A contrarian’s upside view of the Toronto housing market

Many market watchers are feeling grim about the outlook for Toronto-area real estate in 2019.

Real estate agent Manu Singh has guarded optimism: He sees some signals that dispirited homeowners and aspiring buyers will find reasons to get back to house hunting.

Mr. Singh says some clients do worry about the possibility of Canada’s economy falling into recession next year. But the Bank of Canada’s decision to hold its benchmark interest rate steady at this month’s policy-setting meeting has given some people hope that they’ll be able to trade up, he says.

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“A lot of buyers didn’t get what they wanted,” he says. “They haven’t really fulfilled their wish list.”

Mr. Singh, of Right at Home Realty Inc., says “good quality inventory” has been hard to find in the past year or so as potential sellers have been reluctant to list their properties for sale in an uncertain market.

“We’re coming out from a pretty interesting year,” he says. “There’s still a lot of caution.”

Mr. Singh says some professional couples would like to move from a condo to a house as their family expands, but it’s still difficult to find a renovated house on a good street or close to a highly ranked school.

That demand – combined with scarce listings – has buttressed prices, he adds.

Mr. Singh says decent properties with an asking price less than $800,000 are still fetching multiple offers. He recently worked with a client who was able to purchase a one-bedroom-plus-den condo unit in Liberty Village for just less than $600,000.

The buyer didn’t have to compete, he says, because the unit was vacant after a tenant moved out and therefore didn’t show as well as a staged and fluffed condo would.

“We got in at a good time,” he says.

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Marc Pinsonneault, senior economist at National Bank of Canada, continues to expect a soft landing in Canada’s resale market for existing homes.

The latest data from the Teranet-National Bank Composite House Price Index shows that the average price across 11 metropolitan markets in Canada slid for the third straight month in December.

Mr. Pinsonneault notes that home prices weakened in the second half of 2018 in most of the cities tracked by the Teranet-National Bank composite house price index.

Higher mortgage rates and tougher qualification rules are causing the cooling in most major markets in Canada, he says, adding that the recent increase in vacant new dwellings may also add to downward price pressure in some markets.

Mr. Singh says that buyers have spent the past year adjusting to those stricter regulations. Lenders were also much more choosy about handing out mortgages, he adds.

He tracked properties that were sold conditionally and was surprised at the number he saw coming back up for sale. When he delved into the reasons, he found that many of the agreements had been conditional on the buyer being able to line up financing.

Lenders were inclined to give the green light in previous years but in 2018 they became much more cautious.

“For the first time in many, many years, I actually saw deals fall apart.”

Stephen Brown, senior Canada economist for Capital Economics, is warning that Toronto could see house prices falter in 2019.

His portend comes after a recent slump in sales that hit just as a gush of new units is set to arrive on the market.

Mr. Brown is also predicting that a slowdown in building in Toronto and Vancouver will hamper the country’s economy.

“While house price weakness will be painful, the end of the construction boom will have even larger implications for economic growth,” he says.

Mr. Brown points out that sales in Toronto and Vancouver dwindled in the past two months of the year. In Toronto, sales are now 15 per cent below their long-run average while in Vancouver they’ve fallen 40 per cent below.

Mr. Brown says the tighter mortgage rules that came into effect at the start of 2018 explain the sluggish sales at the start of the year, but they don’t explain the renewed weakness in November and December.

“A more likely explanation is that a combination of higher borrowing rates and the end of seemingly ever-rising house prices has made housing seem like a far less attractive investment,” the economist says.

Eyeing the market at a national level, Mr. Brown expects prices to hold up. New listings have fallen alongside sales, which suggests that owners currently face little pressure to sell, he points out.

The problem Mr. Brown sees is that Canadian cities are nearing the end of an intense spate of building. In historic real estate cycles around the world, new supply has hit the market just as demand is falling, and that appears to be happening here, in his opinion.

Pointing to Vancouver as an example, seven per cent of homes completed in the past six months have not yet been sold, he says. And while that amount may not sound alarming, there are currently 40,000 homes under construction that will be completed in the next two years. If that seven per cent ratio holds steady, the number of unsold units would more than double to a record high of 5,500.

“An imminent decline in new construction would not stop this from unfolding.”

The trend in Toronto is lagging Vancouver’s, Mr. Brown says, with fewer than one per cent of newly completed homes unsold in November. But Mr. Brown expects that rate to rise, starting this year.

The new supply of condos and houses coming onstream will likely put downward pressure on prices, Mr. Brown cautions. But for those who have an existing mortgage and other debt, they may find some relief from borrowing costs as a result.

As the steam comes out of consumer spending and construction while investment in the energy sector also contracts, Mr. Brown sees the country’s economic growth slowing sharply. That in turn will prompt the Bank of Canada to cut interest rates later this year, he predicts.

Mr. Singh says about 50 per cent of his clients are investors. Many are still looking to buy, he says, because they are counting on further price appreciation – even if the amount they collect in rent doesn’t cover their carrying costs.

“They’re looking at it for a medium- to longer-term play,” he says.

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