Early last week, the media made the call that Toronto has become a buyers’ market. The monthly sales-to-new listings ratio for real estate in June fell below 40%, which basically means buyers have more choice right now among a larger supply pool. But the condo market might still be telling a different story. What we want to know is this:
If Toronto is now a buyers’ market, where are all the buyers?
According to the Toronto Real Estate Board’s analysis of the real estate market en masse, many would-be buyers are staying on the sidelines right now watching for further decreases in month-over-month prices. Sellers, on the other hand, seem to be listing their homes with the belief that price growth in Toronto real estate has reached its peak. But TREB’s analysis is largely invested with Toronto’s freehold housing market, skewing the picture if you want to look only at condos for sale in Toronto.
Using TREB’s numbers, there were 2,971 new condo apartment listings in June and 1,702 condo sales, equalling a sales-to-listings ratio (2971/1702) of 57.2%. Within standard real estate practices, a sales-to-listings ratio above 60% marks a sellers’ market and below 40% marks a buyers’ market. That means the Toronto condo market has shifted below 60% towards a buyers’ market, but is still above 40%. For Toronto condos, it’s closer to a sellers’ market.
As we explained in an earlier blog post regarding the impact of the Ontario Fair Housing Plan, the condo market saw a declining trend in sales and price growth start in late April, which continued throughout May and June. Now, the Condos.ca Market Index is showing price growth levelling out. A normal summer slowdown mixed with increased supply has pushed us towards becoming a buyers’ market, but prices are still up around 25% year-over-year for condos.
Toronto real estate market psychology is still uncertain
While prices may be levelling out month-over-month, and the slowdown is turning around, the market psychology is still causing uncertainty. Whenever governments intervene in real estate they cause the type of slowdown that we saw start in April. Real estate activity slows down because buyers and sellers are unsure about legislative fallout, sales diminish, prices take a dip–it lasts for about three months–and then the market starts to bounce back.
The shift towards a buyers’ market is less surprising than it seems. It’s a big change from the crazy sellers’ market we experienced in the winter, but it’s merely the result of market psychology. It’s a buyer’s market because buyers aren’t buying. Now isn’t that a fun little mind-bender!
The Ontario Fair Housing Plan, in combination with the recent interest rate hikes and all the media fear-mongering about Toronto’s insane real estate market, has knocked the courage out of Toronto buyers. At the same time, it has scared sellers into thinking that now is the time to sell and get out while the prices are hot. The psychology is all messed up! A smart buyer would recognize that this is a time to act. Buy now, while others are fearful. The new Bank of Canada interest hike impact on mortgage rates is another reason why now is a smart time to buy.
Anyone with a pre-approval mortgage rate before July 12, 2017 will have been locked in for the next 120 days (3 months). You’ll want to buy with your lower locked-in rate. To talk more about the impact of the new interest rate on mortgage approvals, we reached out to James Harrison, President of Mortgages.ca.
How the interest rate hike impacts buyers in the Toronto condo market
The Bank of Canada’s prime rate increase was only for 0.25%, which is not a lot. This works out to an approximate payment increase of $12 a month per $100,000 mortgage balance owed.
“I strongly recommend new buyers take a variable mortgage product,” says James Harrison. “And I also recommend that anyone currently carrying a variable mortgage to stay with that product.”
“Their bank will probably reach out to them to lock into a fixed rate, because it is the most profitable product for the bank. It is not in the client’s best interest to lock in now as the fixed rates are 0.50 to 0.70% higher. It would be like self-imposing a rate increase of over 3x the current rate increase.”
Within a variable rate mortgage, there are two types:
1) A fixed-payment variable, in which you pay the same amount each month regardless of interest rate changes. The interest rate changes the proportions paid to the principal and interest. As a simple example, instead of 50/50 split between principal/interest, it becomes 40 to principal, 60 to interest.
2) A non-fixed payment, in which your monthly payment fluctuates in accordance with interest rates. Your proportion paid to principal remains consistent, but you pay more up front with the interest rate hike.
“For those in a type 1 variable rate mortgage where the payment is fixed, I would still highly recommend they increase their payments to match the increase in rate so they stay on track with their amortization schedule.”
“I also suggest that if you are a variable rate client, you should increase your payments as if you went with a fixed rate. This is a strategy I advise to all variable clients from day one.”
Take the variable product but make your payments as if you went fixed
“This way you are paying extra towards the principal of your mortgage and NOT the interest. You will be paying off your mortgage a lot faster, and when the prime rate goes up, (like it just did) you will already be financially comfortable to meet the higher payments.
“It is never a good plan to budget around a variable payment only. Having a Mortgage Plan is very important. The rates will go up and down, but having a plan will be the key to paying off the mortgage faster and with the most flexibility. This is another reason why working with an experienced mortgage broker will save clients tens of thousands over the life of their mortgage.”
“It’s not all about rate. People have to remember that. It’s about having a financial plan and strategy.”