Optimism Slowly Creeps Back Into GTA Housing Market
Budding optimism in the 2024 housing market led to a modest increase in home sales across the Greater Toronto Area to close out 2023, reported Urbanation, Canada’s leading research and analytics firm for the condominium, rental, and commercial property markets.The Bank of Canada deciding to hold its overnight lending rate at 5% may have compelled sellers in Canada’s largest metro region to delay listing their homes in anticipation of ameliorated conditions this year. With rumblings south of the border that the Federal Reserve is poised to drop its policy rate, which would moved the Canada’s central bank to respond in kind, sellers are confident that market conditions will improve in 2024.At 65,982, total sales in 2023 marked a 23-year low, declining by 12% year-over-year from 74,047, and falling well below the record high of 121,712 achieved a couple of years earlier when the BoC’s quantitative easing regime plunged its policy rate to 25 basis points.Still, there were signs of improvement as the curtains drew on 2023. In December, sales rose by 11% on an annual basis to 3,444, despite still being 27% below the 10-year average. However, that could preponderantly be explained by new listings decreasing year-over-year in December to 3,886 units—17% below the 10-year average, and the second lowest level for the month in 2022 years—leading to speculation that sellers are taking a wait-and-see approach to the market.Active listings in the GTA declined by 19% year-over-year in 2023, and despite being 20% over the decade-long average, at about three months of supply (down from four months in November), they were 11% lower than the 20-year average.The price of a GTA home increased by 3.2% in December to an average of $1.084 million, marking the seventh straight month of year-on-year growth. Despite finishing the year on a high note, home prices declined by 5.4% last year from 2022. Moreover, that was the first time GTA home prices declined since 2018, when they fell by 4.2% following the Kathleen Wynne government’s Fair Housing Plan, which included, among other things, a 15% tax on foreign buyers.Still, home price appreciation in the GTA has averaged a robust 8.3% over the last 10 years, and 7.1% over the last two decades.In December, appreciation was strongest for homes $700,000 and higher, even increasing by 17% for homes in the $1.5-1.749 million range. But for 2023 in its entirety, prices declined for everything above $600,000—which was particularly acute for homes priced at least $1.25 million, decreasing by 20%. That was a marked contrast to the year-over-year spike in sales (+33%) for homes below $600,000, no doubt a result of higher mortgage rates.Despite decreasing by 10% year-over-year in 2023, condo sales have been among the best performing asset class over the past three years. That isn’t too surprising considering sales surged by 51% in 2021. Condo inventory in the GTA declined from 5.4 months in November to 4.8 months in December.
Housing Starts in Ontario Declined Last Year, Imperilling 1.5M Target
Ontario intends to build 1.5 million housing units by 2031, but it may have trouble achieving that ambition as housing starts decreased last year, says a new report from the Ontario Real Estate Association (OREA).Housing starts declined to 90,000 in 2023 from 96,000 a year earlier, and that’s problematic because an average of 150,000 are needed annually if there’s any hope of achieving the lofty target.In order to make housing in the province affordable, OREA has made 105 recommendations.Among its flurry of recommendations, OREA has advised limiting exclusionary zoning, which limits the development of certain types of land uses through municipal ordinances or binding provincial legislation. Last year, the City of Toronto voted to end exclusionary zoning and allow multiplex construction in every one of its neighbourhoods.The real estate association also advised allowing as-of-right conversion of underused commercial property to become mixed-use residential buildings. Additionally, OREA believes that permitting as-of-right multitenant housing and as-of-right secondary suites, garden suites and laneway houses across the province will substantially boost the number of units and help quell rapid price growth, which is driven by excessive demand relative to paltry supply.Increasing density will also be key to helping Ontario meet its target of building 1.5 million homes in the next seven years, posits OREA. To that end, incentives are encouraged for municipalities with excess school capacity to augment density, while height and density restrictions should be rescinded for buildings situated around transit stations, provided municipal zoning isn’t already sufficient.Underdeveloped land has also been identified as a way to improve density in a bid to meet the 2031 target. Developing infrastructure inside and outside municipal boundaries would support “reasonable housing growth,” OREA says, including high-density housing and “complete communities.”The planning department has long been the source of complaints from the real estate industry, and OREA recommends creating “a more permissive land use, planning, and approvals system,” as well as tapering municipalities’ abilities to request or host additional public meetings beyond what the Planning Act already mandates. Doing so should truncate construction timelines.By creating so-called “approvals facilitators” who will act as arbiters during conflicts between government officials and developers, OREA suggests adherence to construction timelines will improve. Moreover, mandating pre-consultations, at which binding application requirements will be clearly stipulated, at the outset could be a preventative measure for timeline overruns.A key facet of this particular recommendation is prohibiting the municipality’s ability to overrule members of regulated professions, such professional engineers, who have stamped applications. Moreover, additional stamps from municipal governments wouldn’t be necessary.The association has also called on permitting wood-frame buildings up to 12 storeys, while looking for ways to prevent abuses of the Ontario Land Tribunal.Ontario saw 100,000 housing starts in 2021—a 30-year high—and 285,37 as of the beginning of 2024, comprising 19% of the target.
