Real estate market facing ‘significant headwinds’

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The luxury real estate market has been quieter over the latter part of the year, with a scarcity of product within the luxury market in many Greater Toronto Area (GTA) neighbourhoods being a central storyline, according to real estate professionals.

Jordan Morassutti, co-founder of Toronto-based developer North Drive Investments Inc., says that, in the current market of “significant headwinds,” the specialist developer will survive and thrive.

North Drive is the company behind the award-winning 10 Prince Arthur and 36 Birch boutique condo projects in Toronto’s downtown core, which is now turning its attention to One Roxborough West, a new 12-storey, mixed-use development going up in the Summerhill neighbourhood, just steps north of Yorkville.

Morassutti says, in any market, while there might be “compromises to the margins,” being best in class allows a developer to soar over choppy waters.

“What’s unique about these projects is that the decision to buy isn’t purely economic,” he says.

“It’s often a stage in life. In the past, when the wind was at your back, you could hopscotch from various geographies and build different building typologies and do quite well. I think, now in this more challenged environment, being a specialist is really going to help us get by, creating a category of one.”

It also comes down to having a fulsome understanding of the market.

“Specializing in the upmarket, end-user segment was a risk mitigation [for us], because if the music was to stop, with the more commoditized investment-driven product you’re typically looking at a B or B- location with 400 units that are all roughly the same … you may have no bid for your suites, where there will always be demand to live [at] One Roxborough, 36 Birch, 10 Prince Arthur,” Morassutti adds.

“And we have buyers where single-level living is very attractive to them, and the locations that we work in and the buildings that we design I think are sufficiently unique that, if you’re if you’re considering it and you don’t move quickly, you may miss out on the opportunity.”

Real estate brokers of luxury properties, which are the segment of the market at $4-million and above, are acknowledging challenges.

“We do still see strong, fast sales when homes are unique and priced appropriately,” says Cailey Heaps, president, chief executive officer and broker of record of Heaps Estrin Real Estate Team. Scarcity of product is a big issue, she says, along with what the impact of the recently announced increase in municipal land transfer tax on properties priced above $3-million is going to be.

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The land transfer tax will go up to: 3.5 per cent on homes valued between $3-million up to $4-million; 4.5 per cent on homes valued at more than $4-million up to $5-million; 5.5 per cent on homes valued at more than $5-million up to $10-million; 6.5 per cent on homes valued over $10-million up to $20-million; and 7.5 per cent on homes over $20-million. The new rates take effect Jan. 1, 2024.

“For the first time in many years, we are transitioning to a buyer’s market,” says Janice Fox, broker of record for Hazelton Real Estate Inc.

“We’re bucking traditional economic trends, so although we are facing a shortage of inventory, with very little on the market, buyers are still slow to make a decision. And prices are starting to see a little slide.”

According to Jason Mercer, chief market analyst for the Toronto Regional Real Estate Board, the GTA luxury market has been affected this year by higher borrowing costs and uncertainty about the direction of Bank of Canada decision-making, inflation and economic growth. Year-to-date, both sales and new listings are down in comparison with 2022.

“More balanced market conditions have also impacted price growth, especially after accounting for inflation,” Mercer says.

Don Kottick, president and chief executive officer of Sotheby’s International Realty Canada, says over the summer months and into early fall, Sotheby’s saw sales activity renew to levels surpassing the same period of 2022. There have been years of pent-up demand, he adds, because over the years potential buyers have chosen to postpone real estate decisions.

“This delay has led to a culmination of demand, which is driving continued activity in the luxury market,” Kottick says.

“Activity in Toronto’s luxury, single-family home market has surpassed activity in the luxury condominium market. This reflects the strong, underlying desire that multiple generations have for single-family homes, even in spite of rising housing and carrying costs. The luxury condominium market has been muted in comparison, with luxury consumer demand currently favouring established and renowned international luxury brands such as Four Seasons and Ritz-Carlton.”

There was an increase in new listings in September, an indication that homeowners are prepared to sell in the current market and have aspirations to a home that better suits their needs, Kottick says.

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“The challenge is that the pricing expectations of many sellers are often out of line with current market realities,” he says.

“At the same time, luxury buyers, often motivated by both lifestyle and financial goals, are becoming more methodical and discerning in their property search and are unwilling to pay more than a property’s immediate market value. With more properties to choose from and a keen awareness that uncertainty in the market is working in their favour, they are prolonging their property search, negotiating and walking away if a deal doesn’t match their exacting criteria.”

And because of that, the velocity of sales has slowed considerably, even though underlying consumer demand is resilient.

The situation in the luxury rental category is improving, according to Mitchell Abrahams, president of The Benvenuto Group. He says projects such as Aberdeen On The Kingsway, with more than 500 rental suites, and The Whitney On Redpath, also with more than 500 units, have been rare in Toronto, but that’s changing. Toronto is adopting almost a New York-style approach to development, much as one sees in the Soho neighbourhood in Manhattan.

“The appeal to the marketplace is very strong,” he says. “For a long time, moving to a condo was a natural progression. But for a lot of people, a big part of their savings has come from the fact that they bought a home 30 years ago, which has appreciated significantly.

“And they’ve been hard working-class families and middle class and upper middle-class families who’ve put money away, but to go buy a condo today that is of a size that they want to be in, it’s $1.5-million to $2-million.”

A big part of your savings when you sell your home would be transferred to another piece of real estate. But if there is a rental option that is every bit as good or better than a condo, keeping that hard-earned capital in the bank or investments where interest rates today are higher and offering a good return, that offers a bigger lifestyle upgrade, he adds.

One advantage to such an approach is to use the interest on those investments for rent and then investing the capital from the original property sale to buy a vacation home or to travel. Also, the interest rates on a mortgage and costs for condo fees and realty taxes when buying “are not insignificant.”

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“It’s a way of living that’s more commonplace in New York and Europe, but it’s starting to appeal to people here,” Abrahams says. Part of the challenge over the past 30 or 40 years has been keeping up with the demand for rental housing in Toronto, and the undersupply of quality rental housing has spiked up rents. That’s changing, with the economics now “making more sense” for people to build rentals, he says.

The federal government’s decision to remove GST/HST on purpose-built rental construction will further help incentivize people to build rentals rather than condos, he adds.

Despite such current challenges as economic uncertainty and rising interest rates, Kottick, like Mercer, says with the underlying demand for luxury residential real estate in the GTA, he sees blue skies on the horizon.

“That will support activity in the fall market ahead,” Kottick says. “Properties that are priced appropriately for the current market will continue to sell and we expect prices to remain resilient.”

“Looking forward, the outlook for the GTA housing market and luxury market is positive,” Mercer says. “Borrowing costs are expected to trend lower in the second half of 2024 and record population growth will continue. This suggests we will see an increasing number of buyers active in the marketplace as we move through 2024 and beyond.”

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