December 28th, 2022 | Canada
THE 2023 REAL ESTATE MARKET – THE GOOD, THE BAD, & THE UGLY … OUR PREDICTIONS
As we head into the final stretch of 2022, it’s time to do what we do best as humans (or at least should), reflect … reflect on what happened, what could have happened and what might happen into the future … all in an effort to make the best possible decisions TODAY, right?
So, let’s do it … let’s reflect and make some predictions … into the abyss we go!
PREFACE: One of the things that’s deeply personal to us at the A+A Team is to be objective. To provide facts, explain how and why things work the way they do … all to empower our clients, enabling them to make the best-informed decisions based on their specific circumstances. What we don’t like (and often see on Social Media in particular) is fear mongering, pushing FOMO or simply put … speaking out of our a$$es. We encourage you to avoid listening to every Tom, Dick and Harry with a mouth & an opinion – instead, ask the questions that matter to you … and ensure that the person giving you their opinion is not only a subject matter expert, but actually has skin in the game (i.e. owns a home and hopefully a portfolio of properties, actively looking at properties daily, out with Buyers/Investors showing homes weekly – not just looking at charts etc.) … we hope you seek professional advice with no BS, just facts and a straight forward attitude, please
For the past decade (and some), the Real Estate Market has behaved somewhat predictably. Notwithstanding the 2008 sub-prime lending crisis, the 2017 policy induced crises and the 2020 global pandemic crisis (see – https://amirandaleks.com/market-crashes-are-opportunities-in-disguise/).
That’s because Real Estate, like Mother Nature, has 4 Seasons, the same Seasons, except not on the same dates (see here if you’re curious about the “4 Seasons of Nature vs Real Estate in Toronto” (https://amirandaleks.com/the-4-seasons-of-nature-vs-real-estate-in-toronto/).
Over the past decade and some, it’s been a fairly cyclical pattern – Spring being our most aggressive market, with the Summer market cooling down (ironically), while Fall sees us ramp up again for a shorter period vs Spring, after which we head into the dead of Winter and everyone goes into a 1-2-month hibernation … annnnnnd repeat!
However, this year, our prediction is that the oh-so-famous and beloved Spring Market will behave quite differently, let’s examine in 2 parts, namely:
- What normally happens
- What we predict will happen
| What normally happens | A+A Realty Team Predictions |
| Jan/Feb historically have the fewest listings – driving prices up as demand increases daily while supply lags by months until we hit summer. | Jan/Feb will see a spillover of listings from Fall & Winter 2022 – we will see more activity vs Fall & Winter (i.e. more trading) but nowhere near the “crazy” prices and # of bids we’d normally see at this time. |
| Eye-popping (and FOMO inducing) headlines like “Bloor West Home Gets 30 Offers and Sells for 150% Over Ask!!” as a result of OFFER DEADLINES or OFFER DATES that have homes listed for arbitrarily low prices (i.e. 999K when the actual true objective value of the home was always 1.5M) – and so the headline is misleading, causing Buyers (and some in the industry) to panic and unnecessarily prop the market up at an accelerated pace with each subsequent sale | Fewer OFFER DEADLINES and OFFER DATES with those Sellers opting for such strategies finding that Buyers aren’t willing (and more importantly, aren’t able) to pay as much – why? Because, ‘back in the day’ every 100K a Buyer borrowed cost approx. $350-400/month, while today that same 100K costs approx. $600-$650/month. The issue is affordability! We will see the OFFER DEADLINE strategies being tested – and when homes don’t sell for what the Seller(s) expect – they’ll simply opt to relist at their true desired price. |
| Buyers willing to sell their souls to get a house. | Buyers will carry the 2022 weariness into 2023 and the key issue will be their affordability – not so much whether they’re wanting to or not … but rather, whether they’re able to or not. |
