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What to Expect? – Real Estate Predictions for 2018

2017 in Review

Owning a condo in the GTA in 2017 was one of the smartest things one could do! During the ‘Year of the Condo’ prices in Toronto rose over 20%, some over 30%, much faster than detached homes in 2017. The average condominium price in Toronto is now over $520,000.

Concerns about affordability and an over-heated market had governments introduce a 15% foreign buyer tax, tighter mortgage regulations and rent control measures. Two interest rate hikes of 25 basis points by the Bank of Canada only brought a short lived slow down to the growth for Toronto condos.

 

A Quiet First Half of the Year

New mortgage qualification rules as of January 1st, know as the “Stress Test” will impact the 2018 market. The fist and second quarter of 2018 will see some instability with prices somewhat stagnant. The result of this measure is reduced affordability by 20% and elimination of 10% of buyers altogether, which will result in a healthier and stronger market.

Whenever government intervenes in the market consumer confidence drops and consumers take a wait-and-see approach. Once people have adjusted their expectations and their confidence in the market returns prices will climb rapidly. It may just be the perfect time to invest during the calm before the next storm as economic fundamentals are very strong and the long- term outlook is good.

 

First-Time Home Buyers

First-Time Home Buyers are experiencing the largest setback by the “Stress Test” as they will now have to wait longer to purchase. In addition, in today’s market it takes 15 years of full-time work for the average buyer to save a 20% down-payment.

First-time homebuyers are being priced out of the market and have to go further from the city to find housing they can afford. If they don’t buy now they will not be able to afford Downtown Toronto in a few years. Downtown ownership will soon be exclusive to high income earners only.

 

Interest Rates Will Rise in 2018

Economic fundamentals are solid: Strong GDP growth, business and consumer confidence, immigration, Canadian dollar along with low unemployment rates and rising inflation will force two interest rate hikes in 2018 of 25 basis points each by the second half of 2018.

The Bank of Canada key lending rate will eventually be at 1.50 per cent by the end of the year. It may just be a good time to convert that variable rate mortgage to a 5 year fixed term and lock in a good rate.

 

Condos Will Lead the Market

Condos are the last attainable real estate option for first-time buyers, young singles and couples, young families and downsizers. House prices are just out of reach for most now, which puts even more pressure on supply. The price gap between the average detached home and the average condo in the City of Toronto is over $700,000.

As they have no choice but to move into condos, young single and young couples with their first child will lead the segment as buyers as it is the first and only step to getting into the real estate.

Due to diminishing buying power entry-level condos will be popular in 2018 for fist-time buyers and investors alike. Starter condos address a wider market due to their affordability. Canadians would rather own a home than rent. 48% want to purchase a home within the next five years.

 

Toronto is becoming a World city

Toronto when compared to other World cities is still relatively cheap by world standards. As Toronto’s real estate market is maturing and with a lack of supply to respond to the strong demand will continue to go up in price. This is caused by many factors, such as scarcity of land, physical boundaries such as the lake and greenbelt restrictions, diminishing inventory of available homes for redevelopment and lengthening development approval times.

The numerous commercial developments underway in the downtown core are the proof in the putting. Fortune 500 companies from around the world are choosing Downtown Toronto as the location for their Canadian headquarters as they want to attract young talent that wants to enjoy the downtown lifestyle.

This is also evidenced by the demand for centrally-located condos in Toronto from foreign buyers. The interest of foreign buyers in Toronto has barely changed even after the foreign buyers’ tax was introduced. Canada is seen as a safe haven for investors around the world. CMHC reports that about 10% of condos built in downtown Toronto since 2010 are owned by a non-resident.

As the epicentre of Canada’s economy and many international industries, Toronto is home to several top-rated educational, financial, health and business institutions.

  • Toronto is one of the Top 3 Best Cities to live in in North America
  • Toronto has the highest immigration rate in the world
  • Condos accounted for 91% of Toronto New homes Sales in June 2017
  • Under 2% vacancy rates in Toronto Condo Apartments
  • 11% Rental demand Increase
  • Condo rentals in the GTA are increasing by more than 11%
  • 28% Increase in resale values
  • Average condo resale prices in Toronto are 28% higher in 2017
  • Population growth vs. low vacancy = continuing decline in inventory & Increase in prices

 

Toronto Rental Prices Will Rise

Over the years the vacancy rate for rentals has been below 1% in Downtown Toronto, which has pushed rents to all time highs resulting in bidding wars and tenants voluntarily pre-paying an entire year of rent just to secure a condo.

The very large percentage of millennials in the core rely on rentals as they are not ready to purchase yet.
Continuously rising property prices now have highly qualified tenants with good incomes staying for 2-4 years rather than the typical 1-2 year terms, which is good news for most investors.

For investors vacant or pre-con condos will become more attractive, as well as smaller units that have higher tenant turnover, because landlords can adjust rents to market value as only subsequent increases are subject to the 10% cap.

The rental market will stay tight as developers are not building units with the purpose of adding them to rental inventory as it is more profitable for developers to build condos for sale to owners.

 

2018 Outlook Summary

Confidence and activity has returned to the condo market and we are seeing record sales and multiple offers, prices are continuing to rise in the City of Toronto. Over the next 5 years will continue to see a shortage of supply in Toronto’s Downtown core with prices increasing rapidly.

For some areas $1,500 per square foot over will be the new norm with a few select buildings in the city already trading at $1,500 and above today.

Bottom line, we believe that the fundamentals of the Toronto condo market will be strong for the next 5-7 years. With rising prices, tight inventory 2018 will be a strong year continuing 2017 trends.

A recent report states that housing prices across the GTA will increase nearly 7% in 2018.

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One thought on “What to Expect? – Real Estate Predictions for 2018”

  • Oliver Baumeister Baumeister von Bretten

    May 30, 2018 at 7:38 pm

    Great article! Hope to see more like this. Thanks for posting.

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