Sahil Jaggi is watching to see if the trickle of properties for sale in the Toronto-area real estate market turns into a wave.
“That’s a good time for investors like myself to go out and buy more.”
Mr. Jaggi, a broker with Re/Max Realtron Realty, owns 17 single-family homes in the Greater Toronto Area.
The time for bargain-hunting has yet to arrive, he believes, because listings have remained tight and prices relatively steady.
Mr. Jaggi points out that the combination of rising interest rates and inflation make it difficult for consumers burdened with debt to afford their mortgage payments, but most homeowners tend to cut back on vacations and other discretionary spending before they uproot their lives and sell the family home.
That’s one of the reasons it’s often several months before rising interest rates really begin to bite, he points out.
He figures financial hardship may eventually push more distressed homeowners to sell.
Mr. Jaggi’s strategy is to buy rundown single-family homes in Etobicoke, North York and other neighbourhoods in the core. He’ll buy a tired bungalow, for example, renovate the main floor and also create a legal basement apartment so one house becomes two units.
“I’m hand-picking these houses,” he says. “It’s very easy to rent them out.”
But despite his zeal for investing, Mr. Jaggi’s last purchase was in January, 2021. At that point, he grew concerned that the market was becoming wildly overheated.
He moved to the sidelines and has been there ever since. Now most investors have joined him.
Mortgage quotes for investment properties dropped 60 per cent in October from September, according to Victor Tran, a mortgage specialist with rates.ca.
“Investor demand is definitely down,” Mr. Tran says.
One reason for the caution is that people are watching to see what the Bank of Canada does at its next rate setting confab on Dec. 7.
Many investors are already seeing negative cash flow – meaning the rent they collect does not cover their mortgage payments, taxes and other expenses.
Now they are worried that property prices will continue to decline.
An investor who buys now with a 20-per-cent down payment risks seeing the price of the asset continue to slide until they have no equity at all, Mr. Tran points out.
“There’s a very good chance they’ll be left with nothing.”
Still, there are wealthy people waiting to deploy capital, he adds.
He recently heard from two investors who are watching prices slide in Durham Region, east of Toronto. They’ve taken money out of the equity market and plan to jump into real estate.
“They’re waiting for the right time to strike.”
Another client has a principal residence worth about $2-million with no mortgage debt, Mr. Tran says. She is planning to tap into the equity of the house to purchase an investment condo.
While some investors are discouraged by the interest rate of 6.4 per cent or so on a home equity line of credit these days, this buyer is still optimistic the city’s real estate will appreciate in the longer term, he says.
Economist Farah Omran of Bank of Nova Scotia wonders if a slight improvement in sales across Canada in October marks the beginning of the end for the housing downturn across Canada.
Sales edged up 1.3 per cent in October from September on a seasonally-adjusted basis, according to the Canadian Real Estate Association. That marks the first increase since February, notes Ms. Omran.
Listings rose at a slightly quicker pace of 2.2 per cent month-over-month to place the national market in balanced territory, the economist says.
Compared with October, 2021, sales tumbled 36 per cent last month.
The 1.2-per-cent slip in the composite MLS Home Price Index in October from September marks a deceleration from the 1.4-per-cent dip the previous month, she notes.
Ms. Omran says it’s premature to say whether October’s performance signals the end of a welcome correction, but it is in line with her expectations of a moderating pace of correction and an eventual uptick in demand.
In the short term, Ms. Omran expects prices to continue to decline even if sales do continue to strengthen. A shift in market psychology means buyers now have a little more power and sellers have adjusted their expectations, she says.
In the longer term, however, an acceleration in immigration is likely to bolster prices if no progress is made on increasing the country’s housing stock, she says.
So far in November, activity appears to be sluggish again after a small uptick in sales in October compared with September.
“November is still a watch-and-wait month,” says Mr. Jaggi.
Sellers are holding firm to their asking prices as they watch to see if the turbulence blows over and prices rebound in the New Year, he says.
Buyers, meanwhile, are struggling to cope with affordability and waiting to see if prices have farther to fall.
For his part, Mr. Jaggi is looking for signs that more homeowners are becoming overburdened by high rates.
When that happens, investors may be able to pick up properties at prices 30 or 40 per cent below the peak, he figures.
In that case, he wouldn’t mind paying a higher rate for a mortgage for the next three or four years if the entry point on the property was low.
One segment that Mr. Jaggi is watching very closely is that for pre-construction condominiums. The broker says he has been steering his own clients away from the line-ups outside sales centres for the past few years.
“There have been so many people who have purchased pre-construction at insanely expensive prices. People were just throwing money at these projects,” he says. “I’ll be very surprised if we don’t see a massive amount of distressed sales.”
Mr. Jaggi says many buyers purchased units from more than one builder with very little oversight from regulatory watchdogs. Developers charged rich prices and agents used aggressive sales tactics.
Now projects are nearing completion and buyers will have trouble qualifying for a mortgage.
“These were not savvy investors.”
Mr. Jaggi recommends that people who want to buy real estate for an investment should stick with houses in high-demand areas such as Toronto’s 416 area code.
“There’s more security in single family,” he says. “You’re actually owning the asset on the land.”
Still, investors also need to proceed with caution in that niche – especially at the high end, he adds.
Mr. Jaggi points out that builders have been hit by the high cost of construction in the past couple of years in addition to today’s rising interest rates.
A builder who paid $1.5-million for a parcel of land and put $1-million into construction, for example, is likely trying to sell the newly finished house for $3-million or more to make a little bit of profit. Sales in that segment are very slow.
“A lot of people who built luxury, expensive houses are being hurt the most. They’re probably going to have to sell for a loss.”