What Really Happened in Toronto’s 2017 Real Estate Market & What’s to Come in 2018

2017 in review article image.jpg

It’s been a turbulent year for the Toronto real estate market. Incomprehensible demand and speculation, government intervention, and rising interest rates have seen the market go up, down and sideways

People say hindsight is 20/20, but I think there’s value in taking a high-level look at the real estate market in 2017 and what to expect in 2018.

Looking back to the beginning of the year, steady momentum from the 2016 fall market led to record breaking growth in the new year. The unusually high demand from buyers who were unable to secure something in spring and fall, overwhelmed the winter market to see steady price wars. The result was 30% price growth between January and April in Toronto.

In April as a response to the market, the Ontario government introduced the fair housing plan that consisted of 16 new rules that would hopefully cool the market. Most notably was the 15% non-resident tax. Knowing what happened in Vancouver after the introduction of their tax, the market almost immediately halted after the announcement. As you can see in the chart below, the rules definitely had the intended effects; for 4 months, average prices in Toronto fell.

Source: Toronto Real Estate Board

Source: Toronto Real Estate Board

Interestingly enough, Statistics Canada released this week that merely 3.4% of homes are owned by non-residents. That tiny percentage cannot be the sole reason for the dip in prices we experienced throughout the summer. So why was there such a drastic change?

The reality is that the majority of the rapid price acceleration was driven by speculative domestic buyers. While I believe that the reason for locals buying homes was, for the most part, not speculation, I believe the psychology behind price valuation and bidding wars led to speculative buying behaviour.

There’s no doubt that we have intense housing demand in the city. With over one hundred thousand people moving into the city every year, and only 35,000 - 40,000 new units being produced, people are constantly looking for a new place to live.

However, the mentality that prices will continue to accelerate - making the 10% premium you pay for your house insignificant in the long run - and the desperation to pay whatever it takes just to secure a property, was the ultimate speculative action that had prices increasing 7.5% each month.

The government’s intervention  to cool the market had everybody take a step back. The biggest impact that the Ontario Fair Housing Plan had in the short term, was not stopping foreign buyers, but rather changing the sentiment around real estate at the time. As buyers' confidence in future housing prices waned, their willingness to participate in bidding wars or to overpay for a house lessened. As caution increased, with some completely leaving the market to wait to see the effects of the rules, sales activity dropped alongside prices.

Since the turning point in August, the market has for the most part normalized. Prices have stabilized and buying behaviour is less heated. There are still many areas recovering from the summer market, and others are booming after barely slowing down in the first place. While the Ontario fair housing plan did it’s intended job in the short term, we’ll see what happens long term.


What to expect in 2018

Moving into 2018 I expect to see a continuously steady market. After a crazy 2017, I believe more typical market dynamics will resume this year - a slow winter and an active spring market.

Prices will likely remain steady, with up to 5-10% growth throughout the year.

Expect news headlines to showcase massive drops in real estate prices as we hit the one-year mark from the peak in 2017. The Toronto Real Estate Board typically presents real estate growth in a year-to-year format rather than month-to-month. So come January, even if prices are up month-to-month, they will still likely be down from last year, providing the media with entertaining headlines.

The bottom line is that the fundamentals have not changed, our population is increasing and there are many people looking to find a place to live in a limited amount of space. However, after a whirlwind 2017, rising interest rate and booming equity markets, I don’t expect to see shocking growth patterns in the real estate market moving forward.

For young families looking to upgrade or first time homebuyers, 2018 could pose a good opportunity to jump in. Prices are relatively steady and market activity is much more manageable. For years, buyers wanted to wait for a cooler market to participate in, and that time has come. Long term prices in Toronto will continue to rise, but hopefully at a sustainable rate.