August 25, 2022 | Fall Market
I often find the fall season of the Toronto real estate market to be an important pivot point. And this year, it will be a very important one after interest rate hikes have sent a missile into the upward trajectory of Toronto property prices for most of this year. But why is the Toronto fall market important to watch?
In a traditional year, the Toronto real estate market has many sales in the spring, then quiets down in the summer. It reboots in September with increases sales in October and November, and then quiets down in December. There are usually two reboots in the real estate market each year. One in September and on in January. During these reboot or pivot points, we usually get a clear indication of how the market will express itself for the next several months. So, if the market starts off strong in September, we usually have a strong market until the end of the year. If the market sinks in September, then we will likely sink in price until the end of the year. As almost every human being in Toronto interested in real estate knows, the Toronto market has changed significantly since the beginning of the year. Not only are we having an increase in inventory, a decrease in the number of sales, but we are also seeing month over month drop in prices.
Properties enter the market. Some of them sell. Some of them don’t sell and are terminated. Some simply don’t sell and remain on the market, part of the growing inventory. Now, to be clear, the inventory is not so big to lead to any red flags at the moment. It’s just bigger than last year. From the perspective of the past five years, it’s fairly average. We have a longer way to go to really see the inventory build. This fall will tell us whether sellers will continue to wait for the market to improve to sell their properties or if they will feel compelled to sell sooner. We’ll also find out if buyers are ready to come back to the market, or if they will continue to wait.
So what is going to happen this fall? Will interest rates increases continue to damper the Toronto real estate market or will we have the return of some confidence in the market? Will prices turn around and go up or sink a little more all the way to early 2023? I don’t really know for certain, but let’s have a look at what could play out.
Let’s start by looking at would could happen if prices begin to rebound after a rather steady decline for most of this year. And to see how this may happen, we do need to look at the transactions from this summer for clues of what may happen in the fall.
What I find interesting from a Toronto point of view. People are starting to buy again this summer. Those properties that were stuck and not selling in June and early July because of uncertainty are starting to sell after months of being on the market. Many listings that didn’t sell were terminated. The properties that did sell were mostly purchased by bargain hunters looking for a deal, but they are selling nonetheless. I’ve seen serious interest on properties in July more than I have seen in June on listings. From my experience, there were more tire kickers in June waiting for the bottom to arrive, and in July I saw more buyers that actually purchased than the previous month. I should remind you that from a year ago, there are still far fewer transaction in July 2022 than July 2021 or any year in the past 20 years. So, the real estate market in the summer is still remarkably slow for transactions. I do think, however, there was a flood of listings in the late spring from people who had the sell because the sellers already purchased a new property. So, there were those seller’s homes that needed to be sold before they took possession of the new home. This summer, some buyers knew that those sellers that bought in the spring had to sell, and they were able to buy more easily. I certainly worked with my buyers to secure the best deals. The late spring/early summer sellers simply didn’t have many bargaining chips. They had to sell in order to close on the purchase they made. This fall, there should be far fewer of these kind of sellers. Many sellers may sell first and then buy their property. They may ask for longer closings. There will be fewer sellers who have to sell. So, there may be fewer bargains.
If the news continues to indicate that inflation is coming down and the interest rate hikes are subsiding, we may begin to see a bounce back. All the buyers who have been waiting to see what happens during the turbulent real estate market of 2022 will be back wanting to buy at what they perceive as the bottom of the market. Why? What we are seeing this summer is that inflation is slowing down a little. Though we don’t know if and what amount interest rate hike will occur in September, it is widely anticipated to be closer to half a percentage point as opposed to a full percent from the previous increase this summer. If this plays out, then we have an indication that the rate hikes are slowing down and inflation is slowing down. It may be enough to signal to buyers-in-waiting to make their move.
There is an alternate reality that may play out here as well. And I don’t want to be the cheerleading real estate salesperson who announces the market will always go up. There is a very real chance that we still have some downward motion left.
So, let’s look at how the market may pivot down.
Many sellers may be waiting until the fall to sell because they didn’t like what they were seeing in the spring. If that’s the case, we may see a larger number of listings appear than usual creating even more inventory. Anecdotally, I have had discussions at my office meetings with many agents with listings that were suppose to come out this past spring, but the sellers decided to wait. Many have told me that they are waiting to the fall in the hopes that thing will be less uncertainty during the September reboot. With more inventory, buyers may have a better choice and better options. Still, sellers in the fall will be different than the spring. Fewer of them will have to sell, and may even wait until next year if they don’t receive the price they want.
Of course, the real big bucket of water that has been thrown on the hot Toronto real estate market is clearly the interest rate hikes. Interest rates are very much driving prices here more than any thing else. In fact, the increase number of sales and interest I’ve witnessed in late July and August (compared to June) may have to do with buyers who locked into a rate and need a firm sale before their current rate expires. If they didn’t buy in the summer, they would be buying in the fall where there may be lower prices, but they would also have to have to do a new pre-approval at a higher interest rate, qualifying for less of a mortgage. To give you some perspective: A 1% increase in mortgage rate equals approx. $530/month increase in payment on a $1M mortgage. If rates go up again as expected, people will qualify for less. Properties will be more expensive to carry. Often buyers of January of this year lament that they paid so much for their mortgages, but if they had a locked in rate, many of the properties purchased in January would be the same or slightly less if we factored in the current interest rates. This is in Toronto right now. This is not necessarily the case outside of the city.
The bottom of the Toronto real estate market will likely be the fall or early 2023 unless some unforeseen factor changes the direction of the market. I’ll remind buyers that we are experiencing one of those rare moments when it is a good time to buy, even if you have a higher mortgage rate. There is currently less competition, more negotiating on price, time to see properties before a bully occurs, and deals that have conditions. We’re in a very different market that all of 2021. If you are buying, the fall may be a good time to make your move. If you are buying and selling, you can do this in this market, but you should have a plan. Right now, I think it’s a better idea to sell first, then buy, but it may depend on the saleability of your current property and what you would like to buy.
The pivot point of this fall will be particularly interesting this year after a rather turbulent 2022. The bottom may be here now or it may drag out to 2023. Just remember, once the fear of interest rate hikes subside and settle in, we still have a problem of limited inventory in the whole Toronto region for the long term. In other words, these buyer markets where buyers have the upper hand will be rare in the future.