What to Expect for 2018 – A Look Into The Future of Toronto Real Estate
In short, this coming year will continue on where 2017 left off with demand outpacing supply in all sectors including single family, condos and rentals. There will be a lot of turbulence caused by the implementation of the “Stress Test” and also looming interest rate hikes will further challenge affordability leading to slower price growth than we have seen in the past two years. These effects will not be long term but they will impact the 2018 market.
The “Stress Test” comes into effect January 1, 2018 so we can expect some instability in the marketplace in the fist and second quarter. The long term effect will be nominal as consumers adjust to the new rules and scale down their expectations of what they can afford to purchase. Buyers will still buy homes and condos but they will be of a smaller size and lesser price point. In short, buyers will adjust and go on purchasing what they can afford. The short term effect caused by a media frenzy scaring everyone into thinking the market is going to collapse will likely be more severe. The first 3 to 6 months of 2018 will likely end with less sales than in the same period last year and lower than expected price growth until this period of uncertainty passes. The only purchasers who will be shut out of the market by the “Stress Test” will be first time home buyer’s who will now have to wait longer to purchase a home.
Also, we are likely to see interest rates increases in 2018. Last year we saw the Bank of Canada raise rates twice and we can expect increases in 2018 as well if the economy continues to grow as expected. This will also cause some instability in the market as consumers take a “wait and see” approach before purchasing a property. Really, unless you are paying cash, waiting for higher interest rates so that you can possibly pay less for a property is not to your benefit. Although, most will not want to pay top price and at the higher rate and that is where the uncertainty will lie. Expect caution from buyers and little flexibility from sellers and therefore fewer transactions in the year to come.
With the threat of interest rates increasing in the coming year, it may be a good time for those with variable rate mortgages to take a good look at the effect higher interest rates will have on their budgets. It may be worth shopping for a good fixed rate mortgage (which you will not get from any of the 5 major banks) and locking in a rate for 5 years. If you email me I will tell you where to find the best rates.
The real bad news is for renters and first time home buyers who have not yet purchased. The “Stress Test” and higher interest rates combined with the effects of “Rent Control” (and Bill 144 which I will write about next week for all of my clients who own investment properties) will be the cause of a substantial contraction of the supply of rental properties downtown leading to much higher rents and the possibility of “Key Money” becoming commonplace for those looking to secure an apartment. Those renting in Condominium buildings may be forced to leave as landlords sell off their rental apartments due to rent control legislation restricting their ability to increase rents particularly if interest rates increase. Those who do not own their homes will be forced out of downtown unless they are high income earners.
The future of the downtown Toronto real estate market is strong. In fact, I think we will see an extreme shortage of supply in the core over the next 5 years leading to large scale prices increases. I expect condo prices will go from $900 per square foot to $1500 per square foot over the next 5-7 years and single family homes will close to double in value. Of course interest rates will play a factor but the pressure to own downtown has never been larger. We live in what is one of the greatest if not the greatest real estate markets in the world right now in terms of growth, stability and more importantly “coming of age”. Toronto is becoming a mature real estate market meaning it is still relatively cheap now but it will not be for long as residential development in the core becomes greatly constricted by scarcity of land at a time when commercial office development is at an all time high. More people working in the city and a restricted ability to create new housing will bring about a drastic increase in prices. This is the time to make money in real estate in Toronto but it will not last for ever.
If any of you have any questions or concerns about whether you should buy or sell now, investment properties you own and what to do with them, mortgages or anything else real estate related, please let me know. Really, there are no dumb questions and I am happy to help.
Happy Holidays and wishing you all peace, happiness and a prosperous 2018.