CIBC’s Benjamin Tal predicts bumpy real estate ride this year

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The fog of uncertainty that has kept real estate sellers and buyers on the sidelines in recent months will start to clear in 2023, predicts Benjamin Tal, deputy chief economist at CIBC World Markets.

With stability in the market, sellers will be encouraged to list in greater numbers, Mr. Tal expects, and some distressed borrowers will add to the supply.

“That lack of listings now is protecting prices from going down farther,” he says.

Pent-up demand from buyers will establish a bottom in prices by the spring, Mr. Tal said in an interview.

The overall tone of the market will be soft, the economist says, but he stresses that it will not go into free fall. Still, his forecast does not rule out some bumps along the way.

According to Mr. Tal, sales are likely to fall another 10 to 15 per cent in 2023 before rebounding modestly in 2024.

All of Bay Street is watching for the next signal from the Bank of Canada, which has raised its key interest rate from 0.25 per cent at the start of 2022 to 4.25 per cent today as it seeks to rein in inflation.

It’s important that the central bank not overshoot, cautions Mr. Tal, who expects policy-makers to lift it one more time, by either 25 or 50 basis points.

The economist cautions that some households are feeling the strain of dealing with higher interest rates for a prolonged period, and he does expect some borrowers to run into trouble if they need to renew their mortgage at higher rates this year. The greater pressure on renewals will come in 2024 and 2025, he predicts.

At that time, buyers who were able to obtain a mortgage at 2.5 per cent during the pandemic may be confronting a much higher rate.

“I have little doubt the delinquency rate will rise,” he says.

Mr. Tal has recently noted an uptick in mortgage delinquencies, but he points out that the greatest risk that people can’t make their mortgage payments stems not from interest rates but unemployment.

So far, the job market remains strong, Mr. Tal adds, but he doesn’t rule out an increase in unemployment in 2023.

Rates for mortgages with a five-year fixed term will likely decrease, in his opinion.

Mr. Tal also expects obstinate sellers to become more realistic about the price they will accept when they realize the conditions that led to the February 2022 peak won’t be returning soon.

“The market will not go back to what it was, because what it was, was insane.”

While Mr. Tal is not expecting a meltdown in Canadian real estate, he warns that there are some real risks to the scenario he has laid out, including the unpredictable actions of the Chinese government, Russian President Vladimir Putin and other world leaders.

He also points to uncertainty surrounding the future impact of inflation and COVID-19.

“These things can surprise us,” he says.

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In Toronto, Patrick Rocca, broker with Bosley Real Estate Ltd., has been hearing from some homeowners who are gearing up to list out of the gate in 2023 after a dismal December.

Sales in the Greater Toronto Area (GTA) plunged 48 per cent last month compared with December 2021, according to the Toronto Regional Real Estate Board. Active listings swelled 169 per cent in December compared with the same month in the previous year.

The average price in the GTA fell 9.2 per cent to $1,051,216 in December from $1,157,837 in December 2021.

Many of the people Mr. Rocca is talking with put off listing last summer and fall hoping the market would improve. He is currently preparing some listings for late January and early February.

Those who need to sell want to hit the market early in the new season, he says.

Most of the homeowners he is hearing from understand that prices have dropped 20 per cent from their peak in midtown Toronto, he says.

“Some want to sell, but at early 2022 prices,” he says. “It’s a very short conversation.”

Mr. Rocca says homeowners who had properties listed in the fall that failed to sell should come out with a new strategy – and a lower price – in January.

In the Leaside and Davisville neighbourhoods where he does much of his business, a semi-detached house that would have fetched $1.9 million at the peak can now be had for $1.5 million or so, he says.

He stresses that a realistic price and a very polished presentation are going to be crucial for sellers in 2023.

Mr. Rocca believes prices are likely near the bottom, but he is concerned about the possibility that homeowners who have high mortgage debt may be forced to sell.

Even in Toronto’s most established neighbourhoods, where prices tend to be more stable, he knows of people who are fearful about whether they will be able to hold onto their houses.

Distressed selling may bring an increase in listings, but he notes that demand has traditionally outweighed supply, and he expects the market to absorb any rise in inventory.

Broker Davelle Morrison of Bosley says the new year is a time when people tend to ruminate about their focus in life and where they want to be in the coming months.

Often, that includes major life decisions, such as getting engaged or contacting a divorce lawyer.

“There’s a late-December, early-January wake-up call of ‘I need to make a change in my life,’” she says.

She has been hearing from the full spectrum of buyers, including first-time, move-up, and downsizing. Some are people who moved out of the city early in the pandemic and now want to return.

Traffic in the GTA has become monumentally worse in the past couple of years, she points out, and some workers have returned to offices downtown.

“If you’ve got to sit through traffic hell, you may start to wonder, why did I move so far out?”

Still, despite their intentions, buyers are facing higher monthly payments than in the past because the increase in interest rates continues to outweigh the drop in prices.

They also remain hesitant to jump into the market while prices continue to decline, Ms. Morrison says.

“A lot of people want to buy at the very bottom,” she says, adding that she found a house around the $700,000 mark for one young man, but his parents discouraged him from making an offer because they believe prices have farther to fall.

The problem with that strategy is that no one knows when prices have reached their lowest until that milestone is in the past, she points out.

Sellers in the coming weeks will need to set an asking price in line with the current reality, she says.

“If sellers go out with overheated expectations, they will not get showings,” she says. “Buyers have wised up.”