| Lots of offers + firm offers (i.e. no conditions) + 5% min certified deposits in-hand on every piece of doo-doo that hits the market – or as Amir likes to put it … “on every cardboard box that sits on a lawn”. | Fewer offers + conditional offers + cheques coming in the next day … on truly deserving properties (i.e. show well) and not just boxes on lawns with little-to-no upgrades and a crazy Seller that expects to get what his/her neighbour got on their fully renovated home. Buyers will be selective and opt for “deals” or move to the next one. |
| Pre-list home inspections on any/all properties listed (certainly Toronto proper). | Fewer Sellers opting to provide a home inspection ahead of receiving an offer – at which point a Buyer may opt to perform their own inspection (as a condition of the offer). |
| Listing Agents (representing Sellers) and Sellers wielding all the power/authority. | Co-operating Agents (representing Buyers) having not only the ability to guide their Buyers/Investors – but also truly negotiate (price and terms) on their behalf. |
| Banks competing for clients by providing the best rates possible (i.e. super low, near 1-2% interest rates). | Banks having to follow the monetary policies and rates as set out by the Bank of Canada with little wiggle room and qualifying rates between 6-9% (i.e. much harder to qualify for loans). |
| A hyper-aggressive Spring market that sets the tone for the remainder of the year. | A more subdued version of the Spring markets we’ve become used to – with more guidelines geared at a slow-and-steady recovery vs eye-popping unreasonable double-digit year-over-year growth. |
| Toronto leading the pack in terms of price growth and appreciation – with the outskirts (i.e. Durham, Halton, Peel etc.) piggy backing onto Toronto prices and seeing equal if not greater gains year-over-year (like 2021!). | Toronto will remain steady with a moderate uptick in prices due primarily to more inventory (and therefore more options for Buyers) and so more activity … but we will return to a baseline in average/median pricing … with some Toronto properties seeing a decline in their prices as they are/were fundamentally overvalued to begin with. However, prices in regions like Durham, Halton and Peel will continue to decline as Buyers who bought too high in the last 2 years may opt to (panic) sell and Buyers looking to move outside of the City will not be wiling to (or able to) pay Toronto prices for homes outside of the City. They’ll actually be moving out as a true trade-off – get a larger home for less vs get a larger home for the same or more (which was the case in 2021 and into early 2022). |
| The BoC and lenders quickly retracting on policies that made lending difficult – i.e. high interest rates. | The BoC will keep interest rates where they are with the possibility of raising them further. The earliest they’ll consider reducing rates will be midway through 2023. Learning from the past, the Bank will opt to stay the course despite the possibility of a forced recession vs lowering rates prematurely as they fear the work they’ve done to combat inflation will be undone (as has been the case in the past) – given the other fundamentals (i.e. pent up Buyer demand, lower than desired supply etc.), the Bank knows that this time around they have to be careful not to induce false growth. |
| Pre-Construction BOOMING with Agents left-right-and-centre promoting every project they can get their hands on! | Fewer pre-cond projects and Agents. Many pre-construction projects will simply opt not to launch – many of the bigger builders own tons of land and can simply choose to build a few years down the line (when the dust has settled). Many Agents that promote pre-con will do so in other provinces/regions as the prices/CAPS for Ontario projects at todays’ rates simply don’t make sense. |
So, why are we of this mindset … why such (seemingly) bold predictions that clearly defy history and popular industry opinion (at least the last decade or so)? Well, because, it’s important to think, gather the facts and present a picture based on the same … vs just sharing the common all-too-common-narrative of “Don’t Wait to Buy Real Estate, Buy Real Estate and Wait.” (god, Amir hates these memes!).
