client interactions, watching sales trends, and keeping up to date with various publications. One of the more prominent changes in 2020 was a shift to online learning and working. In December, approximately 28.6% of Canadians were working from home and a number of Canadian universities had gone digital for the Fall semester. The fast shift to home-based activity decreased the need for people to prioritize proximity to work or school, meaning many local and international students didn’t have the need for their student rentals and many professionals faced the challenge of living, working and sharing spaces not usually designed for it.
The above-mentioned shift led to the next major trend, a desire for more space. Many professionals who faced the need or desire for more space and, for the first time, the flexibility of no longer needing to commute to work, decided to trade cramped elevators and small balconies for freeholds offering a backyard and more space, or at a bare minimum larger condos. This shift in preference took a portion of the buyer pool who would have previously sought a condo and added them to the freehold buyer pool. With this increase in demand and no major change to freehold supply, we saw an acceleration of prices for detached, semi and rowhouse properties.
The 2021 spring market is going to be the busiest in terms of total sales, we’ve seen in the last five years. There is a large number of buyers currently on the sidelines waiting for the pandemic to ease and for clarity from their employers on whether they will be returning to the office, and in what capacity. Once the lockdown comes to an end, and the risk of transmission decreases with warmer weather and the prevalence of vaccinated people, that pent up demand will finally become active in the spring. Additionally, according to Canadian Business, household savings skyrocketed this past year, especially amongst higher-income earners. They estimate Canadian households are sitting on 90 billion in excess cash, which represents significant purchasing power.
Two main factors will contribute to this rise:
- The continuation of cheap debt via low-interest rates.
- Canada expects to welcome over 400,000 immigrants in 2021, with the expectation of about 40% immigrating to the GTA.
The only other time Canada allowed over 400,000 immigrants was in 1913, and it has never come close since.
Many buyers will be forced back into the condo market as a result of price growth in the freehold market (detached up 8.24% (YoY), semi’s up 15.49%(YoY)). Additionally, with the expectation of large immigration numbers and international students returning in the fall, rental prices should recover. This will attract investors back into the condo market. Toronto continues to rank as one of the most livable cities in the world, and we expect foreign investment to return.