Mom-and-pop house flippers exit market as rising costs and uncertainty take toll
Real estate firm Engel & Völkers says mom-and-pop house flippers have entirely left the market, blaming rising costs from construction, interest rates, taxes and elevated housing prices.Those costs, which have cumulatively escalated in recent years, have literally priced small investors out of a market that for years was thriving.That’s left this particular aspect of the market in the hands of bigger players and developers. Much market uncertainty means more education needed Andrew Carros, chief operating officer with Engel & Völkers, who is based in Vancouver, says people today have to be more educated if they’re going to be house flippers because they’re taking a higher risk with the uncertainty in the market and the rising costs and taxes. “There’s a lot of uncertainty in our economy. There’s a lot of uncertainty in every market.”Carros explains that, of course, the effects of COVID have changed people’s perspectives on what they’re looking for. “I think people made their lives a lot more personal but in Vancouver, in particular, we started noticing a real trend moving away from casual house flippers. We’re not talking about your developers here. We’re talking about people that are doing it as a hobby, or a way to make some extra income or do something fun with their family.” Change with foreign buyers’ taxes He notes the change happened when the foreign buyers’ taxes came into Vancouver in 2017. “There were opportunities in other cities, but if you look at Vancouver’s market we’re usually first in and first out when it comes to how the market trends.”Carros continues, “When that happened, the manipulation from the government to try to force prices to come down obviously changed the tone of the economy quite drastically, and in Vancouver, I think the narrative that anything can happen really scared people, the casual consumer. A way to move on and up He says that mom-and-pop house flipping was a nice way for people to live in a home for a few years, do a renovation and then move their family to another property by taking the assets from what they built in the flipped property to “keep moving forward and moving up in the market.”“It’s stalled out a little bit, unfortunately,” says Carros. “In the last two years, we’ve noticed that shelter costs have gone way up, energy costs have gone way up, holding costs on interest rates have gone way up.” The gap: Shrinking and unpredictable A severe lack of inventory in the market has increased the prices of lower-end homes, Carros explains. This means the gap between what someone pays to purchase and renovate a home, and the higher price they get once it’s flipped isn’t big enough anymore when you consider all the rising costs. Plus, “The government has made it very clear that their mandate is to try to stop people from inflating the price of real estate, so they’ve come down hard on capital gains, flipping homes, taxes you have to pay when you come in and out,” he notes. “And I think the bigger, greater concern is that the predictability of what might happen in the time that you own that property to when you flip it is unknown. With elections, they just keep throwing out policies that are meant to help affordability but unfortunately, when we look at what’s happening, I don’t think it’s having its greatest effect.” What makes a successful flipper today? Carros says the first thing a potential house flipper needs is cash — and that’s the hardest thing for most people as they don’t have the money to put into a house project. If they’re borrowing, with interest rates elevated, it just becomes harder to do. To control costs, flippers must also be very organized. If people can put work into their own property, it helps with cost savings. They have to have a plan and target the areas that make sense to get the most on their return.Patrice Grouleau, with Engel and Völkers in Montreal, adds that today’s flippers are the pros: professional builders navigating a market where hiring a general contractor can quickly eat into your profit margins. Higher rates and uncertainty = fewer mom-and-pop flippers Christopher Alexander, president of Re/Max Canada, says as soon as interest rates started going up, the market saw fewer and fewer mom-and-pop investors getting in, whether it was to acquire more for their portfolio or to start flipping.“And it makes sense,” he notes. “Because a lot of times, people will buy a house whatever the cost is and then go out and borrow (money) to pay for the materials to do the flip. So when rates started rising, the margins on those projects got smaller and smaller,” he explains. In addition, he points out the uncertainty added to the mix. “It was hard to determine how long it would take for a property to sell or what price it would sell at, but for so long in much of the country you had pretty decent predictability. It’s impossible to have a crystal ball in this business, but there was a good chance if you bought a house today, fixed it up and renovated it, you could sell it for more tomorrow. That’s disappeared since the spring of 2022.” Making a comeback in Calgary with economies of scale Joel Semmens, a realtor with Re/Max Real Estate (Central) in Calgary, says the local market in the past decade has been fairly stagnant with house prices. “There just weren’t many people flipping houses because the market was declining; it was not on an incline. (Now), this is the type of market where you start seeing that kind of activity again because we’re in a buoyant, upwardly mobile trajectory of a market,” he explains.Semmens is seeing groups of people working on multiple properties at once. “I see the guys that are like mom-and-pops in a way because they’ve got their whole family working for them, three to five at a time.” He notes, “They’re doing five (properties) at a time, so there’s an economy of scale in terms of getting the trades, and they pick the same stuff (for renovating the homes).” Government deeming rule for flipped properties The 2022 federal budget introduced a new deeming rule, effective January 1, 2023, for flipped residential properties, including rentals. The Government of Canada’s website says this is “to ensure that profits from the disposition of flipped property are taxed as business income” and “profits are subject to full income inclusion”. About the rules for reporting profits from flipping, it goes on to say: “The profit from property flipping is fully taxable as business income and does not qualify for the 50 per cent capital gains inclusion rate or the Principal Residence Exemption.” Enjoying this article?Get the latest REM articles in your inbox 3x week so you stay up to date on the latest in the Canadian real estate industry Success! Email Subscribe The post Mom-and-pop house flippers exit market as rising costs and uncertainty take toll first appeared on REM.The post Mom-and-pop house flippers exit market as rising costs and uncertainty take toll appeared first on REM.
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