In 2020, the unthinkable occurred: the red-hot Toronto condo market experienced an unforeseen downturn.
For the first time since the Great Recession, condominiums in North America’s fourth-largest city took a rest after more than a decade of tremendous growth. While Toronto’s detached and semi-detached segments of the housing market performed well, units in the sky suffered a setback – something that nobody would have envisioned at the start of the year.
A broad array of factors contributed to the decline in Toronto condo activity last year, mainly the coronavirus pandemic’s after-effects. Condo buyers enjoyed some bargaining power, an influx of supply gave consumers more choices, and historically low interest rates allowed households to get more bang for their buck.
The real estate industry has often discussed buyer’s fatigue, but a new phenomenon arose in this challenging market: seller’s fatigue. Some condo owners were unable to either rent their units or sell them – even at deep discounts – in a market that was witnessing a rapid injection of supply.
But it appears the pause in activity was temporary. December condo sales were vigorous, but prices eased to cap off 2020, according to data from the Toronto Regional Real Estate Board (TRREB). Unit sales surged 75.9 per cent year-over-year in December, but the average price tumbled 4.7 per cent to $625,828. On an annual basis, condominium transactions fell 6.7 per cent, while the average price advanced 6.3 per cent to $673,869.
“While the housing market as a whole recovered strongly in 2020, there was a dichotomy between the single-family market segments and the condominium apartment segment. The supply of single-family homes remained constrained resulting in strong competition between buyers and double-digit price increases. In contrast, growth in condo listings far-outstripped growth in sales. Increased choice for condo buyers ultimately led to more bargaining power and a year-over-year dip in average condo selling prices during the last few months of the year,” said Jason Mercer, TRREB Chief Market Analyst, in a news release.
Now that 2020 has mercifully concluded, the industry is looking to 2021 for signs of a recovery. Will the condo market return to its glory days this year?
Will We See the Recovery of the Toronto Condo Market in 2021?
Overall, the Toronto real estate market will remain in seller’s territory, with prices expected to climb six per cent in average cost to about $974,015, according to the RE/MAX 2021 Housing Market Outlook. However, the condominium market is forecast to continue being a buyer’s market amid ample inventory levels. Overall, condos should see more activity this year than last, because of affordability – especially among the first-time homebuyer demographic.
For the condo market to return to pre-pandemic levels, several factors will need to come into play.
The first is immigration. With travel restrictions and border closures, immigration to Canada essentially flatlined in 2020, with the federal government only allowing a little more than 30,000 permanent residents into the country. To put this number into perspective, Ottawa typically accepts between 200,000 and 300,000 people per year. Immigrants drive the condo market for two reasons. The first is that they utilize the short-term rental market until they can find a permanent residence. The second is that the more affluent will purchase these types of properties before they step foot within Canadian borders.
The short-term rental market, such as Airbnb, is another element impacting Toronto’s condo market. Because the province of Ontario clamped down on short-term rental rules earlier this year, condo owners had no other choice but to either rent their units to tenants on a long-term basis or sell at a lower cost.
The Bank of Canada (BoC) has signalled that it does not intend to raise interest rates anytime soon, and borrowing costs have never been lower. This can push up the price of housing since homebuyers can borrow greater capital sums at a reduced cost. Even when the economy returns to normal on the other side of the COVID-19 public health crisis, the central bank, like many of its counterparts, could be hesitant about normalizing rates, resulting in lower rates for longer.
And that leaves us to the last point: the Canadian economy.
The Ministry of Health’s target is to vaccinate everyone who wants it by the end of 2021. This involves immunizing as many people as possible at a fast pace.
“Our goal is to have Canadians be vaccinated to the greatest degree possible, because again, vaccination saves lives, and it protects us from spread and this is the goal. The goal is that we can deliver vaccines to provinces and territories, that they can immunize Canadians as quickly as we can actually approve and acquire those vaccines, because we’re all looking forward to a faster to normal,” said Health Minister Patty Hajdu in prepared remarks in December.
This might be the only way for the Canadian economy to return to some semblance of normalcy, although some health experts are still urging everyone to wear face masks and socially distance even after receiving the vaccine, whether it is Pfizer-BioNTech or Moderna. Still, averting lockdowns and shutdowns could lead to a renewed business cycle, correct?
But not everyone is convinced that the Canadian real estate market, which has been one of the few bright spots throughout the pandemic, will remain strong, even if the economy opens up again.
Canada Mortgage and Housing Corporation (CMHC) conducted a “stress test” which included an “implausible” scenario under which housing prices could slump as much as 48 per cent if there is a W-shaped coronavirus-induced recession and recovery, and if the government failed to extend adequate financial support to the population.
Royal Bank of Canada analysts estimate that the industry could experience a “hangover” by the end of the year.
“The strong annual tally will mask a gradual cooling in the market through the year,” wrote RBC economist Robert Hogue. “We expect low supply to become a growing constraint, pandemic-induced market churn (resulting from changes in housing needs) to wane, and a slight rise in longer-term interest rates and material erosion of affordability to cool demand by a few degrees.”
Looking Beyond the Coronavirus Pandemic
With so many unknowns, it’s challenging to forecast what the Canadian economy will look like beyond the coronavirus pandemic. Will the households who fled major urban centres return to the big cities? Will small towns and rural communities maintain record-setting growth in their housing markets? Can the Vancouver and Toronto condo market return to pre-pandemic levels? How much fiscal and monetary support will there be in the coming years?
For now, we’re watching events unfold on a month-by-month basis, in hopes that 2021 delivers positive outcomes for Canadians, the national economy, and the real estate market at large.