On the topic of facts and figures – here’s the scoop:
- On December 12, 2022, the Governor of the Bank of Canada, Tiff Macklem, gave his final speech of the year, where he discussed the lessons learned in 2022 and what the BoC plans are to restore price stability for Canadians (i.e. bring inflation back down near the 2% mark) as we head into 2023
- In short – the Bank of Canada would rather raise interest rates too much vs not enough
- While many thoughts that the 0.5% interest rate hike on Dec 7 might signal the end of interest rate hikes (i.e. the worst is over) – Tiff Macklem made it clear that we’re not in the clear yet
- A quick look at Government Bond yields confirmed the same – as yields shot up more so than they declined after the rate hike less than a week prior
- What do you mean? This indicates the markets feel the BoC may still continue to raise rates into 2023
So, what else did Tiff Macklem discuss in his speech? Well, let’s take a look …
The speech was broken down into 3 parts, namely:
- What surprised us
- What we learned
- Getting inflation back to 2%
So … let’s break it down and look at each part of the speech …
1. The BoC – What surprises us
- Dec 2021 – inflation was at 4.7% – now we’re at ~7%
- 3 key factors are cited as unpredictable …
- 1. Supply chain problems – global (and domestic) issue, lasted longer than expected and increased prices of many goods imported into Canada.
- 2. Russia’s invasion of Ukraine – caused price of oil + some agricultural goods to rise “sharply” globally.
- 3. Canadian consumer FOMO – as the Canadian economy fully reopened, consumers played a game of catch up, but businesses could not keep up with the demand.
2. The BoC – What we learned
3 key lessons they’ve apparently taken to heart
- 1. Supply is harder to influence vs demand (i.e. making stuff, importing stuff, growing stuff etc. is harder vs giving people money to buy said stuff – you think?!)
- 2. Supply and Demand don’t tell the whole story – basically, he says the imbalance is goods wanted vs goods made wasn’t impacted equally across the board.
- 3. Supply chain problems – compounded by the already pent-up demand in the Canadian economy.
3. Getting inflation back to 2%
- Summary – BoC needs to get back down to/around the ~2% target as their main goal, citing the world and geopolitical tensions as unpredictable factors, but reiterating their commitment to restoring price stability and so on.
BOTTOM LINE:
The BoC is not concerned with the housing market as much as they are with inflation – and specifically, getting inflation back down to around 2%. The housing market is in a lull at the moment and while supply is low – no arguments there – the primary culprit is not a supply issue but rather an affordability issue. Put simply, Buyers can’t afford as much given the high rates and so, can’t pay as much. Therefore, Sellers will have to adjust expectations accordingly.
Change will come once a ‘glimmer of hope’ is shared by the BoC. As soon as some sort of announcement is made or better, a reduction in rates occurs, many Buyers and Investors will see this as the start of the ‘turnaround’. Just before that point will be the true ‘bottom’. Buyers who have been waiting on the sidelines will flood the market. Unfortunately, inventory tends to lag behind demand, so at this point we expect a rise in both activity and prices.
However, our opinion is that the gains month-over-month will not be as dramatic as we’ve seen in the past. The key reason for this is that the BoC is unlikely to drop rates from 4.25% (or higher) back down to 2% (or lower) overnight, as they fear that this would undue everything and we’d end up at the same point we started (or worse). Hence, affordability is not going to change drastically, not immediately anyway. Banks will still have to stress test against whatever rate they’re promising Buyers – and so, Buyers will still not be able to afford ‘yesterdays’ prices’. We’re more likely to see steady increases over a longer period of time while we establish new pricing norms and averages for homes across all regions.
2023 will see a ton of opportunities for those Buyers looking to get into the market, and certainly those who are sitting on a good sum of cash. The phrase Cash Is King could not be any truer today as credit is no longer as free flowing as it once was.
Be analytical and don’t rush or let FOMO drive you – but don’t fall trap to analysis paralysis either.
Study your finances, establish your needs/wants and why you’re looking to make the moves you’re hoping to make … and make them … based on your circumstances and on your terms – not driven by fear or uncertainty.
This sort of reversion and market correction is a once in a decade or two (or three) occurrence – so don’t miss your opportunity … and remember, Amir + Aleks are here to help talk and walk you through each step of the way!
Bye for now and happy holidays! See you in 2023
Amir + Aleks
