Canadian home prices rose in February as prices continued to climb in the hot Toronto market, data showed.
Toronto real estate prices are expected to continue rising this year after a strong 2020. Here, we break down the January 2021 data from the Toronto Regional Real Estate Board (TRREB), and highlight some key takeaways for homebuyers and sellers across the Greater Toronto Area.
Housing starts surge 23.1 per cent in January
THE CANADIAN PRESS
Sales activity for the month up 35.2% from January 2020. New listings dropped by 13.5 percent in January compared to the previous month.
TORONTO – Homebuyers in the Greater Toronto Area may have to spend more than they ever have before.
The Toronto Regional Real Estate Board said that the average selling price for homes in the area will top $1 million for the first time later this year.
The average price of a Canadian resale home has risen by more than 15 per cent in the year up to October, the Canadian Real Estate Association said Monday.
The Ontario real estate market has been surprisingly resilient during the coronavirus pandemic and has even been an engine of recovery for the overall Ontario economy. Yet, cases of the virus are on the rise in this province and open houses are off the table once again.
As homebuyers and sellers rely on technology to dip their feet into the market, activity continues despite fears and anxieties.
According to the Ontario Real Estate Association (OREA), Ontarians continue to see home-buying as a good investment. Just over one in two Ontarians (51%) in the real estate market report they are currently actively looking to buy a home. Meanwhile, the public is also lobbying for a Land Transfer Tax holiday in order to increase inventory and address some of the supply issues that the province of Ontario is experiencing.
Although the rental market has had some tough blows since many service-sector jobs were lost, home ownership continues to be a priority for many Canadians. This disproportionate demand has created upward pressure on house prices across the province. Below we explore some of the key trends in the Ontario housing market contributing to this persistent price growth.
House Prices in the Ontario Real Estate Market
Last spring, some of Canada’s top economists predicted a sharp decline in house prices up to 18 per cent, yet many weren’t convinced this would be the case. Months later, experts still believe the strength of the market will remain on its upward course, with prices continuing to rise in Q4 2020.
Ontario Submarket Differences
While the province is seeing overall gains in the real estate market, a disparity exists between urban and suburban regions. House prices are reflecting the shift in lifestyle preferences within these markets. Notably, some of the biggest price gains have been seen in suburban cities like Oshawa, Hamilton and Mississauga. Another small city seeing significant, unprecedented growth is Windsor. In fact, at 17 per cent, Windsor had the largest average price appreciation in the past three months.
Social distancing measures have left condo dwellers cooped up, which has contributed to the shift toward larger homes in suburban and rural locations. Over the past six months, “home” has transformed into a multi-use space for living, working, learning, staying fit, relaxing and more. Not surprisingly, homes with spacious multi-level floor plans and home offices are becoming more desirable.
In addition, common areas within condo buildings, such as lobbies and elevators, are turning some people off condo living. Personal space has become more important in light of the pandemic, which can be hard to find in a dense urban setting.
Ontario markets such as Durham and Peel are seeing booming sales activity. While some may have expected the biggest price gains to take place in popular cities such as Toronto, many homebuyers are gravitating towards the outskirts. The opportunity to secure larger homes with more square footage and access to green space are just a few factors luring buyers further from urban hubs.
Supply and Demand
Ontario experienced lingering demand after the traditional spring home-buying season was pushed into the summer and autumn months. As the economy opened back up across the province, people were eager to purchase homes again.
Yet, low housing inventory has led to upward pressure on prices as competition rises. At the local level, several Ontario markets are now into weeks of inventory rather than months. Highlighting supply issues, the majority of the province was close to or just under one month of inventory.
Low Interest Rates
Across the country low interest rates are attracting homebuyers and helping to keep the market afloat. The Bank of Canada has lowered the rate to 0.25 per cent, which is historically the lowest it’s ever been. Those who were previously sidelined can now borrow at a lower cost. This could be enticing for hopeful homebuyers, who can now potentially secure more financing to purchase the home they desire.
The Ontario housing market is continuing to experience soaring prices in various submarkets. COVID-19 has influenced some home purchasing trends as people expand their home search to suburban and rural areas.
CMT announced that it has concluded the sale of $250 million of senior medium term notes.
The volume of home sales in April touched a seven-year low for the month, the Canadian Real Estate Association said on Tuesday. And home prices in most markets are stagnating.
But if Canada no longer looks like a sellers’ market, buying a home hasn’t exactly become a cakewalk. Unless you’re shopping for a detached house in the country’s two priciest cities, you probably haven’t seen home prices decline.
Renting isn’t cheap either. Forty per cent of the 4.4-million Canadians who have a landlord rather than a mortgage spend over 30 per cent of their pre-tax income to keep a roof over their heads. And things could get worse if rising interest rates and tougher mortgage rules force more Canadians into the rental market.
So, what’s the least bad option in this era of stalling home values and sky-high rents: being a tenant or a homeowner?
Common wisdom has it both ways when it comes to the rent vs. buy question. Many people argue that renting is a waste of money: You’re not building equity in your home and your housing costs will never go down.
Others argue that since rent is usually much cheaper than the carrying costs of owning a comparable home, you can build wealth by investing what you’re saving by not having to pay for things like property taxes and home insurance.
Unfortunately, both arguments can be wrong, depending on your individual situation and the conditions of the market. Crunching some numbers will usually give you a better idea of what renting or buying entail in your specific case.
