The Review · Vol 06/24 · May 2024
The great rate cut puzzle: Is this the calm before the storm?
Written by Pawel Parafianowicz, Founder | Broker, Coral Realty Group ·
May kicked off with a flurry of activity in the real estate market, especially for freehold properties, with new listings flooding in and eager buyers on the hunt. However, as the month progressed and news broke about the potential rate cut by the Bank of Canada, buyer demand noticeably waned. It’s puzzling, isn’t it? A rate cut is typically expected to spur buyer interest.
Now, a couple of weeks into June and after the 25 bps rate cut, the market has cooled even more. Freehold properties that would have seen multiple offers a month ago are now lingering on the market with little interest. Is this the calm before the storm?... Make sure to read our thoughts below!
Buyer's or seller's market?
3.3 months of inventory: a balanced market.
- Seller's under 2
- Balanced 2–3.5
- Buyer's 3.5–5
- Extreme buyer's 5+
Every May, months of inventory
Average price
Average price saw a 3.6% increase from April to May, mainly due to rising prices in semi-detached homes and townhouses. When these property types are excluded, prices have remained stable both month-over-month and year-over-year. Toronto's average home price has risen for the fifth consecutive month, beginning at $959,915 in January.
Despite this upward trend, the market might cool down as we approach summer, given the high interest rates and growing inventory. Although the Bank of Canada recently implemented a 25 bps rate cut, it might not be enough to sustain price increases. If another rate cut happens in September, we could see a boost in market activity, particularly after the summer holidays.
Average price
$1,193,202 ▼ −0.3% vs a year earlier ($1,197,021)
- 2024
- 2023
- 2022
Average price by type
HPI
The Home Price Index provides an apples to apples comparison of home prices in the city and reflects a more accurate change in prices. According to this metric Toronto home prices are down 3.95% (YoY), detached down 2.44% (YoY), semi-detached down 1.25% (YoY) and condos down 6.16% (YoY).
MLS® Home Price Index
Sales
Sales saw a modest increase of 4.65% from April to May, largely driven by the freehold market. Detached home sales surged by 13.5% month-over-month, and semi-detached homes saw a 14.1% rise. On the flip side, condo sales dipped by 0.9% month-over-month. While the month-over-month data appears encouraging, it masks the broader trend of significantly lower demand compared to last year. Year-over-year, sales have dropped by 17.8%. Excluding the pandemic-affected April 2020, May is typically a bustling time for the market, with sales usually exceeding 3,500 units. However, this May, only 2,701 units were sold, highlighting the subdued market activity.
Sales by type
New listings
New listings saw a significant influx of new listings, with a total of 7,360 hitting the market, well above the five-year average of 6,164. This represents a notable 28% increase from the previous year. The surge was largely driven by condos, which saw a 37% rise in new listings. Detached and semi-detached homes also contributed to this growth, with increases of 17.5% and 15.4%, respectively.
However, it's important to note that sales have dropped by an average of 17.7% year-over-year. This discrepancy between rising new listings and declining sales is leading to an increase in active inventory. The big question now is: how will this growing inventory impact prices moving forward?
New listings by type
Active listings
Active listings have skyrocketed, increasing by an average of 20% month-over-month and 82% year-over-year. This surge in listings, combined with significantly low sales rates, has naturally led to a substantial rise in active inventory. The data indicates that this trend is impacting not just condos, whose active listings are up 98% year-over-year and 17% month-over-month, but also the freehold market. Detached home listings have risen 58% year-over-year and 27% month-over-month, while semi-detached listings have increased by 54% year-over-year and 30% month-over-month. We've certainly noticed a cooling in the freehold market since the end of May, and this trend has continued into June.
In the condo market, there is currently 4.5 months' worth of inventory. This means that if no new listings were added, it would take 4.5 months to sell all existing listings at the current sales rate. The big question now is: when will this influx of listings start to impact prices?
Homes for sale by type
The bigger picture
Homes sold every May, 1996 to 2024
Average condo apartment price, by year
Condo prices are back near 2023 levels.
Our thoughts
Where has the buyer demand gone? Despite a 25 bps rate cut, affordability remains a significant issue as prices stay elevated.
In the condo market, almost no one is buying. With high interest rates and lower rental yields, investors are offloading properties due to negative cash flow. Foreign buyers aren't stepping in either, thanks to a two-year ban. Non-residents living in Canada are also deterred by Ontario's 25% Non-Resident Speculation Tax.
First-time buyers are facing their own challenges. With interest rates at 4.75%, banks are lending roughly 4.25 times the income (this is rough and your situation may be different). This means a $100k salary qualifies for a $425,000 mortgage, far below the average condo price of $550k+. The high rates for HELOCs have also dried up support from the "bank of mom and dad."
This stagnation in the condo market affects the freehold market too. Many potential freehold buyers need to sell their condos first but can't. Even young couples struggle to afford freeholds at current rates. The income needed to buy a $1m-$1.4m home, along with a 20% down payment, is a high barrier. Only those moving from smaller to larger freeholds or downsizing seem less affected.
Looking ahead, the market remains cyclical, with post-pandemic cycles shortening to 6-8 months. As we head into summer, we may see continued softness, with the freehold market starting to feel the pinch. There’s speculation of another rate cut in September, which could revive demand. However, the short to medium-term outlook remains uncertain.
Moreover, with developers halting projects and some filing for bankruptcy, the housing shortage will worsen in 2-3 years. Pre-construction buying is nearly non-existent. If your agent is pushing pre-construction now, it might be time to reassess your representation.
Buyers -> Historically, market downturns have proven to be excellent entry points. With a 2-5 year investment horizon, this period of reduced demand might be the perfect time to buy, especially as the Bank of Canada has started its cycle of lowering interest rates.
Sellers -> Freehold sellers may find that selling their homes takes longer than in previous market conditions. With expected lower activity during the prime summer months, we recommend a sell-first, buy-second strategy to ensure you're covered. Just a month ago, our advice would have been the opposite, highlighting how unpredictable the market has been lately. Taking time to prepare your home before listing, including making cost-effective improvements, can significantly enhance its appeal. Staging can also help potential buyers fall in love with your home at first sight, making it stand out among other listings.
Condo sellers, we are currently at 4.5 months of inventory and growing. The only way to sell in this market is with an aggressive pricing strategy and staging. Make your unit stand out among the numerous options available to the few buyers looking. With high active inventory, we might start seeing falling condo prices.
Investors -> 4-plex properties are now legally permitted throughout the city, and certain properties may even qualify for the addition of laneway or garden suites. If you have an interest in exploring these options, please don't hesitate to get in touch with us. We're here to assist and provide further information.
Source: TRREB. Figures as published in May 2024's data, sent June 21, 2024. Market commentary is general information, not advice for your situation.