Should You Buy a House in Toronto Right Now?

Housing affordability is worse today than it was at the peak of the market, even though prices are down.

Ruth Saldanha 17 March, 2023 | 4:03AM
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Ruth Saldanha: House prices continue to fascinate Canadians even as interest rates rise and homes become more unaffordable than ever, especially for first-time home buyers. In Toronto, one of the most expensive cities in Canada, if not the most expensive, anecdotal data is coming in of a market that is more competitive than ever, even in winter, which is typically considered a slow period. So, what can we expect from here on out? John Pasalis is President of Realosophy, and he's here today to tell us what he makes of this.

John, thank you so much for being here today.

John Pasalis: Thanks for having me.

In Toronto, Demand and House Sales are Outpacing Listings

Saldanha: So, tell us a little bit about the Toronto market. How is it doing this year as compared to last year?

Pasalis: Well, prices are – I mean, it's a completely different market from last year. Last year was really the peak of the market, the peak of this bubble period where prices really hit their highest level in February of 2022. And right now, prices of course are still down, kind of close to 20% from the peak. But the bigger question is – I mean, sales are down, prices are down, everything is down from last year because we're comparing ourselves to the peak. But the most interesting trend is, when we compare ourselves to the previous six months – I mean, since July, the housing market in Toronto was quite boring. Prices were flat. There was some activity. Sales were at a 20-year low, listings were close to a 20-year low, and it was a relatively calmer market. And since the start of the new year, the market has actually accelerated. And what we're seeing on the ground is that the demand is significantly exceeding the supply of listing. So, even though we're at a 20-year low in sales, it's not the whole story, because we have to look at how many listings are coming on the market. And right now, sales and demand is outpacing the volume of listings, which is kind of creating a very, very competitive environment, which quite frankly is something that nobody expected including myself. I did not expect the market to start the year like this.

Will Bank of Canada Rate Decisions Impact Demand?

Saldanha: You mentioned that demand is high. Now, with the expectation that the Bank of Canada is unlikely to or may not raise rates as aggressively as they have in the past, do you think demand is likely to pick up from on out?

Pasalis: I don't think so. So, just to be clear, when I say demand is high, I mean higher than expected and higher compared to the volume of listings. Sales are still at a 20-year low, right? So, it's important to think about it as relative demand. And my instinct is I think actually – the Bank of Canada pausing is I think what actually created this spike in demand in some ways. I think a lot of buyers hit pause last year hoping rates were going to cause prices to fall further. And because prices have remained flat since July – again, they're down from the peak, but since July they've been flat – I think that pushed a lot of buyers back into the market. And I think now what we're seeing is even though the bank may have paused rates, we're seeing five-year mortgage rates go up again, and that actually may take some buyers off the market or might cool demand a little bit because people are more likely going to be going with longer-term rates right now than shorter-term.

Housing Affordability is Worse Now Than it was in the Market Peak

Saldanha: There's this phrase that a lot of people tend to use, which says, lower rates and higher prices are equal to higher rates and lower prices. Is this real in the Toronto market right now? What's your sense?

Pasalis: Well, what has happened right now is, even though prices have come down, the impact on our mortgage payments due to this rapid increase in interest rates is actually greater than the discount on prices. So, housing affordability is actually worse today than it was at the peak of the market, even though prices are down because the carrying costs due to the higher interest payments are actually higher. So, when we look at what it costs to buy the same home at the peak of the market, even if we factor in a 23% reduction in prices, because you're paying now 5-plus-percent on your interest on your mortgage rather than below 2%, your actual carrying costs are higher. So, in that sense, affordability is actually worse today than when it was a year ago.

Should You Be Investing in Toronto Real Estate Right Now?

Saldanha: In this environment, what would you say to people who want to be real estate investors right now? Should you be a real estate investor in Toronto today?

Pasalis: I mean, you have to be very well capitalized to be an investor. Most investments, quite frankly, don't work very well. And when I say most, I mean if you're just buying a resale condo or a resale home because the rents aren't high enough to justify the price, especially when you're paying 5% on your mortgage payments, on your interest. That being said, there are opportunities. The opportunities I see on the ground right now – the properties that are selling for decent prices tend to be the homes or the lots that require a lot of work, a lot of renovation or for redevelopment purposes. And those are selling at decent prices largely because not a lot of people have the capital to buy them and to carry the debt payments as people are going through that. And I think if you're an investor and you have an appetite for those types of projects, I think I'm seeing some decent value on those. But aside from that, to just buy a one-bedroom condo, especially if you're paying today's price and today's rates, it's going to be very hard to make those numbers work.

Saldanha: Great. Thank you so much for joining us with your perspectives, John.

Pasalis: Thanks for having me.

Saldanha: For Morningstar, I'm Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Follow her on Twitter @KarishmaRuth.


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