Rent or buy? The case of a Toronto semi
Toronto is a great place to test the rent vs. buy math. When it comes to larger and more expensive homes, the real-estate craze of the past couple of years has dissipated. At the same time, rents are among the highest in the country.
Let’s look at the example of a three-bedroom, two-bathroom semidetached house, what many would call “a starter home.”
According to data provided to Global News by Toronto real estate website Bungol.ca, the average asking price for such a home in the Greater Toronto Area (GTA) is around $744,000. With a 20 per cent down payment of $148,800, and a five-year fixed rate mortgage of 3.49 per cent, the monthly mortgage payment would be $2,969, according to the online mortgage calculator provided by rate-comparison site RateHub. Add in property taxes, home insurance, utilities and home maintenance costs, and you’re looking at spending $3,800 a month at least.
On the other hand, the average rent for a comparable property is around $2,450 a month in the GTA, according to Bungol. That’s a difference of a whopping $1,350 in monthly costs compared to being a homeowner.
But what does that mean?
Global News run the numbers through the online “rent vs. buy calculator” provided by The Measure of a Plan, a Canadian financial planning site. If you assume that home prices will stay relatively flat for the next 25 years, it doesn’t make much of a difference whether you rent or buy that Toronto semi.
A tenant with an initial investment portfolio of $151,800, equivalent to what the buyer would likely spend on the down payment and purchase transaction costs, would end up with around $1.35 million 25 years down the line, assuming an annual return on investment of 5.5 per cent before inflation.
The homebuyer would end up with roughly that amount in home equity.
Rent or buy? The case of a Toronto condo
When you look at small condos in Toronto right now, those who can afford to buy still seem to have a clear advantage.
The average list price for a two-bed, one-bath apartment in the GTA is around $412,000, according to Bungol, which works out to roughly $2,000 in mortgage payments and $2,650 in carrying costs. Renting a comparable unit, on the other hand, will cost you around $2,330 a month. That’s a mere $320 difference in monthly carrying costs.
Even “a conservative 2 per cent annual property appreciation assumption results in almost $700 of gain per month, over time. That’s quite a bit more than [the] rental savings,” said Robert McLister, founder of rate-comparison site RateSpy.com and mortgage planner at intelliMortgage.com
“In most urban markets, it’s hard to beat buying long-term when your rent payment is higher than your mortgage payment for the same property,” he added in an email to Global News.
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But small towns where few homes are available for lease can also be a tough market for renters, said Jason Heath, a fee-for-service financial planner and managing director at Markham, Ont.-based Objective Financial Partners.
In communities where the supply of rental properties is limited, it’s not uncommon to see yearly rent payments equivalent to between 7 and 10 per cent of the market value of a comparable home.
Generally, if a year’s worth of rent adds up to less than 4 per cent of the market value of a similar house, you’re probably looking at a renters’ market. If yearly rent works out to 5 per cent or more, buying is more likely to be the better option financially, Heath said.
Still, there are all sorts of variables that can skew the calculation. For example, the faster home prices rise, the harder it is for renters’ investment returns to keep up.
On the other hand, you won’t be building much wealth as a homeowner if you keep tapping into your home equity to borrow, Heath noted.
And if you have a generous workplace pension with your employer matching contributions, renting and being able to make larger monthly deposits into your retirement savings account might make more sense, Heath added.
The 4-per cent rule of thumb is only a starting point, he said.
“It’s important just to know when to ask more questions.”
Bank of Montreal has raised rates on its posted mortgages, joining a number of other Canadian big banks as they respond to rising bond yields.
Effective Thursday, BMO raised the rate on its five-year fixed mortgage to 5.19 per cent from 5.14 per cent.
But rates on its entire slate of fixed-rate mortgages also rose. For example, the rate for a one-year mortgage rose to 3.44 per cent from 3.29 per cent – an increase of 15 basis points. The rate for a 10-year mortgage rose to 6.5 per cent from 6.3 per cent.
The changes were initially reported by RateSpy. BMO confirmed the moves.
While home buyers can usually negotiate rates that are lower than the banks’ posted rates, the changes nonetheless highlight the fact that borrowing costs are rising as markets respond to a confluence of changes: Global economic growth is picking up steam, inflationary pressures are building and central banks are raising interest rates.
Although both the Bank of Canada and the U.S. Federal Reserve held their respective rates unchanged at their latest monetary policy meetings, financial markets expect rate hikes later this year.
The changes from BMO follow similar changes at four of Canada’s biggest banks, after Toronto-Dominion Bank led the pack with rate increases last week, followed closely by Royal Bank of Canada, National Bank of Canada and Canadian Imperial Bank of Commerce.
Rising posted rates come at a time when Canada’s housing market is adapting to regulatory changes designed to slow home-price appreciation in particularly hot markets – notably Toronto and Vancouver. Among these changes are stress tests, designed to ensure that home buyers can handle payments if mortgage rates rise by 2 percentage points, potentially making it more difficult for cash-strapped or indebted Canadians to buy homes.
The changes may be showing up in home-buying activity. Sales data from the Toronto Real Estate Board (TREB) showed home prices in the Greater Toronto Area in April were relatively unchanged from March, but are down 12 per cent from last year. In Vancouver, residential sales last month fell to their lowest level in 17 years.