Three Bold Predictions for 2022 Real Estate

Last week we took a look back at 2021 (see here if you missed it) so naturally, we are now going to look to the future. More specifically, our predictions about what may happen in the real estate market in 2022 and the key reasons why we think so!

Let’s start with the good news. In July of last year, the city of Toronto released a document titled Expanding Housing Options in Neighbourhoods followed shortly by a survey which aimed to gain a greater understanding of the needs, wants and pain-points for those who own or want to add density to their property. Two key focuses are on enabling missing middle development in areas where it is not currently permitted and providing greater facilitation for areas where it is. With the numbers clearly showing that Toronto’s demand for housing is outpacing its development, missing middle projects offer a vital and necessary vehicle for housing development.

Our prediction is that steps will be taken in 2022 that will allow for certain properties to be converted into triplex and fourplexes, as of right (meaning no requirement for zoning amendments), and loosening of parking requirements. What’s more, we believe that certain authorities will be retracted specifically at the councillor level to make the process of adding neighbourhood density be more efficient and fair. “Not in our neighbourhood” mentality is empowered by councillors who want to keep on the good side of their constituents and we hope to see this reformed.

Now for the bad news (for small investors). As part of the Federal government’s strategy to tackle house risks, the CMHC will be reviewing increasing the minimum down payment requirements for investment properties, from the current 20% minimum to between 25% to 35% down. Additionally, we could see other restrictions regarding leveraging an existing property to finance an investment. This could materialize into no longer being able to borrow from your existing equity to fund a down payment of an investment/ 2nd property. This will likely trigger strong responses either for or against, so we are simply going to provide our objective predictions of how this may play out.

1. The average person will no longer be able to invest in real estate as a method for wealth building, bringing rise to the era of Joint Ventures.

2. Existing investors will go on a buying frenzy, utilizing today’s cheap debt as much as possible before the potential changes come into effect.

3. Bank of Mom & Dad may dwindle as the ability to take out equity from the family home to purchase with/ for a child disappears. What’s more, moving up while retaining your original property as a rental will be incredibly difficult. 

Many of our colleagues are predicting that condos will outperform freeholds based on price growth metrics, but we boldly see things differently… Three factors impact price growth; demand, supply and perceived value.

Annual new listing figures for freeholds have remained steady since 2018, while active listings, the number of listings remaining after any given month, have declined, down a whopping -45% for 2021 compared to 2018. For Condos, total new resale listings were up +31% for 2021 compared to 2018, with active listings up +10% since 2018. It’s worth noting this figure is down compared to 2020, back in line with 2017-2019 figures. This doesn’t take into account preconstruction numbers, which add a substantial amount of inventory annually as well. Reviewing this it’s clear that freehold demand is outpacing the supply, while demand for resale condos, numerically speaking, is not.

Speaking to supply, we can’t create more land and although density is happening, the nature of freeholds limit how many are available, while condos can be developed in much greater volume. We see this reflected in the annual new listing figures for freeholds (2017 – 19,937| 2018 – 17,223| 2019 – 17,972| 2020 – 16,628| 2021 – 17,284) relatively consistent and predictable, while condo resale volume (2017- 28,741| 2018- 25,331| 2019- 24,803| 2020 – 33,562| 2021 – 33,182) fluctuate and experienced a mass divestment during covid.

Lastly, we need to consider the irrational aspect of buying a home – perceived value. This varies by individual but some key factors do impact it – benchmarks, substitutes and scarcity. Toronto is on par with other global cities and increasingly its occupants are either from or have lived abroad. This means the benchmarks used to frame value are influenced by that knowledge. $1.7 million for a detached home may sound expensive, but for anyone who has lived in LA, Hong Kong, New York, Mumbai, Moscow etc these prices are to be expected, if not a bargain.

As for substitutes and scarcity, these go hand-in-hand, creating a sense of urgency to get into the market before it’s no longer an option and again an urgency to pay the little bit extra not to lose when an individual finds a property they like. For condos, the motivations of scarcity and substitution are not nearly as strong, as not only are new condos developed each year but the layouts and styles of condos are fairly generic, meaning if you miss out on this one you can find an identical one shortly thereafter.

It’s for all the above reasons that we believe, yes condos will do great this year, but freeholds will remain the strongest performing home type.

Lastly, we wouldn’t be good realtors if we didn’t make a price prediction or two. So, here it is, Toronto prices will rise, likely by another 10%… Happy now? All jokes aside, all the elements for price growth in Toronto are present. A more interesting prediction is our belief that Durham’s price growth will outperform Toronto again in 2022. According to the Home Price Index, all property types in Durham appreciated a staggering +42.3% YoY in 2021, compared to Toronto at +23.2%. Although we don’t expect to see another +40% increase, we do believe Durham will outperform Toronto by 10% at minimum.

It’s important to note that although Durham is appreciating faster than Toronto, it is still more affordable relative to other 905 areas, with the average detached price in Durham being $1,178,857 compared to Toronto at $1,698,178, Peel at $1,601,465, York at $1,816,614 and Halton at $1,810,446.

Considering Durham it is still more affordable than other 905 areas, its close proximity to Toronto, and the price difference, we predict Durhams excellent value proposition will continue to attract demand and with that, greater price growth than Toronto.