Buyers and sellers adjusting to real estate’s new normal

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Sinking real estate sales in many Canadian cities may find a bottom in the first half of this year, predicts Rishi Sondhi, economist at Toronto-Dominion Bank.

In Toronto, a recent burst of competition for a small number of properties has created some buzz, but the volume of sales is still very low, cautions Mr. Sondhi.

Activity has fallen to the lowest level in about 20 years, he points out, adding that some transactions are always going to take place because of the life circumstances of buyers and sellers.

“How low can you go? Activity at some point has to pick up,” he said in an interview.

Mr. Sondhi has seen a slight improvement in the sales trend from those very low levels, but overall activity has remained mostly flat since October, he says.

Guelph, Ont., is one of the cities that saw a dramatic run-up in prices during the pandemic, then a sudden cooldown when interest rates started to rise last year.

Some properties that were languishing on the market have recently sold, says real estate agent Aimee Puthon of Coldwell Banker Neumann Real Estate as buyers seem to feel more assured about their ability to qualify for a mortgage.

Consumers are getting used to the “new normal” of higher interest rates, she says, and sellers are also adjusting to the current reality of lower prices.

“A confidence and calmness has returned, which was missing in the last quarter of 2022,” Ms. Puthon says.

Families in Guelph tend to time their transactions with the school year, so more homeowners will likely list after the Ontario schools’ March break, she says. The market currently has about two months’ of inventory, which is a substantial jump from this time last year, she adds.

Ms. Puthon says sellers need to ensure their property shows well and does not have an inflated price. Offer dates are reserved for rare properties in sought-after, mature neighbourhoods, she adds.

She points to a downtown two-bedroom condo unit which was recently listed with an asking price of $575,000. The property received three offers and sold for $600,000.

In the neighbourhood known as Old University, a split-level four-bedroom house was listed with an asking price of $1.099-million and sold for the full price after 30 days on market.

Sales remain slow at the high end, which starts above $1.2-million, Ms. Puthon says.

In the area around Hamilton, inventory has increased across all price segments – and particularly in the lower ranges, according to the Realtors Association of Hamilton-Burlington (RAHB).

The region saw demand surge during the pandemic as low lending rates and a desire for more space pushed many buyers to purchase single-family homes in the suburbs and large properties in rural areas.

Supply could not keep pace and prices rose faster than expected, says RAHB president Lou Piriano.

At the end of January, the area had just under three months’ supply of inventory, which is similar to the level before the pandemic, Mr. Piriano says.

The benchmark price has dropped about 20 per cent to $809,800 in January from $1,012,700 in the same month last year, reports RAHB.

Economists are closely watching each new release of data on employment and consumer prices as they fine tune their forecasts for the real estate market in the remainder of 2023.

TD has been more optimistic about the resilience of the Canadian economy than many forecasters, Mr. Sondhi points out, with the bank expecting that the country would most likely withstand higher interest rates without tipping into recession.

In an effort to tame inflation, the Bank of Canada embarked on a series of increases that raised its benchmark rate to 4.5 per cent from a low of 0.25 per cent.

The economy has not seen the full impact of the rate hikes yet, Mr. Sondhi says, and he expects consumer spending to slow.

Some homeowners are struggling with higher mortgage payments, he says, but the number of distressed sellers will remain low as long as the overwhelming number of people hold onto their jobs.

The latest figures show employment is robust and forced selling has not meaningfully pushed supply higher, Mr. Sondhi says.

He does expect listings to increase later in the year as more homeowners decide to make a move.

“We’re not expecting forced selling to dominate the dynamics,” he says.

Bank of Canada governor Tiff Macklem has signaled that the central bank will pause on further hikes until the moves so far are absorbed.

Mr. Sondhi says the central bank may tack on another increase if inflation doesn’t behave as expected, but he doesn’t expect such a move to have a large impact.

“The bulk of the tightening is behind us. An added 25 basis points is not going to move the needle as much. (A basis point is one one-hundreth of a percentage point.)

As for prices, Mr. Sondhi expects those to come down a little bit more, then hold at a roughly flat level. The peak-to-trough drop in the average price will likely be around 20 per cent in the Greater Toronto Area, he forecasts.

Mr. Sondhi points out that affordability remains strained in the Greater Toronto Area and therefore prices are unlikely to jump.

“That might disappoint some sellers that are looking at February, 2022 prices,” he says.

Eventually he expects prices to grind a little higher.

TD’s forecast does face some downside risks, Mr. Sondhi says, with the possibility that the banking regulator could impose tighter standards on lending institutions, including tweaking the mortgage stress test.

Economists will also be keeping an eye on inflation, economic growth and the jobs market, he adds.